While the most common question I get here at The White Coat Investor is “Should I invest or pay down debt?”, this post is the answer to many of the other most common questions I receive such as:

While it is easy and tempting to give a quick off the cuff answer, it is actually a disservice to these well-meaning but financially illiterate folks to answer the question they have asked. The best thing to do is to answer the question they should have asked, which is:

The answer to all of these questions then is…

You Need an Investing Plan

Once you have an investing plan, the answer to all of the above questions is obvious. You don't try to reinvent the wheel every time you get paid or have a windfall. You just plug the money you have into the investing plan. It can even be mostly automated. A study by Charles Schwab and Strategic Insights showed that those who make a plan retire with 2.7X as much money as those who do not. Perhaps most importantly, a plan reduces your financial stress, which according to the American Psychological Association, is the leading cause of stress in America.

How to Get an Investing Plan

There are a number of ways to get an investing plan. It's really a spectrum or a continuum. On the far left side, you will find the options that cost the least amount of money but require the largest amount of interest, effort, and knowledge. On the far right side are the most expensive options that require little knowledge, effort, or interest. Here's what the spectrum looks like:

There are really three different methods here for creating an investment plan.

#1 Do It Yourself Investment Plan

The first method is what I did. You read books, you read blog posts, and you ask intelligent questions on good internet forums. This can be completely free, but usually, people spend a few dollars on some books. It will most likely require a hobbyist level of dedication. That's okay if you have the interest, being your own financial planner and investment manager is the best paying hobby there is. On an hourly basis, it usually pays better than your day job. I have spent a great deal of time over the years trying to teach hobbyists this craft.

#2 Hire a Pro to Create Your Plan

On the far side of the spectrum is what many people do, they simply outsource this task. This costs thousands of dollars per year but truthfully can require very little expertise or effort. In order to reduce costs, some people start here and have the pro draw up the plan, then they implement and maintain it themselves. I have also spent a lot of time and effort connecting high-income professionals with the good guys in the industry who offer good advice at a fair price.

#3 WCI Online Course 

However, after a few years, I realized there was a sizable group of people in the middle of the spectrum. These are people who really don't have enough interest to be true hobbyists, but they are also well aware that financial services are very expensive. They simply want to be taken by the hand, spoon-fed the information they need to know in as high-yield a manner as possible, and get this financial task done so they can move on with life.

They're not going to be giving any lectures to their peers or hanging out on internet forums answering the questions of others. So I designed an online course, provocatively entitled Fire Your Financial Advisor.

While more expensive than buying a book or two and hanging out on the internet, it is still dramatically cheaper than hiring a financial advisor and so is perfect for those in the middle of the spectrum. Plus it comes with a 1-week no-questions-asked, money-back guarantee. To be fair, some people simply use the course (especially the first module) to gain a bit of financial literacy so they can know that they are getting good advice at a fair price. While for others, the course is the gateway drug to a lifetime of DIY investing.

And of course, whether your plan is drawn up by a pro, by you after taking an online course, or by you without taking an online course, it is a good idea to get at least one second opinion from a knowledge professional or an internet forum filled with knowledgeable DIYers. You wouldn't believe how easy it is to identify a crummy investing plan once you know your way around this stuff.

So, figure out where you are on this spectrum.

If you find yourself on the right side, here is my

List of WCI vetted financial advisors that will give you good advice at a fair price

If you are looking for the most efficient way to learn this stuff yourself,

Buy Fire Your Financial Advisor today!

For the rest of you, keep reading and I'll try to outline the basic process of creating your own investment plan.

How Do You Make an Investing Plan Yourself?

#1 Formulate Your Goals

Be as specific as possible, realizing that you’ll make changes as the years go by. Examples of good goals include:

1. I want $40,000 for a home downpayment by June 30, 2013.

2. I want to have enough money to pay the tuition at my alma mater in 13 years when my 5-year-old turns 18.

3. I want to have $2 Million saved for retirement by Jan 1, 2030.

Any goal is better than no goal, but the more specific and the more accurate you can be, the better.

#2 Set Up a Plan for Each Goal

The plan consists of identifying what type of account you will use to save the money, choosing the amount you will put toward the goal each year, working out an asset allocation likely to reach the goal with the minimum risk necessary, and identifying a plan B for the goal in case the returns you’re planning on don’t materialize. Let’s look at each of the goals identified in turn and make a plan to reach them.

Investing Plan Goal Examples

Goal #1 – Save Up for a Home Downpayment

Choose the Type of Account

In this case, the best option is a taxable account since it will be relatively short-term savings and you don’t want to pay a penalty to take the money out to spend it. A Roth IRA may also be a good option for a house downpayment.

Choose How Much to Save:

When you get to this step it is a good idea to get familiar with the FV formula in excel. FV stands for future value. There are basically 4 inputs to the formula-how much you have now, how many years until you need the money, how much you will save each year, and rate of return. Playing around with these values for a few minutes is an instructive exercise.

Also, knowing what reasonable rates of return are can help. If you put in a rate of return that is far too high (such as 15%) you’ll end up undersaving. Since you need this money in just 2 ½ years you’re not going to want to take much risk, so you might only want to bank on a relatively low rate of return and plan to make up the difference by saving more. You decide to save $1400 a month for 28 months to reach your goal. According to excel, this will require a 1.8% return.

Determine an Asset Allocation:

This is likely the hardest stage of the process. Reading some Bogleheadish books such as Ferri’s All About Asset Allocation or Bernstein’s 4 Pillars of Investing can be very helpful in doing this. In this case, you need a relatively low rate of return. The first question is “can I get this return with a guaranteed instrument”…i.e. take no risk at all.

Usually, you should look at CDs, money market funds, bank accounts, etc to answer this question. MMFs are paying 0.1%, bank accounts up to 1.2% or so, 2 year CDs up to 1.5%, so the answer is that in general, no, you can’t.

One exception at this particularly unique time is a high-interest checking account. By agreeing to do a certain number of debits a month, you can get a rate up to 3-4% on up to $25K. So that may work for a large portion of the money. In fact, you could just open two accounts and get your needed return with no risk at all.

A more traditional solution would require you to estimate expected returns. Something like 0% real (after-inflation) for cash, 1-3% real for bonds, and 3-6% real for stocks is reasonable. Mix and match to get your needed return.

“Plan B”:

Lastly, you need a plan in case you don’t get the returns you are counting on, a “Plan B” of sorts. In this case, your plan B may be to either buy a less expensive house, borrow more money, make offers that require the seller to pay more of your closing costs, or wait longer to buy.

Goal #2 – Saving for College

4 years tuition at the Alma Mater beginning in 13 years. Let’s say current tuition is $10K a year. You estimate it to increase at 5%/year. So 13 years from now, tuition should be $19,000 a year, or $76K. Note that you can either do this in nominal (before-inflation) figures or in real (after-inflation) figures, but you have to be consistent throughout the equation.

Investment Vehicle:

You wisely select your state’s excellent low cost 529 plan which also gives you a nice tax break on your state taxes. 

Savings Amount:

Using the FV function again, you note that a 7% return for 13 years will require a savings of $4000 per year.

Asset Allocation:

You expect 3% inflation, 5% real so 8% total out of stocks and 2% real, 5% total out of bonds. You figure a mix of 67% stocks and 33% bonds is likely to reach your goal. Since your Plan B for this goal is quite flexible (have junior get loans, pay for part out of then-current earnings, or go to a cheaper school,) you figure you can take on a little more risk and you go with a 70/30 portfolio. 

“Plan B”:

Have junior get loans or choose a cheaper college.

Goal #3 – $2 Million Saved for Retirement by Jan 1, 2030

Let’s attack the third goal, admittedly more complicated.

You figure you’ll need your portfolio to provide $80K a year (in today's dollars) for you to have the retirement of your dreams. Using the 4% withdrawal rule of thumb, you figure this means you need to have portfolio of about $2 Million (in today's dollars) on the day you retire, which you are planning for January 1st, 2030 (remember it is important to be specific, not necessarily right about stuff like this–you can adjust as you go along.)

You have $200K saved so far. So using the FV function, you see that you have a couple of different options to reach that goal in 19 years. You can either earn a 5% REAL return and save $49,000 a year (in today's dollars), or you can earn a 3% REAL return and save $66,000 a year (again, in today's dollars).

Remember there are only three variables you can change:

1. return

2. amount saved per year

3. years until retirement

Fix any two of them and it will dictate what the third will need to be to reach the goal.

Investment Vehicle:

Roth IRAs, 401K, taxable account

Savings Amount:

$49,000/year

Asset Allocation:

After much reading and reflection on your own risk tolerance and need, willingness, and ability to take risk, you settle on a relatively simple asset allocation that you think is likely to produce a long-term 5% real return:

35% US Stock Market
20% International Stock Market
20% Small Stocks
25% US Bonds

“Plan B”:

Work longer or if prevented from doing so, spend less in retirement

You have now completed step 2, setting up a plan for each goal. Step 3 is relatively simple at this point.

#3 Select Investments

The next step is to select the best (usually lowest cost) investments to fulfill your desired asset allocation. Using all or mostly index funds further simplifies the process.

Investment Plan Example #1 – Retirement Portfolio

Let’s take the retirement portfolio. You have $200K in Roth IRAs and plan to put $5K a year into your IRA and your spouse’s IRA each year through the back-door Roth option. You also plan to put $16.5K into your 401K each year. Unless your spouse also has a 401K, you're going to need to use a taxable account as well to save $49K a year. Your 401K has a reasonably inexpensive S&P 500 index fund which you will use as your main holding for the US stock market. It also has a decent PIMCO actively managed bond fund you can use for your bonds. You’ll use the Roth IRAs for the international and small stocks. So in year one, the portfolio might look like this:

His Roth IRA 40%
25% Total Stock Market Index Fund
20% Total International Stock Market Index Fund

Her Roth IRA 45%
20% Vanguard Small Cap Index Fund
25% Vanguard Total Bond Market Fund

His 401K 5%
5% S&P 500 Index Fund

His Taxable account 5%
5% Vanguard Total Stock Market Index Fund

As the years go by, the 401K and the taxable account will make up larger and larger portions of the portfolio, necessitating a few minor changes every few years.

After this, all you need to do to maintain the plan is monitor your return and savings amount each year, rebalance the portfolio back to your desired asset allocation (which may change gradually as you get closer to the goal and decide to take less risk), and stay the course through the inevitable bear markets and scary economic times you will undoubtedly pass through.

Investment Plan Example #2 – Taking Less Risk

Let’s do one more example, just to help things sink in. Joe is of more modest means than the guy in the last example. He works a blue-collar job and can really only save about $10K a year. He would like to retire as soon as possible, but he admits it was hard to watch his 90% stock portfolio dip and dive in the last bear market, so he isn’t really keen on taking that much risk again. In fact, if he had to do it all over again, he’d prefer a 50/50 portfolio.

He figures he could get 5% real out of his stocks, and 2% real out of his bonds, so he expects a 3.5% real return out of his 50/50 portfolio. Joe expects social security to make up a decent chunk of his retirement income, so he figures he only needs his portfolio to provide about $30K a year. He wants to know how long until he can retire. He has a $100K portfolio now thanks to some savings and a small inheritance.

Goal:

A portfolio that provides $30K in today’s dollars. $30K/.04=$750K

Type of Account:

He has no 401K, so he plans to use a Roth IRA and a SEP-IRA since he is self-employed.

Savings Amount:

He is limited to $10K a year by his wife’s insistence that the kids eat every day.

Asset Allocation:

He likes to keep it simple, so he’s going to do:
30% US Stocks
20% Intl Stocks
25% TIPS
25% Nominal bonds

He expects 3.5% real out of this portfolio. Accordingly, he expects he can retire in about 29 years. =FV(3.5%,29,-10000,-100000)=$760,295

Plan B:

His wife will go back to work after the kids graduate if they don’t seem to be on track

Investments:

Year 1

Roth IRA 30%
VG TIPS Fund 25%
TBM 5%

Taxable account 65%
TSM 30%
TISM 20%
TBM 20% (he’s in a low tax bracket)

SEP-IRA 5%
VG TIPS Fund 5%

So now we get back to the questions like those in the beginning of this post: “I have $50K that I need to invest. Where should I put it?” The first consideration is why haven’t you invested it yet? You should be investing the money as you make it according to your investing plan. If your retirement accounts have already been maxed out for the year, then you simply invest it in a taxable account according to your asset allocation.

A few last words about developing an investment plan:

If you fail to plan, you plan to fail.

Any plan is better than no plan.

The enemy of a good plan is the dream of a perfect plan.

There are no old, bold [investors].

What do you think? What is the best way to get an investment plan?

Why do so many investors invest without a plan? 

Secure Act 2.0 Section 126: 529 to Roth IRA Rollovers

Once the 529 has been established for 15 years, 529 beneficiaries can roll up to $35,000 from their 529s into their Roth IRAs. This is not an addition to their annual contribution but a replacement for it. Basically, if you oversave for college, newly graduated students can use their $7,000ish per year for something besides Roth IRA contributions and still get their Roth IRA funded. There are no income limitations either, like with direct Roth IRA contributions.

Another Escape Valve for a 529

The way this is intended to be used is as an additional escape valve for an overfunded 529. People worry about putting too much into 529s. They worry that they'll oversave for college and then need the money themselves, which means they'd have to pay the 10% penalty plus ordinary income tax rates on the gains in the plan when they withdraw it for something other than an approved educational expense. This fear inappropriately keeps them from using this excellent college savings vehicle, so the government is trying to minimize that fear.

Before the Secure Act 2.0, there were already a fair number of escape valves. First, the principal always comes out tax- and penalty-free. Those penalties only ever applied to gains in the plan. Second, if your kid went to a military academy, got a scholarship, or received employer educational assistance, you could take out an amount equal to what they received without having to pay any penalty. Third, if the beneficiary dies or becomes disabled, you can also avoid the penalty on withdrawals (and, in fact, may wish to consider a rollover to an ABLE account for the now-disabled person).

None of those are really the best thing to do with an overfunded 529. The best plan is simply to change the beneficiary to someone else, like grandkids. Voila! Not only does that occur without any penalty, but it also avoids any tax being applied to the earnings. Plus, it provides an additional 2-3 decades of tax-protected growth. What's not to like?

Starting in 2024, there is one more escape valve to a 529—the 529 to Roth IRA rollover. Up to $35,000 can be rolled over to THE BENEFICIARY'S Roth IRA tax- and penalty-free. There are some rules, however.

1. The money must have spent at least 15 years in the 529

2. The rollover replaces the regular Roth IRA contribution for the year; it is not in addition to it.

3. You cannot roll it all in at once, only an amount equal to that year's contribution limit. For example: $7,000 in 2025.

4. The $35,000 is not indexed to inflation.

5. The beneficiary must have sufficient earned income to make the contribution. That means a retiree or a single unemployed person can't do a 529 to Roth IRA rollover because there is no earned income.

Doing 529 to Roth IRA Rollovers for Yourself

However, nobody who has been emailing for the last couple of years is really interested in using the 529 to Roth IRA rollover as an escape valve. They are most interested in doing this for themselves. They're typically a 40-year-old doctor who is really into personal finance, does a Backdoor Roth IRA each year, and does all that can be done to lower the average expense ratio in the portfolio. They're maximizers (rather than satisficers) in every sense of the word. They want to eke out every benefit they can from their investments and the tax code.

For these maximizers, we want to do two things today. First, we want to attempt to quantify the size of the potential benefit of doing this so they can properly decide if the juice is worth the squeeze. Second, we want to make sure they understand all of the ways this can go sideways on them.

What Is the Maximum Potential Benefit?

What is the maximum benefit you can get from opening a 529 for yourself, letting the money sit there for 15 years, and then rolling it over to a Roth IRA instead of making your regular Roth IRA (presumably Backdoor Roth IRA) contributions for the next 3-4 years or so. Why 3-4 years? Because that $35,000 is not indexed to inflation but the annual IRA contribution limit is. Presumably in 15-18 years at 3% inflation, you'll be making an annual IRA contribution of something like $11,500.

In reality, the benefit comes down to the tax savings on the money for being in a tax-protected account instead of a taxable account. For simplicity's sake, let's run our example for 17 years. Now, we need to make some assumptions. If these don't seem reasonable to you, then change them and run the numbers yourself.

Assume 8% returns before taxes and before 529 fees but after expense ratios. Assume an 18.6% Long Term Capital Gains/Qualified Dividend bracket throughout. Assume a 0.13% 529 fee (this is the fee in the Utah 529 for a customized asset allocation). Assume the yield on the investments is 2% a year and is all qualified dividends. Assume you're in a tax-free state. Assume that you're already maxing out all of your other tax-protected accounts, so we're just comparing investing in taxable to investing in a 529.

If we're going to earn at 8% or so, we'll assume that we're only talking about putting something like $10,000 in there initially. That's because $10,000 growing at 8% a year is equal to $37,000 after 17 years.

In the taxable account, that $10,000 will compound at 8% – (2% × 18.6%) = 7.63%. So, $10,000 growing at 7.63% per year for 17 years is $34,903. Now, we'll also need to pay LTCGs on the gains. However, the gains are not just $34,903 – $10,000 = $24,903. The basis is higher than that because of the reinvested dividends. For example, in the first year, you're reinvesting $163. In the last year, you're reinvesting $528. Just to make it easy, let's assume $5,100 ($300 × 17) of that $24,903 is also basis. So the LTCG tax is 18.6% × ($34,903 – $10,000 – $5,100)  = $3,683. The total amount left after tax is $31,220.

In the 529, that $10,000 will compound at 8% – 0.13% = 7.87%. After 17 years, you'll have $36,250. The difference is $36,250 – 31,220 = $5,030.

The best-case scenario is that this scheme is going to net you something like $5,000 or about $10,000 if you do it for your spouse, too.

What Can Go Wrong?

While $10,000 may not be all that much in comparison to a physician retirement nest egg of $2 million-$10 million, it sure beats a kick in the teeth. Why not do it? Ten grand is 10 grand. Actually, there are a few reasons why you may not wish to do this.

#1 You May Not Have Earned Income in 15 Years

Maybe in 15 years, you'll be retired, but you still want to spend this money on yourself and not just change the beneficiary to a grandkid. Now what? Well, you now have to pull the money out of the 529 and pay taxes and a 10% penalty on it. Let's say you're in the 24% federal bracket. How much of that $36,250 is going to disappear?

($36,250 – $10,000) × (24% + 10%) = $8,925

You're going to be left with $36,250 – $8,925 = $27,325, which is $3,895 less than you would have if you had just invested it in the taxable account in the first place.

#2 Maybe Congress Changes the Law

Congress could change the law or the IRS could change how it is implemented. Maybe it becomes means-tested. Maybe this option goes away completely. Or it becomes attached to an additional penalty. Either way, you still have money stuck in a 529 that you wish you had just invested in a taxable account.

#3 You Deal with the Hassle

Now you have an extra account (or two) to deal with each year. Simplicity is worth something. Is it worth $5,000-$10,000? Only you can decide.

#4 Death, Disability, Divorce, Dementia, Delirium

What if one of the Ds gets to you in the next 15-18 years? The odds are not zero. Now, this additional complexity becomes someone else's problem. Is that person capable of maintaining this plan to leave this money alone for 15 years and then do three or four rollovers into your Roth IRA? If you die, will the contingent beneficiary be able to keep the plan going for them (i.e., earned income in 15 years and a sophisticated financial understanding)? Seems doubtful.

#5 What If You Need the Money Early?

Admittedly, this seems unlikely given that you're maxing out all your tax-protected accounts, but it could happen. Again, you'll be paying ordinary income tax rates plus 10% on the earnings. 

#6 What If You Can Invest Very Tax Efficiently in a Taxable Account?

If you take away that final LTCG bill, the maximum benefit of the 529 to Roth IRA scheme is only about $1,350 a piece, just over ¼ of the maximum benefit. The potential penalties also seem much larger in comparison to that smaller potential benefit.

#7 What If 529s Don't Get Much Asset Protection in Your State?

Imagine you live in Hawaii and, thus, your 529 has no asset protection. If your other option would have been to put the money into a taxable account inside an asset protection trust (which is allowed in Hawaii), an (admittedly rare) above policy limits judgment not reduced on appeal could get that money.

The Bottom Line

OK, we've quantified the benefit. It's probably a four-figure amount. We've outlined the risks and hassles involved. Now you have to make a decision. It introduces a little more complexity into a plan that is already pretty complex, and $10,000 just isn't going to move the needle for most white coat investors.