College savings is a topic that frequently comes up in my client meetings. Young parents and grandparents often inquire about the most effective ways to save for this major expense. I am familiar with the benefits of savings options such as 529 college savings and prepaid tuition plans so I was wanted to see what I could learn at the recent national Financial Planning Association conference in Boston.
Lynn O’Shaughnessy of collegesolutions.com presented “Five Simple Yet Effective Ways to Help Your Clients Cut Their College Costs”. One of the most important points she made was that 83% of colleges today provide financial aid. Lynn told us of a school with an annual cost of $40,000 for tuition, room & board; it was discounted to $21,300 for one of her clients. Other than the top tier of schools that don’t need to discount, colleges are looking to fulfill their enrollment goals. She said schools are so much in need to meet their enrollment goals, that some even try to convince students to change their mind even after they have elected another school. What a difference from my enrollment period in the 1970’s when we baby boomers were competing to get into college!
We often use college calculators such as the one from www.savingfor college.com to estimate a child’s future total expense for a higher education. When using a college calculator, you should to input a discounted number, say 30% to 40% less than the stated annual cost for tuition, food & board & expenses. The number will certainly be less frightening!
In my last two articles I wrote about being a financial role model for your children as well as how to teach them in an age appropriate manner to handle money wisely. To go one step further, let’s look at the benefit of encouraging a child who has earned income to establish an IRA.
Traditional IRAs offer a tax-deduction and the tax-deferred growth of money. Distributions are taxed as ordinary income, usually at retirement. They have a 10% penalty on most distributions before age 59 years. They aren’t the best option for most children as their income is usually not high enough to warrant a tax deduction.
Roth IRAs make great sense; they are designed to use after-tax savings rather than tax-deductible funds. Significantly, they allow for the tax-free growth of the money. That’s right, the savings will compound over time and they can be withdrawn tax and penalty-free at retirement as long as the account has been open for 5 years!
In my last article I wrote about being an effective role model for your children: save a portion of every paycheck, maintain an emergency reserve, budget wisely and talk openly with your children about money. Last but not least, encourage their development of good math skills while they are in school.
So what else can you do? Beth Koblinger, a bestselling author and a member of the President’s Advisory Council Capability, was instrumental in the creation of Money as You Grow:20 Things Kids Need to Know to Live Financially Smart Lives. You can find it online for free.
Kobliner breaks down money concepts that children can learn by age. Note the emphasis in bold for each point. While all points are valuable, I’ll expand upon one concept for each age.
Studies have shown that many people would rather go to the dentist than plan for their retirement. Wow, it amazes me that folks would rather sit in a chair and possibly endure physical discomfort than review their plan statements as well as their investment and contribution options.
Americans also spend more time planning their annual vacation than their future in retirement. Now why would that be? After spending decades as a financial advisor and counseling several thousand 401(K) plan participants, I recognize that many people just don’t feel knowledgeable about investing. Most indicate that they do not follow the markets closely. When they are given a list of investment options they don’t know a government bond fund from a high yield bond fund or a growth fund from a developing market fund. That’s costing them money, and likely a lot of it! Or they are sitting with a lot of money in a cash account.
Well, let’s dispense with the mystery and look at the three main categories of investment options in a plan. The first is a cash equivalent fund, say a money market or a stable fund. The goal of both is to provide stability in interest bearing accounts. Yes, most people can relate easily to these accounts. While they provide a return of capital, they don’t provide a return on capital. That is, the ability of the funds to ultimately grow to meet or exceed the cost of goods and services in the future.
Many people think that they need to save a lot of money to afford to retire, but what they need to do is save a small amount of money for a long time.
When you are young you have the advantage of those small amounts of money compounding over time. What does that mean? Well, if we have a 25 year old that saves $200 a month and they earn an average of 8% annually, their account will be worth $702,856 at age 65. A 45 year old that saves $200 per month at the same rate will have an account balance of $118,589 at age 65. Let’s look at that another way. The 25 year old saved $96,000 over 40 years while the 45 year old saved $48,000 over 20 years. The younger individual ended up saving $48,000 more but ended up with an account worth $584,267 more. Wow, compounding is like a train that gains momentum and keeps moving down the track.
I have been counseling retirement plan participants with the opportunity to join their employer’s plan for decades and am always thrilled when a young person starts saving for retirement. The more they can save today, perhaps the less they will have to save later. Or maybe they will choose to retire early, take the risk to start a business, change their field of employment, travel around the world or make a bigger contribution to their community. The decisions made today, give you freedom of choice later.
(Published in KONK Life 8/19/2015)
I recently posted an article on Facebook about a young woman whose grandparents saved $90,000 for her college education and she blew it. That’s right; she went through all of the funds before her senior year. The tuition bill was in her hands and she couldn’t pay it.
This article got a strong reaction from friends and even my sister-in-law. How could this young woman who was given the fabulous gift of a college education blow it?
Well, how did Americans get to the point where we are today with $1.2 trillion in student debt, $901 billion in credit card debt and 5.8 million home foreclosures since September 2008? While there are multiple reasons, lack of ongoing financial education at home is a big one; poor math skills areanother.
Parents who are good role modelsarethe best indicators of financial success for their children.
When it comes to the subject of financial planning, people often have the wrong idea. Whether they confuse planners with accountants, or assume that the planning process is only helpful for those with a lot of money, the misunderstandings endure. Unfortunately, these misconceptions prevent those who would benefit from planning from ever considering the service. In an effort to clear that up, here are four common misperceptions people make about financial planning.
- Financial planning is only for the very wealthy
While this is a common belief, it misses an important point: Wealthy people are often wealthy precisely because they planned for it. There are many stories of low earning people saving $1 million or more over their working years. They achieved that with careful planning and diligent savings; In other words, they had a goal and worked toward it.
“So, I see that as part of your portfolio, that you own a variable annuity”, I say. “Why did you acquire it?” “What are the benefits of the annuity?” “Are you aware of how the funds are invested?” “Are you aware of the investment performance?” “How about the riders; do you know what they are, what they cost and what benefit they provide?” “And, how about the fee structure of the investment accounts?” “Are you aware there is a surrender charge if you withdraw more than 10% annually?” These are some the questions I have recently posed. And, I am sure you won’t be surprised to learn that each of my new or prospective clients could rarely answer more than two of these questions.
Annuities are simple in concept, complex in reality. You give an insurer a sum of money, or in the case of an employee working for a not-for-profit institution like a school or a hospital, your contributions to an annuity are deducted from your paycheck. The funds are invested in a managed pool of assets called subaccounts.
The annuity contract allows your funds to grow on a tax-deferred basis until you start receiving income.
What do we find when we look at the details?
Behind the scenes in the investment industry, there is much angst over a proposed Department of Labor (DOL) rule to change the advice standards for retirement accounts. The comment period for the proposal closes on July 20th. And, trust me, much of the financial services industry is speaking out. They oppose the rule. President Obama has spoken in favor of it; he views it as a centerpiece of his “middle-class economics” initiative.
Why should an investor care? Because there are inherent conflicts of interest in providing investment advice. Is the advisor a “fiduciary” bound to act in their best interests or a salesperson meeting a lower suitability standard? True fiduciaries, which include registered investment advisors like my firm, are held to the highest standard. We must place our client’s interests above our own. We must have transparency and disclose all fees and any potential conflicts of interest to our clients. And yes, that is in writing in documents provided to potential clients before they retain us.