I remain optimistic when it comes to the stock market’s ability to build wealth over the long haul. Even with that perspective firmly in place, I plan to pull more money out of stocks in 2024 than I will be investing into stocks.
There’s a good reason for that expectation: I’ll have two kids in college. My oldest started in the fall of 2023, and my second child is now deciding where she will attend beginning the fall of 2024. While I pride myself on living below my means, the math simply doesn’t work out for me to be able to cash flow two simultaneous college educations and cover my costs of living from salary alone.
Money you know you’ll be spending soon does not belong in stocks
With that reality in mind, I now face a very strong likelihood that I will be spending more than I take home from work in 2024 (and 2025 and 2026…). The key source of money for my children’s college educations will be the 529 college savings plans I set up for them shortly after they were born and have been funding ever since.
Those plans allow you to put money to work that is after tax from a Federal perspective but potentially tax deductible from a state perspective. While in the 529 plan, the money grows tax deferred, and if used for qualifying educational expenses, it comes out completely tax free.
I put money into stock-based mutual funds in their plans each year through high school, to give them the best shot of receiving long-term growth. In early 2023, when my oldest picked his college, I transferred the investments in his 529 account into FDIC-insured CDs. As my daughter finalizes her choice, I very much expect that I will follow a similar path with hers.
The reason is simple: Money you know that you will spend from your investments over the next few years does not belong in stocks. While that guidance typically gets shared with those planning for retirement, it’s a smart idea for anyone who needs to spend money from their portfolio to follow.
While stocks can be an incredibly strong tools for building wealth over time, they’re terrible tools for preserving that wealth when you need to withdraw money from your investments. This is because even the stocks of strong companies can be volatile.
Your bills won’t wait for a strong stock market for their due dates. If you have to sell stocks while your investments are down to cover a bill, then you’ll be selling that many more shares than you would be if your investments happened to be up.
Once I have a decent handle on how much my daughter’s out-of-pocket college costs will be, I’ll know how much I’ll need to spend — and whether or not her 529 balance will be sufficient to cover them. At that point, unless she gets and accepts a full-ride scholarship somewhere, I’ll have money I know I will need to spend from my portfolio in the next few years. You know, the exact type of money that does not belong in stocks.
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This strategy may provide enough to cover my daughter’s college costs (after scholarships) because it uses stocks for what they’re good for and higher certainty assets for what they’re good for. To get the long term growth prospects that stocks can provide, though, you need to have a long-enough time frame to let them have a chance to grow despite the volatility that takes place in the market.
So make today the day you get a handle on when you expect to spend money from your portfolio and about how much you’ll need. With those dates and amounts in mind, it will get much easier for you, too, to know when it’s time to plan to pull money out of stocks for yourself.
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Why I Plan to Pull Money Out of Stocks in 2024 was originally published by The Motley Fool