Saving for College

It’s that time of year – when graduates and their families get ready to say goodbye and start the next chapter of their lives. For many the associated costs can be daunting, with parents wanting to help by paying for as much as possible. Very noble and a wonderful sentiment – but not necessarily the wisest course of action; unless they have secured their own retirement first.

The first thing parents should be doing, whether they’ve been saving for college or not, is encouraging their child(ren) to apply for FAFSA. This opens the door for a variety of funding sources, not just federal aid – scholarships, grants, etc… Also, don’t assume college is the only way to go; after all, not everyone knows what they want to do or even have a desire to attend. Other options include: military service; working; Profoundly Disconnected (Mike Rowe’s trade scholarships); and apprenticing with a trade.

For those with younger children, or if you want to start saving for your grandchildren, a 529 Plan may be the right tool for you. It could provide you with a state income tax deduction (talk to your accountant) and, if the money is used for education related expenses, is tax-free. However, there is a 10% penalty if it’s not used for educational expenses.

Another option is to pay the tuition directly. To maximize the benefit do NOT give the money to anybody but the school, otherwise it could be considered a gift and depending upon the amount you may need to file a gift tax return. Again talk to your tax professional and/or advisor for more details.

Finally, be realistic about what the student wants to achieve. Community colleges are much less expensive than universities, and offer much of the same lower level course work. Explore the opportunities within a chosen major before enrolling, it doesn’t make sense to rack up thousands of dollars of student loan debt if there’s little to no possibility of making enough to pay it back as soon as possible.




Long Term Care

Long term care (LTC) is probably the touchiest subject I discuss with all of my clients, and I would estimate approximately 85% do NOT want to insure for long term care. The reasons are varied – from it being too expensive to their children will take care of them. Yet statistically more people are going to need long term care than not, and it ends up being us (taxpayers) who are paying for them (Medicaid).

Let’s define what long term care is, because I think the image most people defer to is a nursing home. This is certainly the most expensive option; but long term care includes assisted living, home health services, etc… People want to stay in their homes as they age, unfortunately without proper planning this will not be their reality.

Medicaid will pay for treatment if you pass a means test. So you’ll hear people talk about doing Medicaid planning, working with an elder law attorney and financial advisor to prepare for the 5 year look-back. If you have significant assets, maybe this is worth it – but when you take Medicaid you’re giving up any rights you have to choosing your provider. You will have to take a Medicaid approved provider, and they’re not worried about whether you like it or not. Also – you remove the option of staying home for care.

Perhaps you think of self-insuring. Again, if you have significant assets could be worth it. But what does self-insuring really mean. It means you’re using money you’ve lived without in your younger years – money which you now cannot use for  personal pursuits (vacations, new home, etc…). Setting aside a fraction of that money to transfer the risk to somebody else means you can spend without worries.

Continuing Care Retirement Communities are growing in popularity, and there are several business models – but they can be expensive. On the positive side, they’re regulated by the states (information about Maryland’s may be found here CCRCs). Some will accept LTC insurance, reducing the amount out of your pocket.

Long term care insurance is pure insurance. It’s a sunk cost, the money is spent whether you use the policy or not. So is what you pay for cable and your cell phone. Many companies are offering hybrid products now, combining a LTC policy with life insurance or an annuity.

I have no idea what the best solution is for you; but, as is the case so often in life, the worst thing you can do is nothing at all. I don’t think there is any one perfect solution, it’s what works best with your situation. The most important piece to me is this – you really need to  understand what you are, or aren’t, with regards to long term care. I would start thinking about it in your late 40’s, as your kids are leaving the house for college and retirement is approaching. Ask your parents what their plan is. Failure to plan is a plan to fail.

If It Sounds to Good to be True…

It surprises me that even after Madoff, and so many other situations where people were taken advantage of, there are still so many people out there who believe they have found the “secret formula” to beat the market and get rich. I think we all know at least one person who attests to their investing prowess and how they’ve uncovered the perfect place to put their money for HUGE returns.

Let’s explore the logic of that for a moment. Hypothetically we’ll agree they’ve found the “secret formula”. How long do you think it will be a secret? And once it becomes common knowledge and more people invest in it, do you think it will continue to stay on top? No, and here’s why. Demand will drive the price up, wise investors will see the price going up and cash out. As they start to sell, others will jump on the bandwagon afraid they’re missing something. Next thing you know it’s a frenzy and what once was an AMAZING investment has now bottomed out costing those who wait too long everything.

Yes – this is a dramatic exaggeration, but it’s exactly what happens with bubbles – be it in the stock market or housing. Markets are efficient – they are going to balance themselves out. If there is a demand, then supply will increase until an equilibrium has been reached; the opposite is just as true – if there is more supply than demand then those providing the supply will decrease production until equilibrium is achieved.

If you know somebody who is claiming uncharacteristic returns in the market, perhaps they got lucky – it happens. But the only proven way to make money when investing is over time, using an asset allocation appropriate for your risk tolerance. This means don’t put all your money into stocks if you’re going to watch what the markets do and pull out when they have a correction (not if, when). Diversify your portfolio – if you’re not sure how to do this work with a professional.

Yes – professionals cost money; but if you don’t know what you’re doing or you’re relying on what your neighbor/best friend/some guy on a subway then you will likely cost yourself much more than a professional will charge. If you want to do it yourself, authors like Rick Ferri wrote some great books on Asset Allocation and Index Funds – do your homework. Most importantly, have a strategy. This will help you weather storms and stay the course. Be realistic with what type of return you want from your portfolio, and take the time to determine what type of return you actually need to meet your goals.

In closing – nothing has changed. If something seems to good to be true, it probably is. In the investment world, like everywhere else – you cannot get something for nothing. It takes time, patience and discipline to develop any type of wealth – if saving was as easy as spending the term “1 percenters” would refer to the poor. But there really isn’t a magic formula – spend less than you make, live within your means and start saving as early as possible.

Break The Cycle!

Recently my son’s teachers and I met for his IEP (individualized education plan) and one of the goals we discussed was using money. In elementary school this meant differentiating between bills and coins; here I asked them to help me teach him the concept of using money and tracking expenses. In this age of credit cards and online transactions, I would venture it’s safe to say most people don’t use cash very often. And conducting transactions online or credit card purchases in a store can be pretty abstract – after all you don’t “see” anything happening.

This started me thinking, I can’t be the only parent who wants to teach his child(ren) about money, but isn’t sure where to start – and I do financial planning for a living! I’m sure there are many parents out there, like me, who had little to know guidance growing up – we learned from watching what our parents did. Maybe we learned how to balance a checkbook, but in today’s day and age how useful is that? Statistically speaking – the vast majority of American families are not planning (financially) and have an average of $130,922 of total debt (Erin El Issa, NerdWallet Study). So if children are learning by example, what exactly are we teaching them?

I propose a change, let’s help our children get started with a solid foundation. Paying them for chores (allowance) is a good start, after all; most of us earn a salary. Add a few steps. Teach them about setting goals and saving towards them. Rather than always buying what they ask for, as they get older start requiring them to buy their own toys or phone(s). Here’s an example. Let’s say your 10 year old is getting an allowance of $5/week for doing chores (putting dishes away, sweeping kitchen, whatever). You could tell them they need to set $0.50 aside for future goals (10%). You could even withhold this and put it into their bank account. This is a great way to create the habit and expectation that they need to save 10% of their income, and by the time they hit the workforce they won’t think twice.

If they don’t do their chores you have a few choices. You could either withhold that day’s amount from the allowance, or you could charge them the same amount they would’ve earned because you had to do it yourself. After all, this is what happens in the “real world”. The last thing you would want to do is pay them anyway, because this sends the message of “your entitled”.

Let’s talk about purchases and cell phones. I think most of us would agree a cell phone is a necessity – when I was growing up I always had at least a quarter on me to call home, but payphones are a thing of the past. An opportunity here is to pass along the extra expense of unlimited text and increased data on your plan. Perhaps you’re thinking “this isn’t fair” or “where would they come up with the money”. Well, where do you get the money? Do they “need” those features, or were they added to keep your bill down when you gave the teen the phone? See where I’m going with this?

This is a definite paradigm shift for most households, so let’s explore it in more detail. Schools are responsible for making sure our children get a quality education and prepare them for the work force. We, as parents, are responsible for making sure our children are productive and responsible adults. Is it more work for us to do what I’m suggesting – yes. Does it mean the child(ren) will likely whine and complain about the fairness of it all – perhaps. But at the end of the day think about where they will be if they’re (1) used to saving at least 10% of their earnings and (2) comfortable with living within their means.

If people lived within their means we would see the average household debt decrease. There will still be things we can’t plan for, but people will have an emergency fund to draw from instead of the credit card. The move away from cash is only going to become more pronounced (in my opinion), why not give our children the tools they need now to understand the value of money later. Let’s break the cycle.