TheMoneyGeek Unplugged

Even as the economy begins its slow crawl back, college costs are continuing to rise.  That means parents are continuing to fight a tough battle between funding college and funding their own retirement.

In October, the College Board reported that the average published price of tuition and fees for in-state students at four-year U.S. public colleges was $7,020 for the 2009-10 school year, up $429 or 6.5 percent from a year ago. After adjusting for inflation, the average net price paid for tuition and fees by public four-year college students is lower overall in 2009-10 than it was five years ago, but higher than it was last year.  Private four-year colleges saw a smaller increase of $1,096 or 4.4 percent, but for a much higher average annual tuition of $26,273 for the school year.

Also in October, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) also reported in October that American workers who held 401(k) accounts consistently from 2003 through 2008 suffered a 24.3 percent average drop in their account balance during 2008’s bear market.

Despite these huge challenges, it’s particularly important for parents to make retirement their first priority. Kids can always take on loans and search for scholarship and grant funding to tide them over.  Parents can offer help in a better economy, but the momentum lost in saving for retirement is much tougher to replace.

And there are serious financial consequences to breaking into 401(k) and other tax- advantaged retirement savings to pay for college.  Parents tempted to do so should look for other alternatives.

A July 2007 Country Insurance and Financial Services survey found that not only did 25 percent of respondents think it would cost less than $50,000 to send a child to a four-year college, but that nearly half believe that saving for college is more important than their retirement. Most qualified experts  (including me) advise against. On average, public colleges have surpassed $50,000 in total costs when you add in books, room and board.

Before you choose between yourself and your child by raiding your retirement accounts, here’s what you should know:

You’ll escape an early distribution penalty, but…

Any withdrawals from an IRA you might take for your child or grandchild’s education (as well as your own or your spouse’s) can be withdrawn without the usual 10 percent penalty on early distributions before age 59 ½, but you’ll owe regular tax at your incremental tax rate on the withdrawal.  Ultimately, you really need to talk with a tax advisor or Certified Financial Planner™ (CFP®) professional (like me) to determine how your IRA withdrawals affect your tax liability and how they have to be reported on your Form 1040.

You might hurt your kid’s chances for financial aid:

The entire withdrawal from an IRA — whether taxable or not — must be included as income on the following year’s application for the Free Application for Federal Student Aid, or FAFSA. Family income does more to influence financial aid than the size of the family’s assets, and dipping into your IRA can potentially damage your child’s potential financial aid. Check with a trained financial planner who is well versed in financial aid strategy before you make such a move.

Most middle and upper income folks assume that they make too much money to qualify for financial aid.  I urge all students to apply for aid whether they think they qualify or not.  Many students whose parents report a six-figure income may qualify for grants, loans work-study or other financial assistance.

A ‘hardship withdrawal’ or loan from a 401 (k) plan should be a last resort:

Earlier this year, the Transamerica Center for Retirement Studies reported an increase in workers taking loans from their 401(k) and other work-based retirement savings. Eighteen percent of those surveyed reported that they took loans from their retirement plans in 2007 compared to 11 percent in 2006.

Keep in mind that while most retirement plans provide an option for hardship withdrawal for emergency medical or funeral expenses, the IRS restricts use of those funds for home purchases or tuition expenses. In any case, you’ll pay the tax on the withdrawal plus a 10% penalty on most financial hardship withdrawals.

So what do you do?  Besides talking to a tax professional, it makes sense to find time to speak with a CFP^® professional to take a look at your overall financial situation so you can possibly find alternatives to raiding your retirement.  A trained planner can help you look over all the spending, saving and investment decisions you’ve made so far and seal up the leaks.  Then you can discover whether you have smarter options to pay your child’s tuition. They include:

Starting a search for scholarships and grants with your kid:

See if there are grants and scholarships not only in your community (think community foundations, high schools, local chambers of commerce), or within your industry or trade associations.  Understand what a prospective student’s college choices might offer in terms of aid from its endowment funds.  Also, some employers offer scholarships for their employees’ kids. Start searching online, at the office and by phone for such aid.

The website http://savingforcollege.com provides lots of information about strategies for saving for college, finding scholarships and applying for financial aid.

Negotiate a college work schedule for your child:

No one says that you have to pay 100 percent of your child’s education costs.  In fact, most students work harder when they have “skin in the game.”  A college sponsored work-study arrangement or just a regular full or part-time job while going to school is a great way for students to learn responsibility and how to manage money.

Whatever portion of college costs you decide to pay for your child, I generally suggest that parents let the children first pay for tuition and books and the parents pay for room, board and spending money.  This way, children will think twice about dropping or performing poorly in a class they know they’ll have to pay for again. Also, parents can incentivize kids by agreeing to pay for a larger percentage of college costs based on grades achieved.

Consider attending a commuter college:

Many local colleges and universities offer the same if not a better educational opportunity for students as going away for college.  If money is tight and the student qualifies for little in the way of grants or scholarships, living at home while attending college can be an excellent way to get an education while saving 40 to 50 percent of the total cost.

Fine-tuning your negotiating skills:

Parents need to become more aggressive about negotiating tuition, room, and board at colleges where either their children or they have been accepted. A financial planner with expertise in college planning can train parents to understand where those savings might be and how to ask for them.

Please feel free to get in touch with me or leave your comments or feedback here if you have any questions.  You can find more information about our services and how we can help at http://ydfs.com.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families. This column was produced by YDream Financial Services and the Financial Planning Association, the membership organization for the financial planning community. All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any planning or investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a sole basis for making investment or planning decisions.

It’s hard to ignore all the buzz about gold lately and how it’s going up to $1,000,000 or more an ounce from here.  If you look back at the history of gold over the years, you’ll quickly see that gold as a long term investment has not even kept up with inflation, much less the risk-free treasury bill rate.  In fact, despite all the talk about gold, I personally hesitate to call it an investment and I’ve never invested $1 in gold (other than the obligatory jewelry for my significant others over the years, but those were not investments).  Gold as a commodity has few industrial uses and, for most of the developed world, provides little beyond intrinsic value.  Central banks around the world hold a percentage of their currency in gold as a hedge, and you may have heard that a few countries have recently increased their holdings in light of the weakening dollar and global economic uncertainty.

The fact remains that gold investments have gone up significantly in recent months, and I’m loathe to shun an asset class that may continue to go up (though I’m not endorsing investing in gold.)  Uncertainty about the value of the dollar, the global regulatory environment, a slow economic recovery, future inflation worries and the growing deficit have all contributed to the worldwide craze over gold.  Near term estimates have put an ounce of gold at $1,300, with some longer term estimates up to $3,000-$5,000 an ounce.  As of today, gold is at its highest levels in years, around $1,148 an ounce.  I hesitate to invest in gold at its current highs, but it looks like it may be going higher.  By the same token, investor appetites for gold can wane quickly, and so the price can drop quickly as well.

If you have more than $250,000 in your already well-diversified retirement account, and you have an appropriate investment choice for gold, you may consider adding  a small portion to your portfolio.  The investment should be in the form of a highly liquid mutual or exchange traded fund (for example, the SPDR Gold Trust or GLD which  buys and houses the physical gold for all of its investors.)  I view an investment in gold as more of a “hedge”, but would look to liquidate it once the prices started dropping.  If you are serious about investing some of your money in gold, then I would wait for a short-term pullback of 3-6% in the price before buying (assuming that a pullback occurs), and would invest no more than 3-5% of your total portfolio value in gold.  The investment in gold should be made in your retirement accounts due to the less favorable ordinary tax treatment gold gets as a collectible, rather than as a capital gain asset.  If you invest in the GLD or other exchange traded funds, be sure to put appropriate stop loss provisions in place to protect your investment.

Another somewhat less risky way to “play” gold is to invest in the stocks or funds of gold mining companies, many of which may already be in your existing mutual and exchange traded funds.  Looking up the funds you own on http://morningstar.com will reveal many of your mutual funds’ holdings.

For the first time in my life, I am personally considering an investment in the GLD fund, but I have not done so yet.  So far, none of my clients’ assets are invested in gold directly either.  I should emphasize that I consider a bet on gold to be a speculation, so it should only represent a small portion of your portfolio, and only if you have a large enough portfolio.  While you could buy gold coins or any number of gold trinkets hawked on late night TV, I recommend that you weigh your decision carefully and consider other investment options if you have a small portfolio.  Well diversified growth mutual funds are always a good bet.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.

Here’s a letter that we shared today with our clients, friends and prospects.  I’m posting it in hopes that you might find some value in it.

As the summertime fun draws nearer to its final days, I hope that you’ve been able to take some time to get out there and relax with your families.

The markets have been kind over the summer and have given us much to be optimistic about.  But if you’ve heard or listened to the never ending supply of prognosticators out there, you’d think that the market was about to fall out of the sky any day now.  As I’ve mentioned before, while it seems that the market may have gotten ahead of itself a bit, and the fundamental economic factors may not fully support such a bullish run, I don’t see anything that supports a return to anywhere near the March lows.   However, there’s a “but” to be mentioned.

A few technical signs have developed over the last few days that signal that the current market may be a bit overbought, and therefore may be ripe for some profit taking.  I therefore want to caution you that we may see a correction of sorts come September, perhaps in the range of 3-5%, maybe more.  However, I believe that based on all of the improving economic reports, we will eventually resume our uptrend and I predict that we will see double-digit gains come year-end.  The funny thing is though, my crystal ball did not come with a money back guarantee, so please accept my prediction solely for its entertainment value rather than anything to rely or invest on.

The month of September traditionally has not been kind to the stock markets, so please be prepared for some bumpiness.  Should we see an overall deterioration or any hint of a so called double-dip recession, we will take appropriate protective action for our client portfolios.  But right now, all signs point to a very slow economic recovery over the next year.

Some Money Saving Tips:

Now a Doubly Great Deal: You may recall that I touted this cash back deal from Bing last month.  This month, Microsoft is doubling the cash back for a limited time.  If you’re shopping for anything online, try the price comparison tool at http://Pricegrabber.com, then look for that merchant on Microsoft’s new search tool at http://bing.com. Click on “Shopping”.  Enter the item name in the bing search box, and look for merchants offering “Bing cash back” of 2-40%.  Compare the prices on the two sites (PriceGrabber and Bing) and, if the price is less after the rebate on Bing, then buy it there and have the rebates deposited into your PayPal account. Ka-ching!

1^st Time Home Buyer’s Credit: If you know of a 1^st time home buyer (anyone who hasn’t owned a home in the last three years), they have until November 30 to close on a home and get a refundable 10% tax credit up to $8,000.  They get this money back even if they owe no federal income tax.  But since banks are taking upwards of 60 days to close a deal, getting to an agreement by the end of September is essential so the buyer does not miss out on the tax credit. See http://www.federalhousingtaxcredit.com/2009/index.html for more details on this credit.

Would you like free fries and drink with that?: McDonald’s is offering a free medium fries & soft drink or tea with the purchase of any Angus 1/3 Pound Burger-coupon expires 8/31/09. http://bit.ly/f4M7E

Funny Quote: “The United States has developed a weapon that destroys people but leaves buildings standing. It’s called the stock market.” -Jay Leno

Please enjoy the last few days of summer and your Labor Day weekend.

I welcome your comments and feedback.  If you have any questions, please feel free to get it touch with me and be sure to share this message with your friends and colleagues.  And please be sure to let your friends know about me if you think that they might benefit from my services.  As a CFP® and NAPFA registered investment advisor, we have a fiduciary responsibility to always put your interest ahead of ours and avoid conflicts of interest.  Most brokers and advisors cannot say this nor do they adhere to this very high standard of care.

Please follow me on Twitter at http://twitter.com/TheMoneyGeek

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor and can be found at http://www.ydfs.com.  All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.