COLLEGE SAVING CHOICES with Benefits Comparison

There are so many occasions we buy gifts for our loved ones throughout one year.  Once a year everyone has a birthday. Once a year it is also Christmas, Hanukkah, Kwanza, Easter, and New Year. Graduation from pre-school, kindergarten, elementary school are also times we gift our children. How about considering, instead of buying them some junk, you do something that will last them a lifetime. Save for their education.

So let’s begin by comparing benefits of the different choices people typically use to save for their loved one’s future education. Are you looking for restricted use or flexible use of your dollars, over at least a possible 22 year period of time? Guaranteed growth or no guarantees? Risk of 100% loss or no loss provisions? One use of each dollar or multiple uses for each dollar? Depending on what you are looking for will help you decide which of the following financial vehicles is right for you to save for your child, grandchild’s or great grandchild’s future education.

Below is one example of starting the saving process at age zero with a future cost of $30,000 per year. My son’s tuition and other expenses for just this year was over $46,000 so 22 years from now who knows what the cost will be, when colleges inflation rate is said to be over 5% – Notice they don’t show you past 2007 on finaid.org and another example up till 2014.

The calculator below has estimated one needs to put away $4,316 per year to reach the required target of $30,000 per year for 4 years of college, not taking inflation into account but including a non-guaranteed 2.5% interest rate.

Below is the math of above calculator

Non-Guaranteed Interest accumulated: $25,045.41

Assumptions:

The calculator above uses the following simplifying assumptions:

·The education fund grows and is distributed tax-free.

·The contributions and withdrawals to/from the education fund are made at the beginning of each year.

·The “education cost” is used in a broad sense by this tool.  In this context, it may include board, books, entertainment, etc. as well as the fees charged by the school.

Description of the Worksheet:

This solution is found using iteration to solve for the required cash flows within the following worksheet. (The following outline assumes one student. Columns for additional students are inserted between columns three and four of this outline).

Column one is the beginning of year calendar year.

Column two is the age of the student.

Column three is annual education cash flow requirement for the student.

Column four is the total annual education costs for all students.

Column five is the annual beginning of year fund contribution requirement.

Column six is the net beginning of year balance. Calculated as:

·Previous End of Year Balance + Fund Contribution – Total Annual Education Costs

Column seven is the annual growth of the education fund. Calculated as:

·Beginning of Year Balance * Net Fund Rate of Return

Column eight contains the end of year balance. Calculated as:

·Beginning of Year Balance + Annual Growth

^Now let’s consider the fact that one never knows if a child, when they are of college age, may or may not go to college. Some college savings/investment accounts require the money to be used only for education and if not, an expensive penalty is assessed. Can be up to 20% and add to that the tax that would also have to be paid if the money is not used for qualified educational expenses.

^Let’s also assume that over a 22 year period of time the owner and payer of the savings may wish they had access to the cash for any multitude of reasons. But the parent may not be able to utilize their allotted child’s education savings during the 22 years for their own financial purposes because the money is basically in jail or tied up and inaccessible, depending on the type of account they choose.

^Let’s also assume that a college the parents may wish their child to attend, may not suit the child’s desires or abilities. So do we want to use a savings plan with a particular college?

^the payer of the savings passes away, how devastating will that be financially to the child’s future education and is there a back-up plan?

^One more thing – is the plan you have chosen actually an investment vehicle where your money COULD realize a 100% loss, any year, including the years you need to actually pay for college? So is that really a risk free savings account?

^And another one more thing – How much will be left in your account at the end of the 22 years period? Are you happy to have your dollars perform only ONE job?

^BELOW is an example of what I believe to be THE MOST beneficial savings plan available today. It is the one with all the green boxes all the way down for ALL the benefits and the only one with a green box under guaranteed growth and disability protection. What is it? What is PLI? It is a specially designed whole life insurance policy. Yep. Plain and simple but oh so effective and risk-free. NOT, Universal Life.

^The policy illustration below includes a waiver of premium rider on the insured. Not 100% necessary as the child is not paying for the premiums but in the future, when the policy is turned over to her to pay, she will have a ready made safe guard. If you choose not to include the WPD, the cost of insurance would be lower and the amount of cash value to collateralize may increase.

Guaranteed Growth: $117,694 – $94,952 = $22,742

Non-Guaranteed Tax-Free Dividend Estimate:  $122,067 – $94,952 = $27,115

If you choose to protect the payer of the premium from disability, below is an illustration including that. PBR means Payer Benefit Rider which is protection for the parent in case they become disabled and cannot pay the premium. I recommend the payer also has a policy on their own life in case they pass away.

Now for a few more specifics.

Please understand the following point.

With properly designed whole life insurance each dollar you deposit into that financial vehicle does more than one job. How is that possible? Keep reading.

How one dol­lar can do lots of jobs.  When you buy whole life insur­ance you get a lot of things that go with it. You get the death ben­e­fit, you can get waiver of pre­mium or Payer Benefit Rider, you get the cash value, you get the div­i­dend, you get the abil­ity to bor­row etc. so that’s what I mean by lots of jobs. One dol­lar inside life insur­ance does all those jobs.

With whole life insur­ance you can bor­row against the cash value and get the dol­lars to do addi­tional jobs as well. Maybe it is edu­cat­ing chil­dren, maybe it is help­ing you out with a real estate oppor­tu­nity, maybe it is tak­ing care of pre­mi­ums for you for a while, maybe it is help­ing you get into another invest­ment. These are all jobs that our dol­lars can do.

So much of our soci­ety is pred­i­cated on one dol­lar doing one job. I’m going to put my dol­lar here and it is going to edu­cate my kid. I’m going to put my dol­lar here for retire­ment. I’m going to put my dol­lar here for my life insur­ance, and I’m going to put my dol­lar over here for my mortgage.

It’s really not how our econ­omy works. Our per­sonal economies work because all our dol­lars are inter-connected.

Many clients say I treat my insur­ance dol­lars dif­fer­ent than I treat my invest­ment dol­lars. They might try to sep­a­rate them. But our dol­lars are all inter­con­nected. If we limit our dol­lars abil­ity to do only one job, like putting it in a retire­ment plan; not that that’s bad, but we just have to under­stand that that’s the only job that dol­lar is going to do. If we put it in a 529 plan, that’s the only thing that dol­lar is going to do, is edu­cate a child. Noth­ing wrong with that, but we expand our poten­tial so much bet­ter if we get one dol­lar to do lots of  jobs. Or an HSA plan, it is doing one job, sup­port­ing cer­tain future qualified health issues.

So by using life insur­ance a dol­lar imme­di­ately does 4 or 5 jobs, again, death ben­e­fit, pre­mium protection, cash value, div­i­dends, abil­ity to bor­row against it. And if we do bor­row against it, then addi­tion­ally, it can edu­cate chil­dren, sup­ple­ment retire­ment, purchase vehicles or equipment, take vacations, fund another investment etc. etc. as well.

I truly hope you see my point here and will contact me today, so you can begin saving for your loved ones while providing a flexible fund for your own use at the same time.2014

2014 College Saving-Investment Account tax rules by Legg Mason Global Asset Management

COLLEGE -Family Guide to College Savings – Legg Mason

   In case your child decides not to go to college, life insurance as the savings vehicle makes it easy to be flexible.

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November 10, 2014 · Jennifer · No Comments
Posted in: 529 decline for college, 529 vs 7702, College Planning, COLLEGE SAVINGS PLANS, Comparison College Savings, Tuition Tracking Software

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