In honor of Autism Acceptance Month, Femme Frugality is running a series of Monday articles focusing on the triumphs and challenges those diagnosed with autism conquer as related to their finances and careers.
Joining us for the third post in our series is Tara Falcone, CFP®. Falcone is a CERTIFIED FINANCIAL PLANNER™, former Wall Street analyst, and founder of ReisUP LLC.
ReisUP is an early-stage financial services company dedicated to increasing investing education and access for everyday investors. Her mission is to empower people to “rise up” and play a more active role in achieving their financial goals.
A couple of weeks ago, we kicked off our Autism Acceptance Series by looking into a new financial vehicle: ABLE Accounts.
ABLE accounts allow individuals with disabilities, or their guardians, to stash away some money without having to worry about failing an asset test when they go to apply for state or federal benefits. These accounts can also be used to grow your savings tax free.
There are currently nineteen states that offer ABLE accounts. For simplicity’s sake, we’ll be looking at only Pennsylvania’s investment options today, though the same concepts can be applied in generality.
What are ABLE investment options?
The PA ABLE account has the following seven allocation options:
- High-yield checking account
- Conservative Investment Portfolio
- Moderately Conservative Investment Portfolio
- Moderate Investment Portfolio
- Growth Investment Portfolio
- Moderately Aggressive Investment Portfolio
- Aggressive Investment Portfolio
“The Conservative and Moderately Conservative options invest 70-90% of their portfolios in cash and bonds, with the rest (10-30%) invested in a variety of stocks,” says Tara Falcone, CFP® of ReisUP LLC.
“The primary goal of these investment options is to preserve your principal, which is the money you deposit into your ABLE account, while offering limited to small returns on your investment. Small potential risk equates to small potential reward.
“The Moderate and Growth options’ portfolios are split roughly 50/50 between bonds and stocks. These investment strategies focus less on principal protection and more on generating a slightly higher return on the invested assets. Moderate potential risk means moderate potential reward.
“Finally, the Moderately Aggressive and Aggressive options are invested primarily in stocks (75-90%) with a small portion of the portfolios invested in bonds (10-25%). These options’ primary goal is to achieve the highest growth possible with little regard for principal preservation.”
Figure Out Why and How to Invest
Before making any investment, it’s important to identify why you’re investing, and what limitations your specific life situation may impose. Falcone advises looking at the following factors before choosing your allocation strategy.
Investments are not stagnant. At times they’ll go up, and at others they’ll go down. Your risk tolerance is how much sleep you’ll lose over that fact.
“Generally, more conservative investment options are less volatile, meaning your account balance fluctuates less,” Falcone explains. “However, that also means it’s unlikely to grow as much since less risk yields less reward.”
“Meanwhile, aggressive options typically generate larger investment returns, but also subject your account balance to bigger positive and negative swings. This could put you at risk of not having sufficient funds to cover expenses when you need it.”
How long can you let your money sit without touching it? That’s your time horizon.
“If a beneficiary needs to access a large portion of his or her ABLE account every year to pay for qualified expenses, a conservative investment strategy is likely more appropriate,” explains Falcone. “If someone in this situation were invested more aggressively, they may discover that their account balance has decreased in a market downturn, leaving them unable to pay for current expenses.”
If, however, you’re saving to provide for your child after you’re gone, you may have a longer investing horizon.
“Someone with a longer investing horizon who doesn’t need to withdraw a large portion of their account for five or more years may want to consider a moderate or aggressive option,” says Falcone.
“The larger growth potential inherent in these investment strategies could allow that person to take greater advantage of the tax-free growth nature of ABLE accounts. In this case, the beneficiary should consider reallocating to a more conservative strategy as the time when they will need to withdraw money from their account approaches.”
“In theory,” Falcone continues, “the more someone can deposit into their ABLE account every year relative to their expected expenses, the more aggressive they can afford to be from an investment perspective.”
Check out this example with Ella and Ari:
There are two basic reasons ABLE accounts are so attractive. The reason you were drawn to it probably says a lot about your overall goal.
Reason #1: Savings isn’t counted for asset tests.
If you’re applying for government benefits like Medicaid or SNAP, savings in your ABLE account will almost never count against you. This is important when you’re trying to build up savings for medical equipment, therapies, or even just a basic emergency fund that you will need in the near future. In these cases, Falcone notes that a conservative approach is probably the best fit.
Reason #2: You’re taking advantage of the tax-free growth.
If you’re saving for your child’s future but don’t have a large enough nest egg to justify a special needs trust, ABLE accounts are particularly attractive due to their tax-free growth. Falcone notes that any time you’re making a longer-term investment, you can afford to be more aggressive.
It is possible that you’re taking advantage of both perks. You’re saving large sums of money for a date far off in the future, but are only able to do so because that savings won’t count against you in an asset test. In these cases, Falcone says you can yet again afford to be more aggressive.
While risk tolerance is how you feel about the volatility of your investments, risk capacity looks at the risk you can take on from a concrete, objective perspective.
“Due to the assets test that owners/beneficiaries of ABLE accounts must pass in order to qualify for Medicaid and other social programs, risk capacity is arguably the most important factor to consider in these unique circumstances,” notes Falcone.
“Asset tests often prevent families with disabilities from building substantial emergency funds that could cover expenses temporarily should the ABLE account balance drop in a market downturn. Therefore, even though someone may be comfortable with more investment risk, he or she may not be able to afford being exposed to such risk due to lack of other cash sources.”
If you have friends and family who want to contribute, but you also want to extend your investment time horizon, you may want to direct them to specific bills that they can pay rather than making contributions to the ABLE account.
Falcone points out that this keeps your money in your account as a long-term investment while keeping it out of your regular checking account where it would be counted in an asset test.
How should I invest with my ABLE account?
Wondering what you should do in your specific situation? Below you’ll find Falcone’s recommendations for some common circumstances individuals or families may find themselves in.
While this advice speaks to generic situations, it’s always advisable to talk with a professional about your own, unique set of circumstances before making any investment.
High-Yield Checking Account
- Someone with no risk tolerance. They are not willing to put any of their funds at risk to earn even a small return.
- Someone who needs the ability to withdraw funds immediately. Otherwise, withdrawal proceeds can take 3-10 days to reach the beneficiary in Pennsylvania, per the Program Disclosure Statement.
- Someone who is already the beneficiary of a special needs trust or has some other fund/account/support to help pay for future expenses. They don’t need the benefit of the tax-free growth nature of an ABLE account, but want to shelter more funds from the asset test.
- A disabled adult with current cash need, desire to shelter some assets from the asset test, and/or desire for some financial independence to purchase/pay for things on their own.
Conservative Investment Portfolio
- Someone with very low risk tolerance.
- Someone with no or insufficient emergency fund (i.e. low risk capacity.)
- Someone with potentially large unexpected expenses.
- Someone with a present need for cash (i.e. short investing horizon of less than 2 to 5 years.)
- Someone whose primary goal is to shelter funds from the asset test, not earn a substantial return on those funds.
Moderately Conservative Investment Portfolio
This investor will display similar criteria to Conservative, but is willing to give up some principal protection for slightly more current income.
Moderate Investment Portfolio
- Someone with moderate risk tolerance and moderate risk capacity.
- Someone with high risk tolerance and low risk capacity. They’re comfortable with volatility, but can’t necessarily afford to lose money in the short-to-medium term.
- Someone with low risk tolerance but high risk capacity. They’re not as comfortable with investment volatility, but can afford to take on some risk to earn a potential return.
- Someone with infrequent but potentially large unexpected expenses.
- Someone with a medium-length investing horizon of 5 to 20 years–perhaps a parent saving for their child’s future expenses, including education.
- Someone who wants their money to earn a slightly higher return.
- Someone who has access to other cash sources or temporary support in the event of a market downturn.
Growth Investment Portfolio
Will display similar criteria to Moderate, but is willing to take on slightly more risk for slightly more capital appreciation potential.
Moderately Aggressive Investment Portfolio
- Someone with a high risk tolerance.
- Someone with a high risk capacity (i.e. sufficient emergency funds or other cash/support sources.)
- Someone with a long investing horizon and desire to benefit most from ABLE’s tax-advantaged growth. This could be parents who want to set aside funds for their child’s future needs and want those funds to earn a substantial return.
- Someone who already has a special needs trust or is seeking an alternative to a special needs trust. One example is parents with a young disabled child or young adult.
- Someone who has a low savings capacity now, but a large future capital or income need. One group that may fit this profile is parents wanting to establish a fund to pay for their child’s needs upon their death.
Aggressive Investment Portfolio
These investors will display similar criteria to Moderately Aggressive, but to a larger extent for each point. Even more comfortable with risk, even longer investing horizon, even greater future income or capital need, even more sources of additional support, etc.
Evaluate, but don’t mix and match.
Falcone advises against investing in multiple different portfolios at one time.
“Allocate 100% of your account balance and future contributions to whichever investment option you choose,” she says. “Mixing them changes the overall allocation and therefore the resulting investment strategy. For example, allocating half of your account to the Conservative option and half to the Aggressive option results in a combined portfolio similar to the Moderate investment option.”
She says the only exception would be if you needed some cash on hand in the high-yield checking account, but wanted to invest the surplus.
Falcone leaves us with these final words of wisdom:
“No matter which option you choose, make sure to re-evaluate your choice every year and make appropriate adjustments if your circumstances and/or goals have changed.”