| Practical financial advice is what we all | | | | discussion. |
| should desire. The WWRD series is designed to | | | | |
| provide real life circumstances along with | | | | Let's get back to our case study involving |
| real life, practical solutions, to these | | | | this family's desire to provide for a college |
| circumstances. Here is the first set of | | | | education. I will bet that many of you are |
| circumstances in the WWRD series. | | | | already saying that the solution is simple, |
| | | | just get a 529 plan. I am going to stop you |
| Suppose there is a middle income family with | | | | here and ask that you think of this |
| two children. Husband and wife both work and | | | | investment strategy. Putting money into a 529 |
| make contributions to their respective 401K | | | | plan will be similar to you putting money |
| plans. Their goal is to begin saving for the | | | | into a retirement plan. The investment |
| college education of their two lovely | | | | strategy will be the same. The contributions |
| daughters. One of the daughters is quite | | | | made will have a given purpose and will be |
| smart; the other is very athletic and is good | | | | invested with a strategy that will protect |
| at every sport she attempts. Father recently | | | | this interest. Doesn't this sound like the |
| got a raise in compensation at work and is | | | | 401K? It sure does to me. Let's remember that |
| thinking of what to do with the extra money. | | | | this family wants to build on its emergency |
| The family does have some savings outside of | | | | funds. In addition, it's important to |
| the retirement plan but would like to have | | | | consider that the kids may not want to go to |
| more in case of an emergency. What would be | | | | school, could get a scholarship of some sort, |
| your advice to this family in order for their | | | | or could make some other arrangement to fund |
| financial goals to be met? | | | | college. Mom and Dad should consider building |
| | | | the emergency funds needed and building a |
| The first order of business is to identify | | | | portfolio outside of the retirement plan. Tax |
| all of the issues at hand. This family is | | | | exempt bonds and large cap stocks can be used |
| saving for retirement for the parents, it is | | | | in addition to savings to build the emergency |
| taking care of children, it is building a | | | | fund and increase the portfolio. The argument |
| portfolio outside of the retirement plan | | | | many will make is that the 529 plan grow tax |
| (more attention should be given to this | | | | free. This is true. I will submit to you that |
| area), and the family is deciding how best to | | | | a portfolio can grow outside of the 529 on a |
| provide for the education of its children. | | | | tax free basis if one knows how to master |
| Does this study case sound familiar to | | | | capital gains and losses netting (see my |
| anyone? Before I get started on the solution | | | | article on capital gains and losses as well |
| to this situation, I would like to first | | | | as portfolio management). If this is done |
| mention life insurance. Is there enough | | | | effectively, the portfolio can be built to |
| protection against one ore both of the | | | | accommodate all needs. It can build for |
| parents passing away? There should be enough | | | | education, it can provide for retirement, and |
| insurance to provide for income replacement | | | | it can be used for most anything. A variety |
| if both parents pass. This could mean having | | | | of investments will be available outside of |
| each parent purchase significant life | | | | the 529 plan. These investments will take |
| insurance to protect family assets. A rule of | | | | advantage of income tax attributes available |
| thumb might be to assume a 6% return on | | | | to one's portfolio (capital losses, suspended |
| investments and then calculate how much | | | | passive losses) and if managed properly, can |
| insurance will be needed to generate the same | | | | gain similar tax free growth like the 529 |
| income provided by each working parent. For | | | | plan. |
| example, if one parent makes $120,000 per | | | | |
| year, $2,000,000 in coverage will be needed | | | | As always, it is important to be flexible |
| to provide for income replacement. This | | | | when managing a portfolio inside and outside |
| insurance, in my view, can be obtained | | | | of the retirement plan. The 529 can make |
| through a term policy that would expire at | | | | perfect sense in the right set of facts and |
| some point after the kids are projected to | | | | circumstances. If one is very wealthy, or the |
| graduate college, say at age 24. Remember, | | | | grandparents want to get involved in saving |
| life insurance is a hedge against living and | | | | for college, the 529 plan could be the |
| there is coverage that is needed. We do not | | | | perfect venue. Match a financial strategy |
| want to get more coverage than we actually | | | | with the facts and circumstances that you |
| need. Enough said on this portion of the | | | | have. |