ABOUT HOSTS

Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Helping your adult children afford a college education is likely one of the biggest investments you’ll undertake. Too often families fail to put together a financial plan for college, so they are tempted to dip into their retirement funds and jeopardize their own financial security. The result: parents are taking on more debt than ever before so their kids can receive a college diploma. To help you avoid putting your financial security on hold, planning professionals Joe Anderson and Alan Clopine help you navigate the options and give you money-saving tips for funding for college.

 

Important Points:

(2:00) – Money-Saving Tips for Funding College

  1. Estimate Expenses
  2. Develop a Savings Plan
  3. Explore Investment Options
  4. Update Plan

(3:50) – Estimate Expenses: Calculate Needed Savings

  • College 2K Rule of Thumb
  • Research Current Expenses at Target School Type
  • For Every $10,000 You Pay X Child’s Age by $2,000

(6:50) – Develop a Savings Plan: Plan Ahead, Get Ahead

(9:50) – Investment Options: 529 Plan Pros & Cons

(13:10) – Investment Options: Coverdell Account Pros & Cons

(15:20) – Investment Options: Prepaid Tuition Pros & Cons

(17:50) – Update Plan: 4yr Public & Private Tuition

(19:20) – Ask The Experts

Make sure to subscribe to our channel for more helpful tips and the latest episodes of “Your Money, Your Wealth.”

Transcript:

Joe: Hey, folks. We usually talk about retirement planning, tax planning, retirement income strategies. Today we’re going to switch it up a little bit and get you geared for college education savings. If we can take a look at the cost of college today where it was maybe 10 or 20 years ago, the costs are astounding. We want to make sure that you are prepared if you have kids. So stick around and enjoy the ride. Welcome everyone. Show’s called Your Money, Your Wealth®. My name’s Joe Anderson, President of Pure Financial Advisors. And of course, my partner, Big Al Clopine.

Al: How are you doing, Joe?

Joe: He is a resident expert in college planning. He’s put two youngsters…

Al: I put two kids through college. You’re correct.

Joe: So we’re just going to quiz you, Big Al.

Al: See how my experience was? Because they got through it and it’s paid for.

Joe: Yes, I was with him through some of those times. And I’ll tell you what, it was a little stressful. So we’re trying to get rid of the stress. That’s today’s financial focus. So let’s take a look at some numbers. How much is college? It’s expensive. If you take a look at average private university, it’s around $51,000 per year. $51,000. Now, of course, if you want to look at local or state schools, community colleges, the numbers range all over the place. But $50,000, that’s a pretty big number if you want to put your kids to a private school. Second, how many of you are prepared for this? 61% of families with children do not have any sort of financial plan for their college education. Let’s change the stats today, folks. Let’s dive in and bring in the big man.

Al: Today we’re talking college, so let’s dive in and figure out how to do this. Number one, you’ve got to figure out what the expense is, what you think the expenses are going to be. And inflation has been higher on college costs than other types of cost. So we’ll get into that a little bit. You need to develop a savings plan to cover those expenses. Explore your investment options. So you gotta save money. You need to invest it to be able to get there. And then finally, it’s adjusting and and updating your plan as necessary. Because life changes, your circumstances will probably change. There may be years where you can’t fund the college education as much as you’d like to. There might be some catch up years. So that’s what we’re going to get into today, Joe. And you’re right, as a father that put 2 kids through college, I think it’s a pretty important topic.

Joe: It’s extremely important because what we find is that people jeopardize their own retirement to put their kids through school. They’re taking money out of their 401(k) plans, they’re taking money out of savings, maybe they stop saving altogether and they start funding college. Which is a great thing, don’t get me wrong; however, you can still get loans for college. You can’t necessarily get a loan for your overall retirement. So starting out estimating the expenses is key. How much is the school going to cost? What school is it going to be? And it doesn’t matter. Let’s say my kid’s going to go to Harvard, and maybe when he graduates high school, he’s not going to get into Harvard. Maybe he has a little bit lower IQ or she has a little bit lower IQ. But you can at least plan big to figure out what you want to do and then start working the numbers backward, just like with any other planning that you would do.

Al: So really estimating expenses, that’s the first thing you got to figure out here. And so we’ve got this little rule of thumb to try to help you do that. So the first thing you need to do is figure out what college that you would like your son or daughter to go to, or the one that they would like to go to, and look at the current cost. So maybe it’s $50,000 a year, whatever the number is. So for every $10,000, then it’s a factor of 1 and you multiply that by 2,000, and you multiply that by your child’s age to figure out how much you should have saved at a particular age. So Joe, why don’t you go through an example? Because that wasn’t a very good explanation.

Joe: Clear as mud. That was super. We got an example here. Little Joey wants to go to school. Joey’s 14 years old. So you’re saying, “I haven’t saved a dime for Joey. What are we going to do here?” So this rule of thumb formula of saying, “Hey, Joey is going to go to a private school and we’re going to pay $50,000 a year.” He’s 14 years old. So it’s the 2,000 rule. So 2,000 is what you start with. How old’s little Joey? We already talked about it. He’s 14, so take your child times 2,000. And then if you want to go big, go private. So $50,000, you just take that factor, divide it by 10,000. It’s 5. $50,000, it’s 5. If it’s $20,000, it’s 2. If it’s $10,000, it’s 1, you get the gist. So $2,000 times 14 times 5 is $140,000. So if little Joey wants to go to school and it’s going to cost mom and dad $50,000 a year at age 14, you need $140,000 in the bank. So that’s the formula. So, you know what? Joey’s going to go to a community college. I’m looking at these numbers, he’s going to the army. That’s what happened to me when I graduated high school. I was like, “Mom, dad, I’m really excited about college.” They’re like, “What are you talking about?” No, I would get brochures: Army, Navy, Air Force, Marines. They’re like, it’s a great place to start. So I just packed up and I moved to Florida and I paid for it on my own. So anyway, this is a good rule of thumb, because a lot of times with any goal, we really don’t know what to say or what the number is. This at least helps you to say what is that finish line? If you’re nowhere near $140,000, don’t worry about it. At least you could start planning. If you think you’re going to pay for private school, room and board, out of pocket, and you don’t even have this close… Good luck. Kid’s gonna be a genius and they’ll get scholarships. Full ride. He’s going to be an all star baseball player.

Al: And of course, this is thinking about if you want to pay the whole thing. Maybe you want your son or daughter to pay for some of this, there may be student loans. So there’s all kinds of ways to skin the cat here, but this just gives you an idea of how much that you need to have saved. And so Joe, if people have a plan versus not having a plan, it makes a pretty big difference on how much they’ve saved and whether they’re going to succeed.

Joe: Imagine that, Alan.

Al: We talk about having a plan, and here you go.

Joe: So look at this, here’s a stat. For people that have started a plan. So _95%_, they have a lot more money saved than people that don’t necessarily have a plan. They feel that they’re on track, half of them feel like they’re on track. That’s OK. The other half is like, Hey, we’re out, but we know what we need to do. They save a lot more. They have the right type of savings plan. This is a good estimate of how much money that people should be saving. So again, it gets you on track. So I have a plan. And if I’m looking at a 4 year public university, if I’m taking a look at these numbers here, do I want to pay for a third, a half, or maybe I want to fund the whole thing? So if your child is just born and you want to pay for the whole thing, you gotta start saving about $500 a month. Set aside $500. You’re like, “I can’t afford that”. Pay for a third. It’s $150 a month. Maybe you can’t do that. Maybe it’s $50 a month. It’s just getting started. If your kid’s 6 years old, you can see the numbers go to $870 versus $472. If they’re 12 years old, it’s about $2,000. So the name of the game here, Al, is what?

Al: Get started early. That’s exactly right, because this is assuming that you haven’t saved anything to get to certain ages. So the sooner you start saving, as always with financial planning and investments, the better you’ll be.

Joe: We’re going to take a break. Go to yourmoneyyourwealth.com, click on our special offers. The ABCs of College Funding. ABCs of College Funding. Yourmoneyyourwealth.com. That’s our gift to you. We’ll be back in just a second.

(commercial)

Joe: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al hanging out talking about college funding today. You can go to our website at yourmoneyyourwealth.com, click on that special offer. It’s the ABCs of college funding. The ABCs. What we’re talking about is saving. You’ve got to start at some point. And a lot of us, we always procrastinate a little bit. And then when it comes time to it, we might jeopardize other goals to look at the immediate goal that’s right in front of us. And college hits us with a Mack Truck. It’s like, “Oh my gosh, my kids a junior and I haven’t done anything yet.” We want to give you some tools and tricks just to make sure that you’re prepared and some ideas for you to make sure that you’re at least going down the right path. And the right savings plan Al, is probably the next step we want to go into.

Al: Well, I think so. And there’s really three basic types. So there’s the 529 plan, a lot of you have probably heard of these plans. That’s a great plan because you can get a lot of money in there, it grows tax free if it’s used for college, so that can be a great plan. The Coverdell Education Account is kind of like a 529 plan, but it’s a lot smaller limits as to what you can put in. And then prepaid college tuition. If you have a university that you think your son or daughter is going to want to go to, those plans can be great because you lock in current tuition costs. And if you have a very young child, that can be a pretty good advantage. So, Joe, maybe let’s start with the 529 plan and go through some of the pros and cons.

Joe: There’s multiple ways to do this. We’re just doing the ABCs, high level. And one of the most popular plans out there today is the 529 plan, and these are state sponsored plans. One of the biggest confusion out there with these plans is that, we live in California. But if I wanted to start a 529 plan, I could start a Utah 529 plan or a Minnesota 529 plan. It doesn’t matter because the state of California doesn’t have any tax advantages when you put money in. However, other states might have an opportunity to either get a tax deduction on the state tax side, or it has some different tax savings implications if they save it in their own state plan.

Al: That’s exactly right. And some states, I think Pennsylvania, maybe is one, but there are several states that actually do allow a deduction. So it’s not only a deduction to get the money to the plan, but it grows tax free if it’s used for education later. California is not one of those, as you mentioned.

Joe: So depending on what state that you live in. So you can choose the California plan if you choose to, but maybe you don’t like… because the state picks it out. It’s TIAA-CREF here in California. But you really like Vanguard funds, or you want to use dimensional funds, or you want to use this, or that, whatever. You can go with any type of state. And here’s the pros of the 529 plans is that every dollar that you put in here grows 100% tax deferred. And then when you pull it out, it’s tax free if it’s a qualified distribution. It’s very similar to the Roth IRA that we talk about quite a bit in regards to retirement. The 529 plan is the equivalent type of plan for college funding. It’s an after tax contribution. It grows tax deferred if used for college. 100% tax free. The cons? Well, let’s say you save too much or the kid gets that scholarship. Full ride. Or they do end up going to the military. Then all of a sudden you have all this money sitting in these accounts. And if you take it out, you’re going to get taxed and penalized because it wasn’t a qualified distribution. There could be some high fees in some of the investments. That’s why you want to do the due diligence of the 529 plan. Do I want to pick California or Utah or Minnesota or Wisconsin or whatever? There’s limited investment options within the plan. So that’s why you could shop the 50 states, or you can select your own state. It really depends. So you got a little homework to do here. But the crux of it? After tax contribution, grows tax deferred, pull it out for qualified, 100% tax free.

Al: And it’s important to talk about the beneficiaries. So maybe you’ve got a son or daughter and you’ve set this up for them, that they’re the beneficiary, and they don’t go to college. So now what? You can change the beneficiary. You can use it for another son or daughter. You could use it for yourself. You could use it for a grandchild. But you do have to use it for college. If you don’t use it for college, when you pull the money out it’s fully taxable income plus penalty. So that’s not something that you want to do. And another plan is a Coverdell. It’s similar. It has a lot lower limits in terms of what you can put in.

Joe: This is the IRA of college plans. So again, you get the tax free growth, you get tax free withdrawals, you get numerous investment options. Because you’re going to go to your custodian, let’s say, TD Ameritrade, Charles Schwab, Fidelity, wherever. You’re going to open up a custodial Coverdell account where it’s a shell, again, that you can invest in basically anything that you want, those dollars will grow tax free. You can then take those dollars out tax free if they’re used for college, again. But it’s income based, so you have to qualify. There’s yearly contribution limits, which are relatively low. We just looked at, you needed to save $140,000. You’re not going to get anywhere near that with the Coverdell unless you pick a really good investment. So if I’m looking at the pros and cons of the 529 and the Coverdell, it’s $2,000 is what you can put in. It’s great. It’s something, but it’s not a whole heck of a lot. The 529 plan, you can put a few hundred thousand dollars in there if you wanted to, and there are no contribution limits, but there’s some gift limits. Al, you want to touch on that a little bit?

Al: So the way this works with a 529 plan is you can put in $15,000 as a gift, but the IRS actually allows you to do 5 years, all at one time. So that’s $75,000. So you can get a really quick head start on these. That’s why in many ways it’s so much better than the Coverdell, because not only is there a $15,000 limit, but you can put $75,000 in year one. Coverdell is $2,000 per year.

Joe: And that would be per spouse if they’re married, so you could double that up and almost get a couple of hundred thousand dollars in there. There is no income phase out for the 529 plan, so if you do want to fully front load it, you can do that. There’s no income limit. There’s no age limitation at all. Coverdell, you’ve got to be 30 or else it’s distributed in the $95,000 and $190,000. Those are the AGI limitations for you to take advantage of it. I haven’t seen a Coverdell IRA in years.

Al: I don’t think I have either. Pretty much everyone uses a 529 plan.

Joe: Basically, this is your Cadillac (529). That’s the Yugo (Coverdell).

Al: But the other idea is prepaid college education. And so a couple of things here. It needs to be a college in your own state, so you need to be a resident of the state. But here’s the benefit: you can lock in the tuition costs. So today’s tuition costs, that’s what you’re going to get. And so what happens with prepaid tuition plans is you pay a lump sum right now and then essentially you don’t have to worry about investments. The university is doing that for you. And then when your child goes to the college, the tuition and fees are already covered. Then the question is what if they don’t go to that college? So typically you get your money back. In some cases, you get a little bit of increase. Some plans allow you to have a 2% increase per year. Other plans allow you to transfer it to other universities. So it just depends upon the plan and the university that you pick. But if you have a college that you really think your kids are going to go to and they have a plan like this, it might be a good way to lock in today’s costs.

Joe: So you’re forcing the child to go to the school that you want them to go to.

Al: That’s right. They’re going to my alma mater, University of California, San Diego.

Joe: Alright, there’s Big Al. We’re going to take a break. Go to yourmoneyyourwealth.com, click on our special offers. The ABCs of College Funding. ABCs of College Funding. Yourmoneyyourwealth.com. That’s our gift to you. We’ll be back in just a second.

(commercial)

Joe: Hey, welcome back to the program. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al Clopine talking 529 plans, Coverdells. We’re talking college funding. Go to yourmoneyyourwealth.com, click on the ABCs of college funding. ABCs of College Funding. Yourmoneyyourwealth.com. Let’s go to the true/false question.

Al: “Transferring the funds from a Coverdell to a 529 is always a qualified distribution, so no income tax or penalty is due.” Joe, true or false?

Joe: That is true. Because everyone hates the Coverdell. They’re like, “I want to get rid of this thing. I want to go to the new, more sexy 529 plan.” So if you do have a Coverdell and you have a 529, if you want to open up a 529 plan, you can transfer those funds into the 529 plan income tax free, penalty free. So you can just have one plan if you choose to.

Al: So let’s talk about the cost of college. Inflation has been higher for college than almost anything else, and this will show you in about the last 20 years, it’s tripled, which is almost 6% per year. That’s a lot more than inflation. And to show you that in real numbers, let’s take a look at what it used to be. So this is a private college. This is the tuition, fees, public college on the bottom. So you can see we went from $8,600 in the 60s to $33,000 at this point. And in terms of public, $2,000 to $9,500. So, look at when I went to college. 1975 was my first year, so I was probably between $10,000 and $11,000.

Joe: I was just a twinkle in your father’s eye.

Al: Yeah, you weren’t around then.

Joe: No.

Al: The point here, though, is college costs keep going up and they keep going up more than inflation. And it seems like at some point it should slow down, but it hasn’t. So I would say the best idea in terms of planning is that it will keep going up at this rate because there’s been no stoppage or no slowdown.

Joe: It’s been crazy the last couple of years, you just see that constant tuition continuing to increase. And planning for this is key. And everyone wants to go to college and then everyone goes to college and then they get their Sociology degree. And what are you going to do with that?

Al: Then you go some more.

Joe: Then you go back and get your Master’s and then you go back and get your PhD. Let’s go to Ask the Experts.

Al: “I want to provide for my young grandchild’s education, but I’m concerned their parents will eventually divorce. What is the best tool to use to make sure the money is protected for the kid’s education, no matter what happens with their parents?” This is from Rachel in Carmel Valley. Joe, what do you think? How do you protect your money?

Joe: Rachel’s like, “Uhh, something’s brewing in the household. I love my grandchild, but that son-in-law… he’s out the door soon.” Rachel, you can set up a 529 plan. You can be the owner of it, and you can have your grandchild be the beneficiary so you can control the money and distribute it out to your grandchild. And if you were to predecease before she gets to college, you’re all good. So that would be my advice. I wouldn’t necessarily gift it to mom and dad and then have mom and dad be responsible for the college because, like she’s saying, if they get a divorce or some of the things that could happen in life where that money would be distributed elsewhere, potentially.

Al: So the 529 plan, there’s an owner and there’s a beneficiary. The owner could be you and the beneficiary can be your grandchild. There’s no reason it has to go to the parents. Another thought is depending upon how much you think you want to fund the college education, it doesn’t all have to be in a 529 plan. Just keep your own assets. If you want to contribute more to the college later, you can do that. I guess the key there is to make sure that the funds don’t go into the parents name because that’s where it could get a little bit more…

Joe: Well, yeah, and that’s her grandchild. So maybe she was thinking by the time the grandchild hits college, she might not be around. Let’s go to the next question.

Al: “Is buying life insurance a good way to provide for my kids’ college without impacting their ability to receive financial aid?” This is from Scott in Mira Mesa. What do you got on that one, Joe?

Joe: If you buy life insurance and you fund it with cash value, so it’s a permanent policy, will that give you the ability to get more financial aid? The answer is yes. But is that a good way to save for college? In my humble opinion, the answer is no. A lot of different variables. I think this is a big thing out there, though. There’s college funding advisors and they say, well, let’s hide all your assets. Let’s put them into this life insurance so that shelters it from any type of financial aid calculations because they’re not going to look at that and we’ll build this cash value within it. And then by the time the kids go to school, we can distribute the money out of the cash value in the form of loans or _5 fold tax treatment_. So it’s going to be tax free distributions. People sell that stuff for retirement, people sell it for college education and everything else. It can work. I’m not going to say it cannot. Are there better solutions? In my opinion, yes. But I guess if there’s a need for the insurance and you have a lot of extra cash flowing, you’ve already exhausted or you think that you can get a lot of financial aid. So I would check all your options, but that would probably be my last resort.

Al: I would agree with that, too. I think a 529 plan is actually a better vehicle in most cases. And Joe, before we wrap up, I just want to say one more thing. There is a tax credit. American opportunity tax credit for college. 4 year college, up to $2,500 per year, but it phases out at incomes of $80,000 for single, $160,000 for married.

Joe: He needed to get that little tax tip in there.

Al: I had to do a tax tip.

Joe: Oh, how about the lifetime learning credit? We can go on and on. All sorts of different credits there. But, yeah, there’s some tax advantages, too. So if you’re funding education right now, just don’t forget to understand what tax credits are available to you. To wrap this thing up, to put it in a bow, first thing’s first. With any type of strategy or plan, you just gotta estimate what that finish line is. What is the expense going to be? What are you willing to pay? And then determine the best way to do it. How much money should you be saving on a monthly basis, quarterly, annual? And just make sure that you keep up with those goals. And then you figure out what vessel that you want to save in. Is it a 529 plan? Is it a brokerage account? Is it a Coverdell? Or maybe you prepay it. Or maybe you use life insurance, or whatever. There’s all sorts of different ways that you can accomplish the goals, but it’s just the consistency of following the plan that you have and then making sure that you can adapt to that. But most importantly, if you haven’t started at all, today’s the day, folks. Today is the day, and we can help you with that. Go to yourmoneyyourwealth.com, click on our special offer The ABCs of College Funding. ABCs of College Funding yourmoneyyourwealth.com. That’s it for us, Big Al.

Al: Another phenomenal show.

Joe: Another phenomenal show in the books. Thank you everyone for watching, and we’ll see you again next week.