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Retirement Planning Strategies for Managing Interest Rates, Investment Yields, and 529 Accounts Thumbnail

Retirement Planning Strategies for Managing Interest Rates, Investment Yields, and 529 Accounts

My team at Keen on Retirement has been hard at work analyzing the question that's top-of-mind for many of our listeners. And after crunching the numbers ...

Yes, it looks like Taylor Swift will be able to attend the Super Bowl! She's scheduled to perform in Tokyo the night before our Chiefs take on the 49ers, but thanks to a 17-hour time difference -- and, presumably, a private jet -- we do expect to see Taylor in Las Vegas.

All kidding aside, I'm especially excited for this round of listener questions. A couple of folks who have been with Keen Wealth for many years took the time to ask about important issues that may be relevant to your financial planning.

1. "With interest rates possibly being lowered by the Fed in the coming year, what does that mean for current holders of fixed-income investments?" 

First, a word of caution: while inflation has been declining, and while recent GDP and jobs data continue to point towards a strong economy, there's no guarantee rate cuts are coming. And if the Fed decides to keep rates where they are for a few more months, that doesn't mean the economy is suddenly bad. As we head into election season, and with serious conflicts raging in Europe and the Middle East, it's important to remember that many folks reporting on the economy are also attempting to tell a story about the wider world. If you get too wrapped up in any one narrative, you could make emotional decisions about your finances rather than practical ones.

At Keen Wealth, we believe that fixed-income investments like bonds and CDs can be an important diversification tool within a balanced portfolio. But there is a subset of investors who flock to these investments when the economy is volatile or when they're nervous about things like war and elections. Back in 2022, many economic experts (though not our Matt Wilson!) were convinced that a recession was inevitable, and I-bonds suddenly became popular, despite their complicated rules and limited upside. In 2024 and beyond, some of those bonds and other fixed-income investments might not yield as much as investors hoped, especially if the Fed does indeed cut interest rates.

As Matt shared in his 2024 Market Outlook webinar, historical data suggests that investors who are willing to accept some volatility and focus their long-term financial planning on the markets generally earn more on their investments than those who try to "play it safe" with fixed income. If you're holding CDs or treasury notes that are about to mature, set up a meeting with your financial advisor before you buy more bonds. Even if the yield on those investments is lower than anticipated, you're still getting a return plus the principal that you can reallocate to other parts of your portfolio.

2. "What is the difference between APR and APY?"

APR stands for “annual percentage rate” of interest on money you borrow from a bank or on debt like a credit card or mortgage.

APY is “annual percentage yield,” meaning what you'll earn on something like a CD or savings account over the course of a year, assuming you reinvest the interest and let it compound.

Be aware that sometimes you'll see banks using APY rates when they're marketing CDs or other products that mature in less than a year. So if you buy, say, a 3-month CD, you're only going to receive a quarter of that APY. Always make sure you read the fine print before making these kinds of investments.

Or, better yet, talk to your financial advisor first!

3. "I read that 529 accounts can now be transferred to a Roth IRA. How does that work?"

529 accounts are typically established by parents or grandparents to help younger family members pay for their education. Deposits into 529s grow tax free. Originally, 529s could only be used for college expenses, but recent rule changes have made allowances for K-12 tuition and (in some states) student loan debt.

But what happens if the account beneficiary doesn't go to college or if they don't need the money to cover educational expenses?

Starting this year, the SECURE Act 2.0 allows 529 holders to make conversions into a Roth IRA without incurring penalties from the IRS. We're still waiting for the government to clarify rules around how much you can convert and allowable beneficiaries, but hopefully these changes make 529s a little more useful for folks who are trying to help their loved ones while also securing their own retirement.

For more information on 529s and how the SECURE Act 2.0 could affect your financial planning this year, check out this replay of Matt Wilson's recent webinar.

Thanks again to the friends of Keen Wealth who submitted questions for today's show. And even if you're not a client of our firm, please don't hesitate to send us questions you'd like us to cover on a future episode.

About Bill

Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

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