Welcome to the third part in our five part series on ABLE accounts. The first two parts explained what ABLE accounts are and who may want to consider opening one. IN this part, we’ll look at a few reasons why you may want to consider opening an ABLE account.
What is an ABLE account?
Before 2015, blind people who received Supplemental Security Income (SSI), Medicaid, or other government benefits, were only allowed to have up to $2000 in savings to cover emergencies. This all changed with the passage of the Stephen J. Beck Jr. Achieving A Better Life Experience Act of 2014. The law allows states to establish tax-advantaged investment accounts that people with disabilities can use to save to pay for disability-related expenses including housing, transportation, medical expenses, education, and more. SSI and Medicaid recipients can save up to $100,000 in an ABLE account without impacting their benefits. The money they save can come from themselves, their employer, and their friends and relatives.
Why should I save money at all?
There are three main reasons to save money, and an ABLE account can be used for any of them:
You want to buy something, do something, or go somewhere expensive
Are you involved with the American Council of the Blind or National Federation of the Blind?
Their national conventions are an invaluable source of information and networking for a blind person at any stage of her life. It could cost over $1,200 just to attend a national convention, and that estimate leaves nothing left over for extras. Saving $108 a month for a year will cover that cost and leave your current month’s disposable income available so you don’t feel strapped for cash. An ABLE account can be used to cover transportation to a convention, housing and food while you’re there, and any assistive technology or blindness-related services you choose to buy while you’re there or after you leave.
Do you participate in a sport or activity like blind skiing or beep baseball?
Activities like this require spending on equipment, travel, food, housing, and lift tickets or tournament fees. One beep baseball team suggests that each team member plan to spend $975 to attend the beep baseball world series. Saving just $81.25 a month for a year will cover that cost without dipping into your current paycheck. An ABLE account can be used to cover transportation to a tournament, housing and food while you’re there, and any medical expenses if you get hurt on or off the field.
Do you want to go to college and find a job?
Some states offer tuition assistance to people who are blind, making college extremely inexpensive. There are always out of pocket expenses, though, that aren’t covered. It can also be expensive to move to take a job or internship.
Lee spent over $3000 to move to a neighboring state when he found a job there. He was able to get help from his friends and family to scrape together that money, but having it in savings would’ve saved him some stress during a very stressful time. Lee learned his lesson and now saves part of each paycheck incase an opportunity like that comes along again. An ABLE account can help him to grow his savings faster and protect any future Social Security benefits he might receive.
Do you want to buy a home?
Buying a home may feel impossible for those of us with lower income, but with the help of low interest mortgage loans, down payment assistance grants, and some money set aside, people of almost all walks of life have found this possible.
Art makes about $2,800 a month. He saved $387 a month for a year for a $4,600 down payment on his first home. This, combined with a Federal Housing Administration (FHA) loan allowed him to move out of his $1,084 a month apartment into his first home for just over $1,100 a month. An ABLE account could’ve helped him to grow his savings while paying less in taxes on the interest he earned.
Are you a parent of a blind child and aren’t sure what her future holds?
People who are blind have achieved all of the things above and much more. Setting aside a little bit of money throughout their childhood may barely impact your finances, but will mean the world to them when they move out on their own for the first time.
You want to start or stop working
Paul worked for a local radio station for almost 30 years. He lost his job when he was 55 after his station was bought by a big company who downsized the local staff. Between his retirement savings, his SSDI check, and some contract work he was able to find at other radio stations, he was able to partially retire and continue supporting his family. He couldn’t have done it if he hadn’t been saving part of each pay check for most of his career. An ABLE account could’ve helped him by allowing him to withdraw money tax free during his retirement.
Jessica graduated from a midwestern college and got her first job offer on the east coast. It cost her and her parents $7,600 to travel to her new city to find and furnish her new apartment. This put them in credit card debt. Their minimum monthly payment was $304. If they’d saved $304 a month throughout Jessica’s college years, they would’ve had $14502, or nearly twice the amount they actually needed to spend. An ABLE account could’ve helped them to grow Jessica’s savings while protecting the SSI benefit she received throughout college.
You want to be prepared for an emergency
Emergencies are hard to save for because they’re hard to predict. Life can be humming along just fine when something big, or small, goes wrong. Maybe your computer or smart phone breaks, making it more difficult to read the recipe you were planning to make for dinner. Possibly your water heater breaks the night before you have a big job interview, or perhaps you’re called into your boss’s office at the end of the week to find out that you’re losing your job.
Insurance policies are made to cover very large emergencies, like a house fire, and credit cards or installment loans can be used to cover small emergencies, like an appliance breaking. There is no substitute, though, for an emergency fund, even if it’s a small one.
- A $500 emergency fund can replace most home appliances.
- A $1,000 emergency fund can cover food for a single person for several months if necessary.
- A $2,000 emergency fund can cover a rent or mortgage payment for many people.
- A $4,000 emergency fund can cover the cost of a new furnace if it breaks in the middle of winter.
- An $8,000 emergency fund can cover three months of expenses for someone making $2500 a month.
- And a $16,000 emergency fund can cover expenses for someone making $2500 a month.
Why should I invest?
Investing helps you to save faster by growing the money you’ve already saved while you continue to add more. The technical term for this is “compound interest”. It seems complicated, but it just means that you earn a little extra money from the money you’ve invested.
Consider this example:
- Britney deposits $100 in a savings account that earns 2 percent interest a year.
- After a year she has $102 in her savings account because she has earned $2 in interest.
- After five years she has $110.40 in her account because she has earned $10.40 in interest.
- After 10 years, she has $121.89 because she has earned $21.89 in interest.
- After 20 years she has $148.59 because she has earned $48.59 in interest.
As you can see, the amount of interest Britney earns increases every year that her money stays in her account. The increases will keep getting larger over time, but at two percent, it’ll take Britney a very long time to earn much money this way. She can do two things to improve this, though:
- She can contribute regularly to her savings account, so she adds money at the time her bank adds interest.
- She can open an account with a higher interest rate so she can earn more in interest every year.
An investment account is an account that earns interest by investing money in bonds (loans to companies or governments), and stocks (shares of ownership in a company). Buying individual stocks and bonds can be difficult, costly, and risky for individual investors, so some companies offer mutual funds (professionally managed groups of stocks and bonds). They earn less interest, but are also a lot less risky. Bonds, stocks, and shares of mutual funds are held in investment accounts.
Interest rates for investment accounts vary a lot, but are typically much higher than interest rates for savings accounts:
- Investing in bonds has low risk and can earn between 2 and 10 percent interest, though two to four percent interest is much more typical.
- Investing in individual stocks has high risk, but can earn much more interest.
- Investing in a combination of stocks and bonds can earn more interest than an all-bond portfolio, but can still have low risk. Typical interest rates for low risk stock/bond combinations range from six to twelve percent.
If Britney saves $100 at twelve percent, her interest earnings will be much higher:
- After a year she will have $112 because she has earned $12 in interest.
- After five years she will have $176.23 because she has earned $76.23 in interest.
- After ten years she will have $310.58 because she earned $210.58 in interest.
- After 20 years she will have $964.62 because she has earned $864.62 in interest.
As you can see, by increasing the interest rate, Britney will have earned more than eight times her original investment, simply by keeping her money invested for 20 years. She’d have much more, though, if she also contributed a small part of her income every month over that period of time.
Why should I invest using an ABLE Account?
As you’ve seen, saving money leaves you prepared to afford planned and unplanned expenses. Earning interest lets you build up a larger savings than you could on your own. The benefit protections and tax advantages of an ABLE account are an opportunity only available to people who are blind or disabled. You and your financial advisor should be aware of them and should consider how they fit into you or your child’s financial plan.