529 AND 401(K) PLANS: REAL SAVINGS OR AN ILLUSION OF SECURITY?

529 Plans serve a purpose in saving for college education for our children. In the family law arena, these funds are often designated as the first funds to be applied toward the child’s college education before the assets and income of each parent and child are considered under 750 ILCS 5/513.

However, as should be noted of the recent stock market decline of 2008-2009, the question of when to convert the 529 Plan to liquidity is often a topic rarely discussed among divorcing parents, never married parties and married couples alike. To avoid a crisis and make these accounts meaningful, savings should begin at birth, and perhaps be converted from stocks and bonds to a certificate of deposits, which mature sixty days before the start of your child’s first day of college starting in the second year of high school. The illusion is centered on the increasing cost of higher education and the ability of the average family to save for same, especially when divorce and/or partners terminate their relationship and its effect on saving for college education.

As for 401(k), SEP IRAs, Profit Sharing, Keogh Plans, and other nonpension or retirement plans, it is clear that corporate, state and federal pensions provide a more certain monthly income guarantee if properly funded for the individual. The individual funding his own retirement plan at current rates of return might require over $2,000,000 in their account upon retirement to ensure an $80,000 income per year, assigning a retirement age of 66 years old and a life expectancy of 90 years of age, with equal amounts per year in withdrawals and no accounting for inflation. The illusion here is that it is nearly statistically impossible to accumulate said amounts without commencing retirement contributions at 22 years of age. In today’s unemployment market for young adults, this seems impossible to achieve on the surface. Putting away $2,000,000 by 66 years of age is a lofty goal. At current rates of interest paid by banks at less than 1.2% annually, a retired individual would earn $12,000 in the first year and would have to significantly remove the principal from the amount to maintain the standard of living they enjoyed before retirement.

As a family law attorney, I examine the assets of every client in my office. I often compare equity in a home to the value of retirement accounts. These two assets tend to be the largest holdings of most households. The recent deterioration of equity in real estate reflected by foreclosures and short sales have impacted all homeowners, including those who have made all their mortgage payments but unfortunately live down the block from a home being foreclosed or short sale at a time that a divorce is filed at their household and the need to sell the marital residence occurs. These are issues we deal with every day.