Long-Term Investment Truths

October 11, 2016
Share

Key lessons for retirement savers. 

You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.

First & foremost, you learn to shut out much of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.   

You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.  Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.    

You learn the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be. Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.  The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time. 

You learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance. Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. 

You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Do Women Face Greater Retirement Challenges Than Men?


Share

If so, how can they plan to meet those challenges?

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings. There is also the gender wage gap, narrowing, but still evident.

What can women do to respond to these financial challenges? Several steps are worth taking.

  • Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and, in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. So saving and investing regularly through IRAs and workplace retirement accounts is vital, the earlier the better. So is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.
  • Consider Roth IRAs & HSAs. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.  IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA need be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HAS’s have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income). That fact has prompted some journalists to label HSAs “backdoor IRAs.”
  • Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%. Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.
  • Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring strategizing to take greater control over their financial futures. At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Get Ready for Seven Serious Life Transitions Ahead

September 27, 2016
Share

change-aheadIt can be dangerous to generalize about the baby-boom generation, but there are seven key events that nearly everyone will face as they move through the last third of their lives. Unlike earlier, happier events such as getting married, having children, and moving up the career ladder, some of these events may be anticipated with dread. For this reason many boomers may put off facing them. But lack of preparation can make a bad situation even worse. (more…)

The A, B, C, & D of Medicare


Share

Breaking down the basics & what each part covers.

Whether your 65th birthday is on the horizon or decades away, you should understand the parts of Medicare and what they cover, and where they come from.

Parts A & B: Original Medicare. America created a national health insurance program for seniors in 1965 with two components. Part A is hospital insurance. It provides coverage for inpatient stays at medical facilities. It can also help cover the costs of hospice care, home health care, and nursing home care – but not for long, and only under certain parameters. Seniors are frequently warned that Medicare will only pay for a maximum of 100 days of nursing home care (provided certain conditions are met). Part A is the part that does so. Under current rules, you pay $0 for days 1-20 of skilled nursing facility (SNF) care under Part A. During days 21-100, a $161 daily coinsurance payment may be required of you.

If you stop receiving SNF care for 30 days, you need a new 3-day hospital stay to qualify for further nursing home care under Part A. If you can go 60 days in a row without SNF care, the clock resets: you are once again eligible for up to 100 days of SNF benefits via Part A.

Part B is medical insurance and can help pick up some of the tab for physical therapy, physician services, expenses for durable medical equipment (scooters, wheelchairs), and other medical services such as lab tests and varieties of health screenings. Part B isn’t free. You pay monthly premiums to get it and a yearly deductible (plus 20% of costs). The premiums vary according to the Medicare recipient’s income level; in 2016, most Medicare recipients are paying $121.80 a month for their Part B coverage. The current yearly deductible is $166. Some people automatically get Part B, but others have to sign up for it.

Part C: Medicare Advantage plans. Insurance companies offer these Medicare-approved plans. Part C plans offer seniors all the benefits of Part A and Part B and more: many feature prescription drug coverage and vision and dental benefits. To enroll in a Part C plan, you need have Part A and Part B coverage in place. To keep up your Part C coverage, you must keep up your payment of Part B premiums as well as your Part C premiums. To say not all Part C plans are alike is an understatement. Provider networks, premiums, copays, coinsurance, and out-of-pocket spending limits can all vary widely, so shopping around is wise. During Medicare’s annual Open Enrollment Period (Oct. 15 – Dec. 7), seniors can choose to switch out of Original Medicare to a Part C plan or vice versa; although any such move is much wiser with a Medigap policy already in place.

How does a Medigap plan differ from a Part C plan? Medigap plans (also called Medicare Supplement plans) emerged to address the gaps in Part A and Part B coverage. If you have Part A and Part B already in place, a Medigap policy can pick up some copayments, coinsurance, and deductibles for you. Some Medigap policies can even help you pay for medical care outside the United States. You have to pay Part B premiums in addition to Medigap plan premiums to keep a Medigap policy in effect. These plans no longer offer prescription drug coverage; in fact, they have been sold without drug coverage since 2006.

Part D: prescription drug plans. While Part C plans commonly offer prescription drug coverage, insurers also sell Part D plans as a standalone product to those with Original Medicare. As per Medigap and Part C coverage, you need to keep paying Part B premiums in addition to premiums for the drug plan to keep Part D coverage going. Every Part D plan has a formulary, a list of medications covered under the plan. Most Part D plans rank approved drugs into tiers by cost. The good news is that Medicare’s website will determine the best Part D plan for you. Go to medicare.gov/find-a-plan to start your search; enter your medications and the website will do the legwork for you.

Part C & Part D plans are assigned ratings. Medicare annually rates these plans (one star being worst; five stars being best) according to member satisfaction, provider network(s), and quality of coverage. As you search for a plan at medicare.gov, you also have a chance to check out the rankings.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

 

How Can LTC Insurance Help You Protect Your Assets?


Share

How will you pay for long-term care? At the moment, you may not be able to answer that question – but long-term care insurance can provide an answer for you.

Why are baby boomers opting to make long-term care coverage an important part of their retirement strategies? The reasons to get an LTC policy at or after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long-term care costs. By paying for LTC out of that pool of money, you can help to preserve your retirement savings and income. The cost of assisted living or nursing home care alone could motivate you to pay for an LTC policy. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long-term care in the U.S. Here is some data from the latest edition:

*In 2016, the median monthly cost of a private room in a nursing home is $7,698. The median monthly cost of a semi-private room is $6,844, 2.27% greater than Genworth’s 2015 estimate.

*How about the median monthly cost of an assisted living facility? That currently comes to $3,628. Thankfully, that has increased only 0.8% from last year.

*The median monthly cost of an in-home health aide (44 hours per week) is $3,861. Across the past five years, that median cost has risen 6.6%.

When you multiply these monthly cost estimates, the math gets downright scary. Can you imagine taking $45-90K out of your retirement savings to pay for a year of these expenses? What if you have to do it for more than one year? The Department of Health & Human Services estimates that if you are 65 today, you have about a 70% chance of needing some form of LTC during the balance of your life. About 20% of those who will require it will need LTC for at least five years. Today, the average woman in need of LTC needs it for 3.7 years, while the average man needs it for 2.2 years.

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire.

What it pays for. Some people think LTC coverage only pays for nursing home care. It can actually pay for a variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability. For example, it can fund home health care, care in a group living facility, and adult daycare.

Choosing a DBA. That stands for Daily Benefit Amount – the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some LTC plans offer you “inflation protection” at enrollment. That means that every few years, you will have the chance to buy additional coverage and get compounding – so your pool of money can grow.

The Medicare misconception. Medicare is not long-term care insurance. At most, it will pay for 100 days of nursing home care, and only if 1) you are getting skilled care, and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all. In some cases, Medicaid might help you pay for nursing home and assisted living care, but it is basically aid for those in dire financial need. Some nursing homes and assisted living facilities don’t accept it, and, for Medicaid to pay for LTC in the first place, the care has to be proven to be “medically necessary” for the patient. Do you really want to wait until you are nearly broke to try and find a way to fund long-term care? Of course not. LTC insurance provides a way to do it.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Retirement Planning With Health Care Expenses in Mind

September 12, 2016
Share

It is only wise to consider what Medicare won’t cover in the future.

As you save for retirement, you also recognize the possibility of having to pay major health care costs in the future. Is there some way to plan for these expenses years in advance?

Just how great might those expenses be? There’s no rote answer, of course, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly. For the last eight years, Fidelity has projected average retirement health care expenses for a couple (assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other). In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 to absorb those future costs.

When it asked Americans aged 55-64 how much money they thought they would spend on health care in retirement, 48% of the respondents figured they would need about $50,000 apiece, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made back in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.

AARP posed this question to Americans aged 50-64 in the fall of 2013. The results: 16% of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42% figured needing less than $100,000. Another 15% admitted they had no idea how much they might eventually spend for health care. Unsurprisingly, just 52% of those surveyed felt confident that they could financially handle such expenses.

Prescription drugs may be your #1 cost. In fact, EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75% probability of paying off 100% of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.

The main message: save more, save now. Do you have about $200,000 (after tax) saved up for the future? If you don’t, you have another compelling reason to save more money for retirement. Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare covered about 62% of retiree health care expenses. While private insurance picked up another 13% and military benefits or similar programs another 13%, that still left retirees on the hook for 12% out of pocket.

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids – and it certainly doesn’t pay for extended long term care. Medicare’s yearly Part B deductible can start at $122 for 2016. Once you exceed it, you will have to pick up 20% of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger (the threshold for a couple is $170,000). Part D premiums (drug coverage) can also vary greatly; the greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums is only wise each year.

Underlying message: stay healthy. It may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96% of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77% of that end salary – about $61,600 – to cover 100% of annual retirement expenses.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

 

 

Mistakes Families Make with 529 Plans

August 21, 2016
Share

5 common errors to avoid + 2 big factors to consider.

Most families that start 529 college savings plans have done their “homework” about these programs. Missteps are made, though, often with the distribution of 529 plan assets. Here are some of the major gaffes, and the major factors anyone should think about before enrolling.

Assuming a university will withdraw 529 plan assets for you. When the time comes, you have to tell the 529 plan that you need the money and specify the payee. Typically, a 529 program offers you either a check written out to you, to your student, or a payment made directly from the 529 plan to the university. There are two big reasons why a check made payable to the student may be the best option.

*A 529 plan distribution triggers a Form 1099-Q. You most likely want your student’s name and Social Security number on that form, not yours. If your student’s name is on the 1099-Q and your student has qualifying higher education expenses (QHEE) equaling or exceeding the gross distribution figure for that tax year listed on the form, that whole 529 plan withdrawal becomes tax-free and the distribution from the 529 doesn’t show up on the student’s Form 1040. If your name is on the 1099-Q, the distribution doesn’t show up on your 1040. Even if your student’s QHEE equals or exceeds the magic number on the 1099-Q for the tax year, an omission may trigger an IRS notice to you, and you will have to defend the exclusion.

*Let’s say you accidentally overestimate your student’s qualified education expenses, or maybe parents and grandparents make withdrawals without each other’s knowledge. In this event, the earnings portion of the distribution is partly or fully taxable. If the distribution is paid out to you, then the earnings are taxed at your federal tax rate. If it is made payable to your student, then the earnings are taxed at his or her federal tax rate, which barring the “kiddie tax” is presumably just 10-15%. Having a payment made directly the school can lead to a second common mistake.

Inadvertently reducing a student’s financial aid potential. When a university takes a direct payment from a 529 plan, its financial aid office may make a dollar-for-dollar adjustment to the need-based aid a student receives. Often, it is viewed the same as scholarship money.

Since the IRS bars you from using multiple education tax benefits to pay for the same education expenses, using tax-deferred 529 plan earnings to pay for the first semester of college may disqualify your student for an American Opportunity Credit. You should read up on the IRS income restrictions on education credits or consult a tax professional. Paying the first few thousand dollars in freshman year expenses with funds outside the plan may allow your student to retain eligibility.

Mistiming the distributions. It can take up to two weeks to arrange and carry out a 529 plan distribution; telling a financial aid office that you are using 529 funds to pay tuition just a few days before a tuition deadline is cutting it close. Some families withdraw 529 monies during freshman year, which can conflict with federal tax returns. If a tuition payment is due in January, withdrawing it in December will create an incongruity between total withdrawals and expenses. The same will apply if a withdrawal is made in January, but tuition was due in December.

Botching the tax break offered to you on the distribution. To get a tax-free qualified withdrawal from a 529 plan, the withdrawn funds have to be used for qualified, college-related expenses. If the distribution isn’t qualified, it will be considered fully taxable, and you may be hit with a 10% federal penalty plus state and local income taxes. If you withdraw more plan assets than necessary, any excess distribution is also nonqualified. Calculating and withdrawing the “net” qualifying expenses of your student’s college education could help you avoid this last problem, or alternately, you could report the excess 529 funds on the student’s 1040.

Ceasing 529 contributions once a student enters college. You can keep putting money into a 529 plan throughout your student’s college years, with the opportunity for additional tax-deferred growth of those savings.

Finally, two other factors are worth noting. These would be a 529 plan’s expenses and deductions. Tax deductions represent a key reason why families choose in-state 529 plans. Most states that levy income tax offer 529 programs with deductions or credits for taxpayers. It varies per state.  Lastly, compare the expenses and fund choices offered by a 529 plan to those of other funds or investment vehicles found outside the 529 wrapper. Make no mistake, 529 plans offer great potential advantages for households striving to meet future college costs. Just remember to read the fine print, especially as your student’s freshman year draws closer.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

HFG Wealth Management serves as Sponsor for EfTA Trivia Night

August 15, 2016
Share

HFG Wealth Management, LLC is pleased to serve as Table sponsor of Education for Tomorrow’s Alliance (EfTA) Fourth Annual Trivia Night. The event is hosted by EfTA as an annual fundraiser for the organization. The event was hosted at The Grand Palace in Conroe. Education for Tomorrow Alliance is a nonprofit organization dedicated to connecting the business and education communities in Montgomery County, Texas. With innovative programs focused on science, technology and career preparation, EfTA has become the portal through which business leaders can access and strengthen local education.

“It is an honor to support EfTA and their mission and their endeavors. The work they do in our community is incredibly impactful in helping to prepare students for a college or career path. EfTA offers so much for the students and businesses of our community,” said Larry A. Harvey, Founder and CEO of HFG Wealth Management. “

HFG Wealth Management is an independent, fee-only, comprehensive financial planning and wealth advisory firm headquartered in The Woodlands, Texas, serving clients nationwide. Led by Founder and CEO Larry A. Harvey, ChFC® HFG Wealth Management has integrated financial life planning and investment management services into a customizable wealth management offering.

For more information about HFG, please visit www.hfgwm.com or 832-585.0110

Saving for College and Retirement

August 10, 2016
Share

Tips on trying to meet two great financial goals at once.

Saving for retirement is a must. Saving for college is certainly a priority. How do you do both at once?

Saving for retirement should always come first. After all, retirees cannot apply for financial aid; college students can. That said, there are ways to try and accomplish both objectives within the big picture of your financial strategy.

As a first step, whittle down household debt. True, some debts are not easily reduced, and some are worth assuming, but many are byproducts of our wants rather than our needs. Less revolving consumer debt means more money available to potentially direct toward a retirement fund and a college fund.

See if your children have a chance to qualify for need-based financial aid. Impossible, you say? You may be surprised. You can have one million dollars in your IRA or your workplace retirement plan and not impact your child’s potential for need-based financial aid one iota. This is because those retirement accounts are not considered parental assets in the calculation of the Expected Family Contribution (EFC) that factors into determining a student’s need.  That “need” is determined through a basic equation: the cost to attend the school minus the EFC equals the financial need of the student. So, in theory, the lower you can keep your EFC, the more need-based financial assistance your student deserves.

The Free Application for Federal Student Aid (FAFSA) and College Board CSS/Financial Aid PROFILE use slightly different calculation methods to determine the EFC. Both student and parental assets factor into the calculation. What usually counts most is the income of the parent(s), minus some taxes, tax deductions, and allowances. Capital gains from investment accounts can qualify as “parent income,” and so can Roth and traditional IRA distributions.

Money held inside a qualified retirement plan, though, is not included in need analysis formulas. Life insurance cash values rarely count. Most Coverdell ESAs and UGMA and UTMA accounts represent assets owned by the child, and child assets receive 20% weighting in EFC calculations (parental income receives up to 47% weighting). Parental assets, as opposed to parental income, are weighted at no more than 5.64% yearly. Cash and brokerage accounts are considered parental assets; so are student-owned 529 plans. Even real estate investments can be defined as parental assets. The CSS PROFILE form does inquire about retirement account values and life insurance cash values, but they are not factored into the EFC calculation. They may be considered if a college financial aid officer needs to make an assessment of the overall financial health of a household pursuant to a financial aid decision.

What if your kids have little or no chance to receive financial aid? Then scholarships and grants represent the primary routes to easing the tuition burden. So save for retirement as well as you can and save for college in a way that promotes the best after-tax return on your investment. Feel free to max out your workplace retirement plan contribution (and get the match from your employer). If you do so, the impact on your child’s eligibility for college aid would be negligible. If you have a Roth IRA or permanent life insurance policy, think about the ways they can be used in college planning as well as retirement and estate planning. You may be able to tap a life insurance policy’s cash value to pay some college costs, and distributions from a Roth IRA occurring before age 59½ are exempt from the standard 10% early withdrawal penalty if they are used for qualified educational expenses.

Even if your household is high-income, look at the American Opportunity Tax Credit. The AOTC is a federal tax credit of up to $2,500 per year that can be applied toward qualified higher education expenses. It is better than a federal tax deduction, as it lowers your federal income tax dollar-for-dollar. If you are married and you and your spouse file jointly, you are eligible to claim the AOTC if your modified adjusted gross incomes total $180,000 or less. If you are a single filer, you are eligible if your modified adjusted gross income is $90,000 or less. Phase-out ranges do kick in at $160,000 for joint filers and $80,000 for single filers.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

 

What is the Right Formula for Funding Education?


Share

Education is truly an investment for a lifetime.  The gift of a college education can open the door to a world of opportunity for your child or grandchild.  Saving, even a little at a time, can make a big difference down the road.  With the cost of a college education continuing to increase, the key is to start saving early and regularly. There are many different methods to fund education expenses.  Determining the best method for your family should first start with an honest conversation regarding your goals.  At HFG Wealth Management, we utilize the life planning approach; our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.

Ask yourself:

  1. How much of my children’s or grandchildren’s education do I want to fund?
  2. What is a feasible savings amount based on my financial situation?
  3. Which other funding methods (i.e. scholarships, work-study, student loans, financial aid) are likely to play a part in funding education?

Once these key questions are answered, a plan can be implemented to fund education.  I have provided some helpful information on the various education funding methods that you may want to use to begin the planning process:

529 Plans 

529 plans are one of the most popular tax-advantaged college savings options.  They include both college savings plans and prepaid tuition plans.  With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses.  Each state may also offer their own tax advantages.  With a college savings plan, you open an individual investment account and select one or more of the plan’s mutual fund portfolios for your contributions.  With a prepaid tuition plan, you can purchase tuition credits at today’s prices for use at specific colleges in the future and there’s no individual investment component.  With either type of plan, participation isn’t restricted by income, and the lifetime contribution limits are high, especially for college savings plans.

Coverdell Education Savings Accounts 

A Coverdell education savings account is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year.  Your contributions grow tax deferred and earnings are tax free at the federal level (and most states follow the federal tax treatment) if the money is used for the    beneficiary’s qualified elementary, secondary or college expenses.  You have complete control over the investments you hold in the account, but there are income restrictions on who can participate.

U.S. Savings Bonds 

The interest earned on Series EE and Series I saving bonds is exempt from federal income tax if the bond proceeds are used for qualified college expenses.  These bonds earn a guaranteed, modest rate     of return, and they are easily purchased at most financial institutions or online at www.treasurydirect.gov.  However, to qualify for tax-free interest, you must meet income limits and other established criteria.        

UTMA/UGMA Custodial Account

An UTMA/UGMA custodial account is a way for your child to hold assets in his or her own name with you (or another individual) acting as custodian.  Assets in the account can then be used to pay for college.  All contributions to the account are irrevocable, and your child will gain control of the account when he or she turns 21 (varies state to state).  Earnings and capital gains generated by assets in the account are taxed to the child each year.  Under the kiddie tax rules, for children under age 19 and for full-time students under age 24 who don’t earn more than one-half of their support, the first $1,050 of earned income is tax free, the next $1,050 is taxed at the child’s rate and anything over $2,100 is taxed at your rate.

Financial Aid

Many families rely on some form of financial aid to pay for college.   Loans and work-study jobs must be repaid (either through monetary or work obligations), while grants and scholarships do not.  Most financial aid is based on need, which the federal government and colleges determine primarily by your   income, but also by your assets and personal information reported on your aid applications.  In recent years, merit aid has been making a comeback, so this can be really good news if your child has a special talent or skill.

It is most likely a combination of the education funding methods above will be utilized in order to meet your own family’s education goals.  We recommend custom tailoring an education funding plan based on your family’s needs.  Additionally, the plan should be reviewed on a periodic basis and adjustments made accordingly.

At HFG Wealth Management, we embrace a more holistic method of financial planning known as Financial Life Planning™.  We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan.  As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values.  At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future.  We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage.  For more information, please visit www.hfgwm.com or call 832.585.0110