How are we going to pay for college? That’s a popular question this time of year as parents hurry to complete their FASFA forms. For those who don’t know what the FASFA form is, it’s used by colleges to determine Federal Student Aid eligibility. I’ll have more on the form in a future post, but today I want to focus on parents that sabotage their own cash-flow and retirement plans in a desperate attempt to pay for college.
Let me begin by saying I’m a big fan of 529′s, TAP programs, coverdell IRA’s, and saving bonds to stash away money for your little Johnny and Mary. Unfortunately, even if you begin saving the day they’re born, there’s a slim chance that you’ll have enough to pay for 4 years of college. So what should you do to make up for the shortfall?
This is where I’ve seen parents make irrational decisions. We are constantly bombarded with data on the rising cost of tuition. I believe this causes parents to feel guilty about not being able to help out more. This leads to bad financial decisions. There are three ways I see parents damage their financial future.
The number one rule to follow when deciding to pay for college…….never jeopardize your own cash-flow or retirement.
Your retirement comes first. If you withdraw from your retirement accounts you’ll never make it up in growth, dividends, interest, etc. Don’t kid yourself either, I’ve heard the “but I’m paying myself back” line in response to loans from retirement accounts plenty of times. I can prove that you will not come out ahead with that strategy.
Whether it’s a refinance, home equity or personal loans, being saddled with increased debt is going to delay retirement and/or reduce your standard of living. Typically the load of that debt stretches into the first years of retirement, increasing the chances that you’ll run out of money.
What if Johnny or Mary find that college is not for them after a year or two? You’ll have less retirement funds or more debt and nothing to show for it. So what do I usually recommend?
Just because I recommend you don’t raid the retirement account or increase your own debt doesn’t mean you still can’t help your children. I’m just saying do it when you’re in a better position.
The kids may have significant loans, but since your in such a good position (you’ve been working with J.H. White Financial for many years), that you can help out and pay their monthly loan. You also have to remember that they may be able to deduct up to $2500 in student loan interest, depending on income, as well.
Everyone wins! You have little or no debt, significant retirement savings, and have the ability to help your children. If you can help with a few or all the annual payments, your children can take the tax deduction, and put the savings toward retirement, a home, or whatever else they need as they begin to build a future.
This of course is what would happen in a perfect world, but regardless, your retirement and cash-flow must come first. You can’t, correct that, you shouldn’t take out loans for retirement! Using home equity and reverse mortgages for retirement should be the last resort, again good topics for my next post.
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I had a client recently ask me if they should purchase life insurance for their children. Next to a discussion on annuities, which I’m not a big fan of in most cases, insurance is for children is the second most argued topic among those in my profession.
So what was my answer? 99.9% of the time the answer is no, but there are two exceptions. First, if your son/daughter is a child star, like Justin Bieber with significant current income and the family lifestyle now depends on that income, then yes insurance is definitely needed. The second exception is if your child has health issues or a potentially disabling condition that would make it difficult for them to obtain insurance when they are adults.
Life insurance should never be used as a savings vehicle for children, I’ll repeat that…never, never. Some advisors and many insurance agents would argue that point with a myriad of excuses, but none of them hold water. There are so many better options out there today to help you save for your children that insurance shouldn’t even be a part of the discussion.
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Instead of financial advice, I’ve decided to give medical advice. When you don’t feel well, don’t be stubborn and go to the doctor. That’s it, now hopefully I’ll listen to my own advice in the future.
Long story short, I continued to work and coach my son’s basketball team with a fever and a terrible cough for a week. I finally went to the doctor after my wife made me (I had lost about 8 lbs too). I figured I’d get better eventually and I was too busy to be sick anyway.
My doctor let me know what he thought of my stubbornness after he told me I had pneumonia. Yes, if I had gone sooner it probably would have been just a bad case of bronchitis and I would have recovered quickly. But because of my own stupidity it’ll be weeks before I fully recover.
So take my advice and go to the doctor right away, I sure hope I do.
Here’s to a Happy and Healthier Year!
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The Social Security Administration announced a 3.6% Cost of Living Adjustment (COLA) beginning in 2012, the first increase since 2009. In addition to all Social Security Benefit recipients seeing a 3.6% increase in monthly benefits, here are a few of the other key changes.
Maximum Taxable Earnings in which Social Security taxes will be withheld increases from $106,800 to $110,100.
Retirement Earnings Test Exemption Amount
Under Full Retirement Age : $1 of SS benefits will be withheld for every $2 in earnings above $14,640 annually.
The year you reach full retirement age: $1 of SS benefits will be withheld for every $3 in earnings above $38,880, BUT this is only applies to earnings in the months prior to attaining full retirement age.
There are no limits on earnings beginning the month you attain full retirement age.
Maximum Social Security Benefit for worker beginning benefit at full retirement age: $2513 per month.
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Date: November 17, 2011
Time 7PM
Location: Towne Book Center & Café
220 Plaza Dr (across the parking lot from Wegmans)
Collegeville, Pa
Snacks and drinks will be provided
Whether you are planning to retire in 5 years or 35 years there is one important, often overlooked measure you should do immediately to make retirement a reality. It may not be what you think! Don’t procrastinate, Prepare for Retirement Now!
Jim White, CFP®, of J.H. White Financial Services, LLC, will walk you through this important step and answer your questions to get you prepared. This is not your typical seminar. Lively, thought provoking, and entertaining, you will walk away with the knowledge to begin your retirement plan.
Call or email to make your reservations. Space is limited.
Towne Book Center & Café - 610-454-0640 or
J.H. White Financial Services, LLC – 610-469-0647 or
jhwhite@jhwfs.com
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Building a snow ghost to get us in the Halloween spirit!
We ended up with an unbelievable 1 foot of snow on October 29. It seems most locations, even if they were only 2 or 3 miles away, only got 4 – 6 inches. Must be living up on the big hill.
I sent a letter to our clients last week, before we lost electricity, tempering the big run up that occurred in the month of October.
In a nutshell, the good news was:
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The following story is true. Names have been changed to protect the innocent.
I recently received my bill to renew my homeowners Insurance. Much to my surprise this large, well-known company increased my premium 21%. I had no claims, damages, injuries, or anything that would cause such an increase. It should be noted the year before my premium increased 8%, but I chose not question or challenge it.
I called Large Company and they said “due to inflationary pressures premiums had to rise.” I didn’t have the Construction Cost Index (CCI) at the tip of my fingers when I called Large Company, but I doubted construction costs rose 21%. I told them I’d check the CCI and shop around for new insurance, but the Agent didn’t seem to care.
The CCI as of July was up for the one year period 2.7%. I called Large Company back, told them my data, threatened to shop around again, and again was met with silence and then a “sorry Mr. White.”
Although this was pretty darn handy when I was thinking about a good blog topic, it’s not the first time it happened. Over the past twenty years I have changed Auto Insurers 4 times and this will be my third home insurer change. I call it premium creep! You get your insurance and over the years you notice the premiums keep increasing. I’ve gone through it and I know a number of my clients have too.
I know you’re wondering…..I’ve been in 2 accidents. A deer ran into my car once and the other time another driver making an illegal turn hit me. I haven’t had a speeding ticket in 15 years, but that’s just luck. I’ve made no claims on any home damage (I’m knocking on wood).
So if you don’t have accidents, moving violations, or claims of damage to your home, why does this happen? I have a friend who is an Actuary and he gave me a few reasons. First he said many Insurers discount new policyholders with good records to get them in the door so they show up as an increase in business on the books. Over time they increase the price to these policyholders to cover the insurance policies they write on those that are not so good and the discounts they give the new business that you once were. He also said significant premium increase may be due to a recent rash of claims from a natural disaster.
That’s all fine, but what about years where there no very few natural disasters, why won’t my premiums go down? The actuary’s opinion was interesting. Premiums don’t generally go down because insurance companies know that the majority of people are “too damn lazy to shop around.”
So what happened with my Home Insurance? Since I’m not too damn lazy to shop around, I shopped around, received 5 quotes from some companies, 4 of which are well known. I wanted almost identical coverage, although I did slightly increase replacement cost and medical payments. I have a quote that is 40% less than Large company…the kicker is that this company is actually a subsidiary of Large company. Now I’m with Subsidiary Company with a 40% lower premium and slightly increased coverage.
There are a few moral’s to learn. First, don’t be too damn lazy to shop around and always question and probe why things happen. Secondly, I stopped having both my auto and home insurance with the same company about 7 years ago. At that time when I was shopping it didn’t pay to have them together – so don’t assume it will be cheaper just because you see the term “multiple policy discount.” Subsidiary company asked if they could give me an auto policy quote and I told them I may in the future. We’ll see how my auto policy fairs with insurance creep.
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There is a fantastic op-ed piece by Warren Buffet in the New York Times today. Here is the link http://www.nytimes.com/pages/opinion/index.html
I encourage to read it, think about it, and act on it by contacting your elected officials. It’s short, interesting, and educational. He cuts through the crap you hear coming out of Washington. He’s saying what I’ve been telling my clients, if you want to fix the debt, it has to be done three ways, raising taxes, cutting benefits, services, and program, or eliminating the many tax credits and deductions you receive when you file your taxes. What our country has been doing for the last 50 years is lowering taxes while increasing Government. Anyone who can balance a checkbook understands this can’t last.
Both parties are to blame. Democrats and Republicans can’t agree on what programs and services to cut. Most Republicans have agreed to this asinine pledge to not raise taxes for individuals or corporations (if you don’t know who Grover Norquist is, look him up). Guess what, current tax rates are among the lowest this country has ever had and I don’t even want to get into corporate tax rates, they’re a joke. The argument for the corporate tax rates is that if you raise them the companies will move offshore. Wake up, that’s happened already with low tax rates. Companies are more concerned with low labor rates.
So pick your poison. Each party will try to spin it their own way, wrap it in nice paper, put a bow on it and present it to the American people as a gift, but it will be the same old crap. You’re going to be paying more or receiving less and that is the way it must be to have a financially sound Country.
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OK, the word benefit may be too happy of a word for the bloodbath that took place yesterday. A better way to phrase the headline would be, How To Take Advantage of the bloodbath! Your probably thinking how can I ever do that? There is a way, the Roth Conversion.
By converting your Traditional IRA or 401K to a Roth IRA or Roth 401K when the value of those investments has dropped, the tax due upon conversion will be lower. Here is an example.
Suppose you have an IRA that was worth $20,000 on June 30, but this morning the value is $15,000. If you were thinking of converting a a quarter of the IRA, which is $5,000 of the $20,000, the taxes due would be $5,000 times your marginal tax rate. If your marginal tax rate is 28%, the tax would be $1400.
If you procrastinated and decide to do the conversion today, a quarter of the value of the IRA ($15,000) is $3750. $3750 times the tax rate of 28% is $1050. So you would save $350 in taxes.
Converting your Traditional IRA or 401K to a Roth is not appropriate for everyone and the amount you choose to convert is up to you, there are no amount restrictions. If you are interested in doing a conversion or have questions about it, please contact me and we can analyze the suitability.
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Please take a few quick minutes of your busy day and contact your elected officials, imploring them to come to a compromise regarding the debt crisis. The fact that this has not been settled is unbelievable. The damage that it may cause could be felt for years to come.
Just find your elected officials website – they all have a email contact. It will take 3 minutes. Please pass this along to get the word out.
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How are we going to pay for college? That’s a popular question this time of year as parents hurry to complete their FASFA forms. For those who don’t know what the FASFA form is, it’s used by colleges to determine … Continue reading
