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Where Should I Invest College Savings?

Question: I was planning to move money tagged for college expenses three years from now from a balanced fund to a tax-exempt bond fund. Now, based on all the chatter about bond funds heading downward, I am at a loss as to where to put the money, or if I should move it at all.  While safe, savings accounts and short-term certificates of deposit just don’t seem right to me.  Any suggestions on what to do to best preserve my investment?

– John Fuoss, Plano, Texas.

Answer: Because you’ll need the money in a few years, it makes sense to move the savings out of a balanced fund — which can have hefty, risky equity exposure — and into a bond fund, which should be more stable. But you’re right to be concerned: Bond funds could lose money if interest rates start to rise and bond prices fall. The Federal Reserve has said it intends to keep rates low for the next two years. Still, that’s no guarantee.

To protect yourself against rising rates, use a bond fund that focuses on short-term bonds, defined as those that mature in less than five years, says Deborah Frazier, a financial adviser in Chapel Hill, N.C. A tax-exempt municipal bond fund would pay off most if you are in a high tax bracket and can take advantage of the tax break—which maxes out at 35%, depending on your income tax rate. But for most people, a diversified short-term bond fund, such as the $22 billion Vanguard Short-Term Bond Index fund (VBISX) should do the trick, says Frazier. The fund invests in high-quality bonds, according to Morningstar, and it charges 0.22%, or $22 for every $10,000 invested.

To be even more conservative, as you get closer to the date when you’ll need the money, you may want to move some of it into a certificate of deposit – for example, a year out, put one year’s worth of tuition into a one-year CD, says Scott Halliwell, a financial planner with USAA. Rates on CDs may be low, but the money would be backed by FDIC insurance. And your savings would be safe from any price fluctuations in the bond market.

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    • My view is: the required reientmert amount (CASH, not including asset like houses) will depend on the age who this person (single) or couple want to retire (could be any age). Some assumption have to be made. Assumption are: 1) All loans are fully paid ie. Housing, education. No more dependent allowances and expenses to worry about. It will be difficult to talk about reientmert if loans/debt are not cleared.2) Inflation: average 2% annum3) Optimistic Investment return: 4% annum (ie. SGS bonds)4) Assuming a person life span of 80 years old.5) Assuming CPF RA minimum amount reached – S$117,000. Retirement age at ie. 50years oldA) For Single – $600K CASH$600K at 4% – $24K passive incomeB) For retired couple -$900K CASH$900K at 4% – $36K passive income[Left over from passive income to be re-invested to SGS bonds][Remember that at 65years old, CPF RA will be able to be utilised]Retirement age at ie. 60years oldA) For Single – $500K CASH$500K at 4% – $20K passive incomeB) For retired couple – $700K CASH$700K at 4% – $28K passive income[Left over from passive income to be re-invested to SGS bonds][Remember that at 65years old, CPF RA will be able to be utilised]

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