July 15, 2024
Search
Close this search box.
Search
Close this search box.
July 15, 2024
Search
Close this search box.

Linking Northern and Central NJ, Bronx, Manhattan, Westchester and CT

The TBD Account–Many Applications (Part 1)

Many professional sports teams in the United States conclude their seasons with a playoff to decide a champion. With the exception of football, these playoffs typically consist of a best-of-seven series in which the first team to win four games either moves on or is declared the champion. Because a series can be as short as four games (a sweep) or as long as seven, broadcasters of these events have a tentative schedule; they know the air times for the first four games, but the specifics regarding games 5-7 are dependent on how the series plays out. Thus, when a fan checks a newspaper or online to know when his team will play one of the later games in a series, the schedule will often read “TBD”–for “To Be Determined.”

If you are a ticket holder for games 5–7, waiting for a start time can a bit aggravating. If your ability to attend depends on your work schedule, it could make a difference if the game starts at 3:00 p.m. instead of 8:00 p.m. Or what if you have to drive a long distance to attend? While it is perhaps a small inconvenience, the uncertainty of a TBD event can be unsettling.

However, while sports fans may see TBD designations as an irritant, it may be profitable to use a to-be-determined strategy for wealth accumulation. Like the network that waits to set its broadcast schedule to maximize viewers, individuals may optimize their financial effectiveness by taking a wait-and-see approach instead of overcommitting to specific accumulation strategies that may later prove to be less than the best. For example…

· Instead of making a maximum 401(k) deposit from each paycheck, there might be advantages to limiting contributions, then using the “catch-up” provisions in your 50s and 60s.

· Instead of pushing extra dollars into a 529 plan or Coverdell account for college costs, it might be prudent to hold your accumulation outside of these for-education-only accounts until your children are sure about their higher education plans.

· Instead of opting to pay off your home loan with a 15-year mortgage, it might be to your benefit to choose a 30-year term and accumulate the difference in the monthly payments.

While this approach may at first seem counterintuitive, a TBD accumulation strategy merits thoughtful consideration. Here’s why:

In trying to find the perfect solution to each financial challenge, it’s possible to end up with an under-performing financial program. For every specific financial need, the marketplace offers a variety of products and plans. Congress provides a new template, financial institutions develop new products, and financial gurus mint new acronyms: there are Roth IRAs, SEPs, CDOs, IPOs, REITs, and dozens more. Taken by themselves, many of these products and strategies make perfect sense. But a financial approach that simply adds another account each time a new issue arises usually doesn’t work well. This is because…things change. Your income may be interrupted, a home repair could require a major expenditure, your daughter could decide not to attend college, and a big down payment might be needed to seize an opportunity. If (and when) change comes, accounts that were established to “perfectly” address an old financial issue may not be well-suited to handle today’s challenges. If making changes to accommodate new financial realities results in surrender charges and/or additional penalty taxes, reconfiguring those “perfect” plans can be a costly process.

There’s not enough money to go around. When consumers have many issue-specific accounts, but not enough money, some programs may never be fully funded. And under-funding often leads to under-performance. As an example, when individuals seeking a permanent life insurance benefit choose a minimum-premium universal life policy, they run the risk that the coverage will expire before they do. The result: a lot of premiums paid, and no benefits.

The shortcomings of the issue-specific approach are evident in the way employees focus their accumulation efforts on their 401(k)s, then end up borrowing from the accounts to address other financial issues. Bloomberg News, citing an April 2013 report from Wells Fargo & Co., found: “The number of people taking loans from their 401(k) retirement accounts increased 28% in the fourth quarter from a year earlier as older workers tapped their savings.” The report specifically mentioned that savers in their 50s were the most likely to be borrowers against their retirement savings. Retirement accounts work best when they aren’t accessed until retirement. But when career changes, health problems, or financial emergencies crop up, the only recourse for those who maximally fund their 401(k)’s is to tap the account. Using a 401(k) before retirement is costly from a tax standpoint, limited in regard to amounts that can be loaned, and can result in another debt that must be added to the monthly budget. In short, it is financially inefficient. Why not “under-commit” one’s 401(k) contributions, and instead establish another accumulation account (yes, a TBD account) that wouldn’t be so costly or restrictive to access? The to-be-determined approach recognizes the realities of change and limited resources, and gives you options to better respond to whatever comes up – bad or good.

 

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers.

Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil

Leave a Comment

Most Popular Articles