Alice and her wife Ann live in a small northern New England town with their two sons and two dogs. Both Alice and Ann are educators and enjoy their work. Their children were adopted from the foster care system and both have significant early childhood trauma. Due to this, they have intensive needs and Alice and Ann have organized their family life around addressing these needs.
Practically, this means Alice is the primary at-home parent managing a constellation of doctors, social workers, school interventions, therapists, medication management, and mental health crises. As a result, she’s only able to work part-time. Although the state pays for their sons’ health insurance and an adoption subsidy, this doesn’t match the financial reality of caring for their children. Ann and Alice are living below their means right now, but are concerned they don’t have enough money saved to continue this level of care once their kids are legal adults. Thus, Alice has asked for our help in assessing her financial situation and ensuring she’s on a sustainable path for the future.
What’s a Reader Case Study?
Case Studies address financial and life dilemmas that readers of Frugalwoods send in requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide advice, encouragement, insight and feedback in the comments section.
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The Goal Of Reader Case Studies
Reader Case Studies highlight a diverse range of financial situations, ages, ethnicities, locations, goals, careers, incomes, family compositions and more!
The Case Study series began in 2016 and, to date, there’ve been 88 Case Studies. I’ve featured folks with annual incomes ranging from $17k to $200k+ and net worths ranging from -$300k to $2.9M+.
I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight, queer, bisexual and polyamorous people. I’ve featured women, non-binary folks and men. I’ve featured transgender and cisgender people. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, Spain, Finland, Germany and France. I’ve featured people with PhDs and people with high school diplomas. I’ve featured people in their early 20’s and people in their late 60’s. I’ve featured folks who live on farms and folks who live in New York City.
Reader Case Study Guidelines
I probably don’t need to say the following because you folks are the kindest, most polite commenters on the internet, but please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not condemn.
There’s no room for rudeness here. The goal is to create a supportive environment where we all acknowledge we’re human, we’re flawed, but we choose to be here together, workshopping our money and our lives with positive, proactive suggestions and ideas.
A disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises.
I encourage everyone to do their own research to determine the best course of action for their finances. I am not a financial advisor and I am not your financial advisor.
With that I’ll let Alice, today’s Case Study subject, take it from here!
Hello friends, I’m Alice and I’m 47. My wife Ann (age 51) and I live in a small northern New England town located in a valley near lakes, rivers, mountains and miles of skiing/hiking trails. We love it here and spend as much time outside as possible, enjoying our place in the world. Our boys, ages 14 and 12, also love being outside: playing with the dogs, biking, and swimming. I’m an enthusiastic–albeit subpar–homesteader who is constantly expanding the garden and planting new trees.
Ann loves biking, watching movies, and cross-country skiing on the weekends. We also spend a lot of time standing on soccer field sidelines, cheering for our kids. Ann is an IT teacher in a large public school and I’m a part-time teacher and tutor. Our older son has a regular babysitting job and our younger son pet-sits and does light landscaping for neighbors. Our dogs, however, do not have jobs… hmmm.
I am so grateful to Mrs. FW and this blog. I’ve been a reader for several years and have taken much of the advice on these pages to heart. We’ve prioritized:
- Paying off our debts (mortgage, car payments and student loans)
- Building an emergency fund
- Investing in our retirement accounts
- Using cash-back credit cards
- Having a high-interest savings account
- Switching to financial companies with low or no fees
We’ve used “extra” money (gifts, tax returns, side income) to make our home as energy efficient as possible and purchase an electric car. We’ve also been incredibly fortunate that we have the resources and support to parent our beloved kids.
What feels most pressing right now? What brings you to submit a Case Study?
I wanted to submit a Case Study because our family has a unique set of circumstances that affect our finances and I thought Mrs. FW could help! Our children were adopted from the foster care system and both have significant early childhood trauma. Because of this rough start, they have intensive needs and consequently, we have organized our family life around helping and addressing their needs. Practically, this means I am the primary at-home parent managing a constellation of doctors, social workers, school interventions, therapists, medication management, and mental health crises. Due to this, I’m only able to work part-time. The state pays for their health insurance and pays us an adoption subsidy, both of which will end when they turn 18. While we are grateful for this support, it doesn’t match the financial reality of caring for our children. Having high-needs kids means there are a thousand little costs–mileage, lost wages, last minute take-out, respite care, convenience services (lawn mowing, etc..)–that all add up. We’re living below our means right now, but I’m concerned we don’t have enough money saved to continue this level of care once our kids are legal adults. This NPR article articulates many of our concerns (and experiences): Paying for mental health care leaves families in debt and isolated.
What’s the best part of your current lifestyle/routine?
Ann and I love each other and are deeply committed to our partnership and family. We make each other laugh and support each other as individuals and as parents. Our sons are smart, energetic, creative, and loving and it is my great joy to be their mom.
My family is the best part of my life.
It’s also true that our home life is very stressful because of the boys’ behaviors and needs. This stress is balanced by our daily outside time, frequent dates with my wife, and a strong, supportive community of foster/adoptive parents. We both love our work and find meaning in what we do for a living.
What’s the worst part of your current lifestyle/routine?
We have to do it all. We’ve built the web of support necessary for our family, but when one strand of the web breaks, things get shaky. I’m doing this Case Study so that I can strengthen the financial strand of that web.
Where Alice & Ann Want to be in Ten Years:
- Both of us working part-time to cover living expenses only (is this called Coast FI?)
- Enough in retirement savings to maintain a modest standard of living for the two of us, which I believe will be about $5,000/month. Our estimated Social Security is $2,600/month, so we’ll need to drawdown our retirement investments at $2,400/month.
- Have a substantial savings account for emergencies for our kids as well as 6 months of living expenses for us. $60,000 seems like a reasonable goal.
- Move to a smaller house that requires less maintenance and has an attached apartment. The apartment may be used by one of our adult children and/or a tenant who will provide passive income.
- Even more outside time! I would love to do a long trip once the kids are more self-sufficient; something like distance hiking or paddling a river from its source to the sea.
- Continue to invest in, and prioritize, my relationship with Ann.
- I don’t foresee either of us fully retiring in the next 10-15 years, but rather, working part-time or seasonally. We both love what we do.
Alice & Ann’s Finances
|Ann’s net income||$5,145||Minus taxes and mandatory state retirement|
|Alice’s net income||$1,200||Hourly employee, average over the last 6 months|
|Alice’s side income (tutoring, user testing)||$200||Varies|
Mortgage: paid off; home is valued at $350k
|Item||Amount||Notes||Interest/type of securities held/Stock ticker||Name of bank/brokerage||Expense Ratio|
|Ann Family Trust||$681,820||Ann’s family owned a business that she helped to run, this is from the sale of that business||This is an investment account held equally by Ann and her two siblings. The total listed is Ann’s portion.
She does have access to the money but the siblings decided not to divide it up until after Ann’s mom passes. It is accessible without major restrictions, but is in no way an emergency fund or something we could access tomorrow.
|Alice Roth IRA||$98,054||Try to contribute max per year||Vanguard Target Retirement Fund 2040||Vanguard||0.08%|
|Ann State Retirement A||$62,000||State pension fund, hard to get an exact number; this is how much she has contributed||State|
|Alice 403b||$37,962||From previous employer, cannot roll over||CREF Social Choice R1 (QCSCRX)||TIAA||0.42%|
|Ann State Retirement B||$27,120||State pension fund, hard to get an exact number; this is how much she has contributed||State|
|HSA||$13,300||Equal to medical insurance deductible for one year||Lively||0%|
|High interest Savings||$15,000||Usually have $20,000 in this account; we just had an emergency and a major house repair, which is why this is lower than average||Discover||2.75%|
|Checking||$9,850||No fee checking||Local bank||0.5%|
|Roth IRA for older son||$1,987||
Target date fund
|Roth IRA for younger son||$1,987||Target date fund||Vanguard||0.08%|
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|Toyota RAV4 Hybrid 2020||$30,000||35,000||Yes|
|Hyundai Kona EV 2019||$28,000||15,000||Yes|
Our below budget is based on our last 6 months of expenses (thank you, Personal Capital, for making it so easy to pull these numbers!). During that time, one child had daily intensive outpatient therapy, one needed to be homeschooled for a time, and two family members were in the ER. I don’t know how to express this reality in a budget, but I do know that it affects our financial stability and future.
|Groceries||$1,102||Umm, yes, my kids eat a lot.|
|Kid tuition||$922||Independent school, necessary expense|
|Health insurance and health expenses||$520||High deductible health plan (ACA exchange), pay most health care costs out of pocket, expect this will go up significantly in 2023|
|Maintenance and repairs||$410||Our house is very old and something is always breaking. Always. Breaking.|
|Dogs||$364||Two big happy dogs, includes boarding during vacation|
|Electric||$320||We have mini-splits (heating/cooling) and have an electric car.|
|Vacation||$220||Camping and 1 AirBnB vacation|
|Kid tutoring||$160||Private tutoring to address learning disability|
|Insurance||$146||This just went up so much! (I did shop around.)|
|Cell phones (4)||$116||Have an MVNO, great service and great coverage.|
|Hobbies/entertainment||$100||Disney+, coffee with friends, date nights, concerts|
|Propane||$98||Pre-pay every year|
|School lunch for Ann||$60|
|Quarterly exterminator service||$42||Old house = lots of unwanted critters|
|Trash pick up||$42||No municipal services where we live.|
|2 cords of wood||$40||Love our wood stove!|
|Hot water heater/wood stove yearly maintenance||$30|
|Tax prep||$10||Thank you TurboTax|
Credit Card Strategy
|Card Name||Rewards Type?||Bank/card company|
|Chase Freedom Unlimited®||1.5% cash back||Chase Bank (affiliate link)|
|Discover||1% cash back|
Alice’s Questions For You:
1) Are there any readers who have experience with transitioning high-needs kids from adolescence to adulthood?
- I need all of the advice you can throw (type) at me, specifically about medical insurance and SSI.
2) We save about $800/month and use it to fund Alice’s Roth IRA, the HSA, and our savings account, which is our emergency fund.
- Is there a better distribution for this financial cushion?
- Should we be saving our emergency fund in two categories: 1) kid related; 2) general emergencies?
- What is a series I-bond? I googled it and don’t get it. Is this a place to hold some emergency money long-term?
Liz Frugalwoods’ Recommendations
I want to thank Ann and Alice for sharing their story with us. They bring us a difficult, but important, situation with their two high-need kids and I’m thankful for their transparency in sharing their struggles and questions. We all have diverse, unique, personal money stories; furthermore, the way that money intersects with our lives isn’t always neat and tidy.
I’m grateful to every Case Study subject for their willingness to share because these Cases aren’t just for the subjects–they’re also for everyone reading. They’re an opportunity for us to delve into different financial topics and learn from one another. And so, thank you Ann and Alice for allowing us to broach this difficult topic today.
Alice’s Question #1: Are there any readers who have experience with transitioning high-needs kids from adolescence to adulthood?
My chief advice for Alice and Ann is that they should hire a lawyer if they haven’t already.
Everyone needs a will and estate plan, created by a lawyer (don’t DIY something this important), but it becomes even more imperative when you have kids with special needs or high levels of need. There are a number of different legal constructions available in these situations with the most common–in my limited knowledge–being a Special Needs Trust (SNT).
According to the Special Needs Alliance:
A special needs trust (SNT) is a trust that will preserve the beneficiary’s eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Because the beneficiary does not own the assets in the trust, he or she can remain eligible for benefit programs that have an asset limit. As a general rule the trustee will supplement the beneficiary’s government benefits but not replace them. Examples of supplemental needs are costs for sitters, companions, and dental or medical expenses not covered by Medicare or Medicaid.
The need for an SNT (or other legal construction) is obviously dependent upon the level of care Ann and Alice predict their children might need after the age of 18. It’s impossible to predict the future, but this is something they should consult with an attorney about.
The inherent challenge in answering this question is that a lot of their future expenses (and financial health) will depend on whether or not their kids are still living with them after age 18. As it stands now, many of their expenses are kid-related and it’s hard to know what their expenses will be without putting a likelihood on the kids still living with them/supporting them. Their financial picture will look dramatically different if the kids are living with them/being fully financially supported by them versus not and only occasionally needing financial help for emergencies.
They should also be sure to ask their lawyer whether or not it makes sense to have money in Roth IRAs for each kid as these would be counted as assets in the children’s names and thus could disqualify them from future government benefits.
One salient question for Alice and Ann: do you envision college, or another secondary trade school, as an option for either/both of the kids?
To the healthcare aspect of Alice’s question, that is one area where an SNT can help as it would preserve the kids’ eligibility for Medicaid and SSI. Additionally on the healthcare topic, I am curious about the monthly $520 healthcare line item. Since it’s open enrollment season now, I strongly suggest Alice and Ann shop this around a bit as a $520 per month premium for just the two adults seems very high to me.
- Does Ann’s workplace offer health insurance? As she’s employed at a public school, her employer-sponsored health plan should be excellent. I urge Alice and Ann to revisit what it would cost them to instead both be on Ann’s workplace insurance.
- If they want to remain on the ACA, I encourage them to research the subsidies offered by their state as it appears to me they are overpaying. ACA subsidies are determined by your income (not your assets) and there is no cliff for subsidies–it’s a sliding scale.
I think this’ll be well worth their time to investigate.
Alice’s Question #2: We save about $800/month and use it to fund Alice’s Roth IRA, the HSA, and our savings account, which is our emergency fund.
This calls for a full financial overview, my friends! Let’s take a look at each of their accounts in turn.
1) Pensions: Need to Learn the Details
The big wildcard here are Ann’s pensions. This is another area I encourage them to research fully. As a state employee (in a public school), Ann’s pension is likely excellent. Knowing these details will help paint a much more lucid picture of their retirement investments. They should reach out to Ann’s HR/Benefits coordinator and learn everything they can. Some districts/states offer periodic seminars on “understanding your pension,” which would be a great place to start.
2) Social Security: Calculate Anticipated Benefits
Edited 11/11/22: Thanks to commenter Sarah, I see that Alice DID in fact provide their estimated SS, which is great! Thus, they can disregard the below advice, but I will leave it here in case it’s helpful to anyone else. Thank you, Sarah!!
The above retirement total also doesn’t include what they’ll each receive in Social Security. To figure out their anticipated Social Security benefits, Ann and Alice should follow these instructions on how to retrieve their earnings tables from ssa.gov (the government’s Social Security website).
Aside from the full pension benefits and Social Security, Ann and Alice have $225,136 in retirement investments. Let’s see how that stacks up against Fidelity’s retirement rule of thumb:
Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.
As they’re both circa age 50, we’ll go with 6 x $95,280, which is $571,680.
From this perspective, they’re behind. However, again, without knowing the full pension details and their anticipated Social Security, it’s impossible to accurately assess their progress. Once they gather that information, they’ll be able to plug in the numbers and have a much clearer picture of where they stand.
If they determine they need to beef up their retirement investments, they could have Ann open either an IRA or Roth IRA. This would be in addition to Alice’s existing IRA.
A Roth IRA is:
- A retirement account that’s post-tax
- That means you pay taxes on the money you put into a Roth IRA, but you don’t pay taxes when you withdraw the money in retirement.
- A Roth IRA grows tax free.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- Your eligibility to contribute to a Roth IRA depends on your income and your particular tax situation.
- The maximum annual contribution amount in 2023 will be $6,500.
- The IRA catch-up contribution limit for individuals aged 50 and over is $1,000.
- I like this article on Roth IRAs if you want to read more.
A Traditional IRA is:
- A retirement account that’s pre-tax
- This means you don’t pay taxes on money you put into an IRA, but you do pay taxes when you withdraw the money in retirement.
- There are no income limits. Anyone can contribute to a traditional IRA.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- More about traditional IRAs here.
- The maximum annual contribution amount in 2023 will be $6,500.
- The IRA catch-up contribution limit for individuals aged 50 and over is $1,000.
A person can have both a Roth and a traditional IRA, but their combined annual contribution to both can’t exceed the limit.
Since Ann is 51, she could contribute a maximum of $7,500 per year to an IRA (Roth or regular) and Alice (at 47) can max out at $6,500.
Your cash-on-hand, also known as your emergency fund, should cover 3 to 6 months’ worth of your spending.
- At Alice & Ann’s monthly spend rate of $7,177, their emergency fund would cover just over three months, which makes it right on target. Very well done!
I also commend them for having some of this money in a high-interest savings account as that is FREE MONEY, people! A high-interest savings account is pretty much the only good thing about inflation and the Feds continually raising interest rates. Make sure you are taking advantage of this as it’s the easiest way to leverage your $$$.
My question for Alice and Ann is why they have so much of this money ($9,850) in a checking account that earns only 0.5% interest? I understand the need to have a local bank account and I have one myself; however, I keep the bare minimum in that account since they offer me NOTHING in return.
Roth IRAs for Both Kids: $3,974
As noted above, I recommend Alice and Ann speak with a lawyer about how to structure savings/investments for their kids.
Health Savings Account (HSA): $13,300
Makes sense to me to utilize an HSA if you have one. I still encourage Alice and Ann to do some research around their healthcare plan, as discussed above.
Ann’s Family Trust: $681,820
I saved the big kahuna for last because we don’t have enough visibility into this account to properly assess it. I can appreciate the complicated family dynamics that might be at play here, but, it does represent over 72% of their overall net worth and so it is a tad concerning that Alice and Ann don’t know what this is invested in. I am cheered to see that it’s held at Fidelity as that’s a brokerage with a reputation for well-respected total market low-fee index funds. However, since we don’t know which funds at Fidelity this is in, we can’t say for sure if it’s being invested properly.
Alice and Ann have a very high financial IQ and to their credit, have done an excellent job mastering and implementing the most important basic elements of responsible money management. I think the area they can consider a growth opportunity for themselves is investing prowess. The funds you invest in are a critical aspect of your longterm financial health and the good news is that it’s not too complicated to educate yourself. I highly recommend the book The Simple Path to Wealth by JL Collins as a primer on investing (affiliate link). It’s well-written, funny, easy-to-understand and has great advice.
For Alice and Ann (and anyone else out there reading), the basics of Collins’ book–and my own personal investing strategy–are:
1) Choose a brokerage with low fees.
A brokerage is a company that sells you the stocks you invest in. For reference, the following three brokerages offer DIY low-fee investment options:
- Fidelity’s Total Market Index Fund (FSKAX) has an expense ratio of 0.015%
- Charles Schwab’s Total Market Index Fund (SWTSX) has an expense ratio of 0.03%
- Vanguard’s Total Market Index Fund (VTSAX) has an expense ratio of 0.04%
Wondering how to find a fund’s expense ratio? Check out the tutorial in this Case Study.
2) Select low-fee (as noted above), total market index funds.
The rationale behind this is that, in general, investing in a total market index fund gives you the broadest possible exposure to the stock market. In a total market index fund, you’re essentially invested in a teensy bit of every single company in the stock market, which gives you a ton of diversity. If one company–or even one sector–tanks, your entire portfolio isn’t toast. It’s the “not putting all of your eggs in one basket” version of investing. It’s what I do, it’s what the vast majority of FIRE folks do and, best of all, it’s easy to implement and maintain.
3) Don’t panic sell. Or panic buy.
The smartest way to invest is on a regular basis and for the longterm. Ideally, you want to invest money in the market and then not touch it for decades. During this time, the stock market WILL go up and down (that’s literally what it’s designed to do). However, you–the savvy investor–won’t pay it any mind. The only thing that following the market will give you is indigestion.
The key is to remember the data on historical stock market returns. And now, enjoy some data:
The average annualized return since its [S&P 500’s] inception in 1928 through Dec. 31, 2021, is 11.82%.The average annualized return since adopting 500 stocks into the index in 1957 through Dec. 31, 2021, is 11.88% (source: Investopedia).
Sounds great, right? We’re all going to make 11.82% every year on our investments? WRONG. You will, if you are lucky, make that percentage OVER TIME and on average. One year, you may lose a lot. The next year, you might gain a lot. It’s a looooooooooooonnnnng game that does not favor the tentative.
I, personally, utilize 7% as my estimate for what I can expect the market to deliver as an annual average. In all things, I like to underestimate and then be pleasantly surprised if it’s better than I predicted. Also, as this article notes:
Inflation is one of the major problems for an investor hoping to recreate that 11.88% average return regularly. Adjusted for inflation, the historical average annual return is only around 8.5%.
That makes my 7% seem a lot more reasonable. Furthermore, people argue about what the actual accurate, inflation-adjusted return rate is:
When looking at nearly 100 years of data — from 1926 to 2021 — the yearly average stock market return was between 8% and 12% only eight times. In reality, stock market returns are typically much higher or much lower (source: SoFi).
To put a finer point on it, the NYU Stern School of Business made this very nice chart outlining the annual returns from the S&P 500 since 1995 and, as you will see, some years it’s good and other years, it’s pretty bad. In 2008, for example, it was -36.55%. YIKES. However, the savvy investors who kept their nerve and didn’t sell that year went on to enjoy a 25.94% return in 2009, followed by more good years including a whopping 32.15% return in 2013.
Remember: People only “lose it all” in the stock market when they sell their stocks at a loss and don’t remain invested for the long term.
4) Is it Ever Wise to Invest in Individual Stocks?
In my opinion, no. If that one company whose stock you hold goes down, your investment plummets. If Apple or Amazon or Netflix or whoever has a bad quarter, you have a bad quarter. If you are instead invested across the entire stock market, companies can go bankrupt and your portfolio will still bob along with the broader stock market. Investing in an individual stock is the epitome of “putting all your eggs in one basket.” I consider investing in individual stocks to be a hobby, not a financial strategy. If you really enjoy day trading and want to do it for fun, go right ahead! But I wouldn’t do it with money I need. In my opinion, it’s not much safer than going to a casino.
5) When Should You Use Your Taxable Investments?
Ideally, you will keep your money invested for the decades, until you retire. When you retire, you can begin to drawdown a percentage of these funds each year to cover your living expenses. As you near retirement, you’ll want to reduce the risk exposure of these investments so that you’re buffered from any major market downturns in the run-up to your retirement.
How This Applies to Alice and Ann
Alice and Ann have the majority of their net worth (not considering their paid-off home) invested in the stock market. In light of that, they’ll want to ensure they’re following the above investing basics. Chief among them: selecting a brokerage with low-fee, total market index funds and investing in those funds.
- I encourage them to investigate what Ann’s trust is invested in at Fidelity as a high expense ratio will leech money from that total over the years.
- Alice’s Roth IRA has a fairly low expense ratio (0.08%), but there are lower fee options available.
- Alice’s old 403b at TIAA is the major area for concern. At 0.42%, she’s losing a lot of money to fees.
- She notes that it “cannot be rolled over,” but that shouldn’t ever be the case. Here’s TIAA’s website on how to execute a rollover.
- There should be a way for her to roll this over into an IRA at a brokerage with low-fee offerings.
- And, retirement accounts aren’t impacted by capital gains taxes, so that shouldn’t be an issue.
- I can almost guarantee that TIAA will give her a very hard time about it, but it’ll be a worthy battle.
And now, onto the other parts of Alice’s question:
Is there a better distribution for this financial cushion?
I don’t think so. Their emergency fund is fully funded and their retirement is a wild card until they determine the pension and SS benefits. As noted above, if they are behind on retirement after determining these two variables, they can have Ann open up an IRA and max it out. As for the kids, I recommend they speak with a lawyer about how to structure those savings/investments.
Should we be saving our emergency fund in two categories: 1) kid related; 2) general emergencies?
This is really a question of personal preference. There’s no financial advantage to having two different emergency funds, so it’s more of an administrative preference. If it would be helpful to Ann and Alice, they can certainly divide up their emergency fund. For me personally, I find it more streamlined and easier to just have everything all in one place, but it’s totally up to them.
What is a series I-bond? I googled it and don’t get it.
A Series I Savings Bond is a bond sold by the US government that earns both, “…a fixed rate of interest and a rate that changes with inflation. Twice a year, we set the inflation rate for the next 6 months” (source: The US Department of the Treasury). The idea is that it’s supposed to keep up with inflation, which makes it very attractive in our current inflationary market.
Is this [a series I bond] a place to hold some emergency money long-term?
Yes and no. It depends on your life, your risk tolerance, how variable your expenses are, and how much “extra” money you have on hand. The reason being is that putting your money in an I Bond locks it up. It’s no longer liquid. You can’t withdraw it tomorrow when your car breaks down. Here’s how the Treasury Department explains it:
“You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.”
What they’re saying is that you cannot get your money out before one year passes. And if you take your money out sooner than 5 years, you lose the last three months worth of interest. Therefore, you do not want to put money in here that you might need. I do not recommend that anyone utilize an I bond as an emergency fund because it’s not one. By its very definition, an emergency fund MUST be held in easily accessible cash. An I bond isn’t going to do you any good if your dog gets quilled by a porcupine and has to go to the emergency vet. Your emergency fund should be money that you can access when you’re standing in the ER, at the vet, at the mechanic’s, etc.
In Alice and Ann’s case, my advice would be to not put their money into an I Bond at this time because:
- They only have three months’ worth of their expenses in cash. This is the bare minimum to have on hand. If they had, say, a year’s worth of cash, then an I Bond might make sense for half of that cash.
- Additionally, given the variability they experience with their kids’ needs, I wouldn’t recommend they tie up their emergency fund.
- Hire a lawyer to advise them on how to structure savings/investments for their sons’ future. Explore whether a Special Needs Trust or other vehicle will be most appropriate.
- Be sure to ask the lawyer about whether or not to continue investing in Roth IRAs for each child.
- Research healthcare options:
- As a public sector employee, Ann’s employer-sponsored healthcare plan might be cheaper for the two of them.
- If not, explore the other options through the ACA and make sure they’re applying all of the subsidies they qualify for based on their income.
- If they do change insurance, re-assess if the level of HSA contribution continues to make sense.
- Delve into Ann’s pension plan details and ensure they fully understand the ramifications. Ask HR for help–they are there for this purpose.
- With the knowledge of Ann’s pension and SS benefits in hand, assess their progress towards retirement.
- If they need to catch up, consider opening an IRA for Ann and have her contribute the annual max ($7,500 in 2023).
- Keep their emergency fund in cash so that it’s there for them when they need it.
- Consider putting all of their cash (or the majority of it) into their high-interest account.
- Try to determine what Ann’s trust is invested in.
- Follow the investing guidelines above for the trust and all retirement accounts.
- Feel confident that they’re doing great and are on a solid financial path!
Ok Frugalwoods nation, what advice do you have for Alice? We’ll both reply to comments, so please feel free to ask questions!
Would you like your own Case Study to appear here on Frugalwoods? Apply to be an on-the-blog Case Study subject here. Hire me for a private financial consultation here. Schedule an hourlong call with me here, refer a friend to me here, or email me with questions (firstname.lastname@example.org).
Oh, and before I forget… Join a UFM Mastermind Group!
Money is something we’re not supposed to talk about and so many of us don’t. We harbor secret concerns, joys, frustrations, questions and don’t have an outlet for them. This is that outlet! These groups are the place to discuss every single weird money question you have. These groups are the place to share every single money success you experience. These groups are where you’ll find camaraderie and support.
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🧠 Lack of clarity on your long-term goals and how your money might impact your future.
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