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