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More Q & A, Star Tribune

Q: My wife and I had our first child a few months ago. After doing some research, we had all but pulled the trigger on one state's 529 college savings plan (Virginia) when we learned that as a gift, our family had already started and plans to continue giving to a another state's 529 (Minnesota - the state we live in.) Other than the need to make and keep track of the minimal annual investments for each, is there are any negatives to having two plans open at once? Right now, we only have one child, but do plan to have another in the future. Aaron

A: This is one of those times when you really can't go wrong financially. You researched 529s and liked the Virginia option the most. Your family chose Minnesota's 529 plan, but it is also well-regarded. So, there's no good reason just on the basic plans to choose one over the other.

The real advantage of going with one 529 is simplicity: It makes your bookkeeping life a hair easier and a bit more straight forward in communicating with any family, relatives, and friends who would like to contribute. That said, in some cases it can make sense to diversify with 529 plans to take advantage of different investment choices. For example, both the Minnesota plan and the Virginia college savings plan offer an aged-based savings option. It's a sensible choice that automatically invests more of your money in equities when your child is young and more in cash as the college tuition bill looms. If that's what you want to do, then I would go with one plan.

But Virginia also offers a broker-dealer option that lets you invest with mutual funds managed by the American Funds (for a higher fee). Now, I'm a fan of low-fee aged-based 529 plans. But the giant American Funds offers a number of well-respected investment options. You may want a different savings mix and you can create that option for yourself by investing in the two plans.

If you go to www.savingforcollege.com it has a nice feature that allows you to compare the basics of up to six 529 plans at once.

Q: What is your opinion on Single Premium Immediate Annuities? My wife and I are both 80 years old. I have a defined pension which started 20 years ago. I have had no increases in that time frame. We have a significant amount of money invested with Vanguard and Fidelity in various funds. We have significant money in a Bank Money Market Account. We also have two large 12 month CD's. Right now we have enough money coming in to meet our monthly expenses. Should I be looking into the future when that may not be the case? Thanks.

A: As readers of this column and listeners to Marketplace Money know, I'm not a fan of many types of annuities, especially variable annuities. A variable annuity is a tax sheltered insurance investment product wrapped around mutual funds and, despite their popularity, variable annuities have a number of drawbacks, including steep fees, limited financial flexibility, and the transformation of low-tax capital gains into high-tax ordinary income.

But there is a lot to be said in favor of single premium immediate annuities for retirees. The appreciation of immediate annuities has grown in recent years in the financial planning community, too. Basically, single premium means you make a lump sum payment and in return you get a predictable monthly income on that investment for the rest of your life. Like Social Security and an old-fashioned defined benefit pension plan, you can't outlive the annuity. It's an annuity product that offers financial security and piece of mind to many retirees.

There are a number of factors to consider before buying an immediate annuity. For instance, how much you can get monthly depends on a number of factors, including your age and how much you invest, whether the payouts are for your life or include your spouse, and if the investment is protected from inflation. You also should factor in a loss of control over the money you put into the annuity. Right now you can always cash in some of your mutual funds in an emergency--it's there to meet any unusual expenses. That won't be the case for any of the money you put into an annuity. You should only do business with a highly rated insurance company, one with a blue chip balance sheet.

Whether or not a single premium immediate annuity is a good investment for you is partly a matter of finances and partly temperament. First, I would go through your expenses and investments, and run the numbers to see if an immediate annuity is a financially savvy move on your part. And, of course, how much of your savings to annuitize. I would talk with a financial planner (preferably a fee-only Certified Financial Planner or CFP) to get expert guidance.

Take the psychological element seriously. I know people who put the bulk of their retirement savings into annuities for piece of mind. They did it so they could sleep at night during periods of extreme market volatility, such as the current credit fears over subprime mortgage loans. They also drew solace knowing that they couldn't outlive their next egg. But other people I've talked to over the years believe the steady income from Social Security pension is enough (and a traditional pension if they have one). They'd rather manage the rest of their money on their own. They like maintaining control over their investments.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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