Have You Saved Enough For Your (Grand)Child’s College Expenses?


anatomy of piggy bankHappy May 29th – a few days past – otherwise known as 529 day. According to the College Board’s “Trends in College Pricing” report, the cost of attending a four-year university rose roughly 3.5% from 2015 to 2016. Costs just keep going up. Have you done enough educational planning for Junior? Take a breath of fresh air and then check out how much college will cost at these schools for the upcoming 2016-2017 school year:

Average Cost of College 2016 2017 final

For those of you with younger ones or planning for a family, fortunately, there is still time! Read on as this blog is for you as it focuses on what may be the best college savings program out there: 529 College Savings Plans!

The 529 is a great opportunity for parents, grandparents, or other family members looking to help a child make college a reality someday. Studies show that children with money set aside for college are seven times more likely to actually go there.

529 Plans are state-sponsored investment programs that qualify for special tax treatment under section 529 of the Internal Revenue Code. These plans typically involve an agreement between a state government and one or more asset management companies. The contributor (e.g. parent, grandparent, etc.) of the account typically becomes the account owner and the account owner controls withdrawals of assets. The person for whom the plan is set up becomes the beneficiary (e.g. Junior).

Tax-Free Growth.  Earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. The 529 account remains under the control of the account owner rather than transferring to the child at the age of majority as in the case of an UTMA/UGMA. Any U.S. citizen can participate in a 529 and the funds can be used at any accredited college or university.

Quality investment options.  Most 529 programs have a couple dozen quality equity and fixed income investment choices to choose from. Most programs will also allow you to choose an age-based asset allocation model which makes the underlying portfolio become more conservative as the beneficiary approaches college age. Or you create your own portfolio to match your risk tolerance (whether it be more conservative or aggressive) and expected timing of funds. A wealth manager like DWM can help you decide.

Contribution limits.  Unlike other tax-advantaged vehicles, 529 have no income limitations on who can contribute, making them available to virtually anyone. Contribution limits to 529 are determined by each 529-sponsoring program independently, but most are quite attractive with limits over $300,000 per beneficiary. To reach that total, a married couple can contribute as much as $140,000 within a single year (the limit is $70,000 for individuals) and, as long as no more is contributed in the following four years, the entire amount qualifies for five years of the gift-tax exclusion. (This type of 5year “front running” can be a great estate planning strategy for grandparents as well.)

Tax benefits.  There is no federal tax deductions or credits for 529s, but there typically is at the state level. Contributions to a 529 are fully deductible in South Carolina and up to $10,000 per year by an individual, and up to $20,000 per year by a married couple filing jointly in Illinois assuming you use an in-state program – Bright Start & Bright Directions in Illinois & Future Scholar in SC are all excellent choices. Contributions remain tax-free if used for qualified education expenses.

What’s a Qualified Education Expense?


-Required books, equipment, supplies

-Computer technology

-Room and board for ½+ time student

-Special needs expenses of a special needs beneficiary

Non-Qualified Withdrawals. Non-qualified withdrawals will not get the special tax treatment. With a few exceptions, such as when the beneficiary receives a scholarship, the earnings portion of non-qualified withdrawals will incur federal income tax as well as a 10% penalty.

Effect on Financial Aid. A 529 account is counted as an asset of parent if the owner is the parent or dependent student. This is typically more beneficial than other vehicles when calculating the expected family contribution figure.

What happens if the beneficiary decides not to attend college?

The tax laws make it easy on the family if the beneficiary for some reason doesn’t go to college or use the 529 earmarked funds. The account owner can simply change the beneficiary by “rolling over” the account to a “family member” of the original beneficiary with no penalty whatsoever. The definition of “family member” includes a beneficiary’s spouse, children, brothers, sisters, first cousins, nephews and nieces and any spouse of such persons; but typically and most logically it’s one of the original beneficiary’s siblings. Or the account owner can use the funds themselves – it’s always fun to go back to school and learn! Or the least likely option is “cash out and pay”, where the account owner can redeem assets for himself/herself as a non-qualified withdrawal and pay ordinary income taxes and a 10% penalty.

529s vs other college savings plans. Downsides of the others:

  • UTMA/UGMA: 1) Control/custodianship within an UTMA/UGMA terminates at age of majority (21 in Illinois & 18 in South Carolina), and 2) kiddie tax considerations and capital gain considerations upon liquidation
  • Coverdell Education Savings Accounts (“ESAs”) – maximum investment is only $2,000 per beneficiary per year combined from all sources within ESAs whereas 529s are typically $300K+ per beneficiary.

Conclusion. There is over $230 Billion in 529s now up from less than $10B in 2001. The reason for this growth is people catching on to what really is a great tax-free funding vehicle for an important future educational need. Prepare for that financial burden today by saving early and saving often with a 529 account. Give us a call to help get you started or talk more about educational planning in general.

Planning for the Yearend

20151117 SW blog picWith Paul Ryan being elected as the new House Speaker on October 29, 2015, many are looking ahead to the possible “once-in-a-generation” tax overhaul. Ryan is considered by many as one of Congress’ most distinguished and ardent tax experts. Before becoming House Speaker, Ryan served as the chair of the House Ways and Means Committee where he spent time laying the foundation for an ambitious rewrite of the tax code. Although many of Ryan’s ideas have fallen short in the past, he now carries the weight to push a new tax reform to the next level. With time running out in 2015 and the presidential election happening at the end of 2016, the likeliness of a major tax overhaul could occur in the early stages of the next presidency.

While it’s fun to entertain the idea of a new tax code, we all know how difficult it is for the government to pass any bill these days. With that being said, it’s imperative that you, the taxpayer, remain in the present and focus on tax planning for the current year. Even without the major tax legislation headlines for 2015, it’s still a good idea to know the changes that may take place. If Congress moves as they did last year, the decision on which tax provisions are extended could occur as late as the last week of December. Luckily, most of the major tax changes occurred in 2013, so any last minute decisions to extend some of the current provisions shouldn’t cause a major “sticker-shock” for 2015.

An important part of planning each year is to make sure the tax strategies used in the prior years are still effective. Taxpayers saw as much as 14-18% increase in tax, even with consistent income, since the 2013 laws were enacted. A majority of the increase was related to the increase in tax rates, increase in capital gains tax, phase outs of deductions and addition of the 3.8% Medicare surtax on net investment income. There are strategies such as grouping related passive activities, deferring income and accelerating expenses, shifting income to children – especially if you own your own business, examining the entity structure of your business and minimizing the effects of Alternative Minimum Tax that can help reduce your tax liability. If these strategies are not already in place, it’s important for you to bring some of these ideas to your CPA.

Being that healthcare insurance is an item that affects each and every one of us, it’s important to understand a few of the tax law changes that affect this topic. These changes won’t necessarily have a large impact on reducing your tax liability for the upcoming filing season, but they can affect planning and eliminate penalties. While you may or may not understand the thoughts behind Obamacare, it’s important to know the penalties being enforced for not having health insurance. The penalties last year were fairly insignificant – greater of $95 per person or 1% of household income. Moving forward the penalties are becoming more substantial. The penalties for 2015 and 2016 are the greater of $325 per person or 2% of household income and $695 or 2.5% of household income, respectively. There may not be a way out of paying the penalty for 2015, but it’s advised to look into the exchange market if necessary for 2016. Another area you may be familiar with is a Flexible Spending Account. These accounts allow taxpayers to contribute pre-tax dollars to pay for health care expenses. Traditionally these accounts were “use it or lose it” plans. As of 2013, these plans allowed you to roll over $500 to the next year. Starting in 2015, the laws have changed again in regards to these accounts. If you have an FSA and decide to roll over an amount, you will be ineligible to participate in a Health Savings Account (HSA) for the year into which the amount was rolled over. Many employers offer both FSA and HSA plans if you elect a high-deductible insurance plan. Be mindful of this new change so you can maximize the pre-tax savings gained from contributing to an HSA.

The tax changes and strategies mentioned above are just a few of the important items you should be aware of when looking at year-end tax strategies. With every taxpayer being unique, tax planning should be done on an individual basis. We encourage our clients to schedule an appointment with their CPA each November or December to review their projection. There may still be strategies available that can save 2015 taxes and need implementation by December 31st. For our clients who prepare their own returns, DWM would be happy to help them with this before year-end. It’s always a good financial plan to know what to expect when April 15th rolls around.

P.S. Please join us in welcoming Sam Winkler, CPA, to our DWM team. Sam joined us last week from Dixon Hughes Goodman LLP, in Charleston. Sam, wife Lauren and their twelve-week old son, Will, live in Mt. Pleasant. Sam will be heading up our tax and estate planning area for all DWM clients as well as adding value in all aspects of our wealth management services. Welcome aboard, Sam!

Budgeting: Putting the Pieces Together


Budgets are like a puzzle. You have a finite amount of money, regardless of how much you earn. You need to figure out where each piece of it is, and should be, allocated. It’s an honest look at your spending and saving rates. Many people have a negative attitude towards budgeting, thinking that it’s restrictive, time consuming, or unnecessary, but a budget is really something positive. It’s a tool to help you get where you want to be one day.

DWM works with clients to create custom financial plans. Why is that so important? The CFP website says it perfectly: “Creating a financial plan helps you see the big picture and set long and short-term life goals, a crucial step in mapping out your financial future. When you have a financial plan, it’s easier to make financial decisions and stay on track to meet your goals.” These plans help you define and quantify your goals. They’ll help you identify how much you will need to save to make these goals.

To create a realistic plan, one needs realistic numbers. One of the most important figures in all of this is the amount of money you spend, since the more you spend the less you have to save. Remember, you have a finite amount of money. Some people like to know exactly what they are spending, and we have clients that have created Excel budget spreadsheets that detail their spending down to the penny. On the other hand, some people don’t think about their spending (or live in denial about it) and have no clue. But burying your head in the sand doesn’t change reality. The money is still being spent whether you’re aware of how much you’re really spending on discretionary items vs saving for goals like retirement, or not. It’s better to face things now when you still have a chance to change your spending habits, and save to meet the goals that are important to you.

For DWM to provide you with a meaningful plan, we need solid numbers on your spending. So if you’re not currently tracking where your money goes, here is some advice to get you started:

  1. Take a look at your current spending. This is the part where many people stop before they get started because many budget worksheets contain 50+ categories. Trying to classify and tally everything into that many categories is daunting and time consuming. Instead, download a full year’s worth of transactions from your bank accounts’ and credit cards’ websites to an Excel spreadsheet, and sort by category or description to get an idea of where your money is really going. Label each category as Fixed, Goals, or Flexible according to the guidelines below in step two, and figure out what percentage of your take-home income each of the three composes. For some people there will be surprising or depressing revelations, but don’t be dismayed. You can take control of your spending habits. Now you’re ready for step two.
  1. Set goals and adjust your current spending accordingly. A good, easy to follow guideline is to divide your total take-home income 50/20/30:

–  Fixed expenses such as home, student, and car loans, utilities, insurance, memberships, and other expenses you are committed to and don’t vary much should make up 50% of your budget at the most.

–  Financial goals such as retirement, saving for college or a down payment on a vacation home, building an emergency fund, and paying off credit card debt should total at least 20%. (Note that you may be saving more towards retirement goals than reflected in this number because it only includes take-home income, and 401k contributions are deducted before your paycheck is deposited. For more on the ideal saving rate, see Brett’s recent blog.) For our clients, this is where a financial plan from DWM really helps you to know how much to allocate each month to meet your goals. Of course, we also review and offer our advice on fixed expenses and flexible spending as part of our comprehensive financial planning process.

–  Flexible spending makes up the other 30% (or less). This includes things that usually vary month to month like food (both grocery shopping and dining out), hobbies, medical costs, entertainment, shopping, gifts, etc. This portion may be spent on whatever you want or need, as long as you stay within budget.

This guideline is proportional (it uses a percentage of your income for each of the three categories), so it is scalable for all income levels.

We strongly suggest setting up automatic payments/contributions for the fixed expenses and financial goal categories. You will save time, avoid missed or late payments and contributions, and it can help keep your flexible spending portion in line. If 50/20/30 is a big change from your current spending and you are having a hard time cutting your fixed or flexible spending, start with adjusted percentages and continue to make small changes until your budget is in line with your goals. Monitor your actual-vs-budgeted spending monthly to see if your actual percentages are in line with your budget. Once you are consistently finding your percentages are where they should be, you can move on to step three.

  1. Re-evaluate as circumstances change. For example, if you receive a raise or bonus, your mortgage increases, decreases, or is paid off, you buy a new car or pay off an existing loan, when you are no longer saving or paying for college, etc. Otherwise, if you are making all your fixed expenses and financial goal payments/contributions without running up debt from flexible spending expenses, you know you’re doing fine and don’t have to track expenses each month.

So, look at how your income is being spent and be honest with yourself. With DWM on your team, you can develop a budget and make sound financial decisions that help you meet your short and long-term goals. Please contact us to update your plan or learn more about budgeting, saving, or our comprehensive financial planning process. Your future self will thank you.

Retirement Planning Rules of Thumb are Likely Off-Target

retirementnumbersWhat’s your “Number”? You know, that elusive amount of investment assets you need when you stop working so that you don’t run out of money in retirement.

Barron’s ran a series of articles Saturday on retirement which included rules of thumb for calculating your number. “Conventional wisdom” would have you take 75% of your annual working income, subtract your social security and pensions expected in retirement and then multiply the result by 25 to get “your number.”

Here’s a simple example. Household income of $120,000. Social security expected to be $30,000, no pension. 75% of income is $90,000. Subtract $30,000. The result is $60,000. Multiply by 25 and the number today is $1,500,000. It will keep increasing with inflation. Easy calculation. But likely off-target. Here’s why:

First, using 75% of your current income as your expense level for all of retirement could be way off. You may have mortgage payments that will exist for only a few more years into retirement. You might still have children at home at retirement time for which education costs will be incurred. And, at some point, the kids might leave home and reduce your expenses. You might currently only be spending half your paycheck and investing the rest. For business owners and salesman, expenses in retirement could be higher because previously company-provided benefits now have to be paid personally.

Also, expenses in retirement change over the years. Typically spending declines when folks reach their late 70s or early 80s. And, then with medical costs, expenses could ramp up significantly if people live into their 90s. Furthermore, a married couple will likely not die on the same day, particularly if there is an age difference. Expenses of one person for part of the retirement period will typically be less than expenses for two people.

Second, the use of multiplier of 25 is based on a “safe withdrawal rate” of 4% each year. The concept is that since expenses will increase with inflation, if the portfolio earns 7% and you withdraw 4% the first year, then your principal grows 3% which means you can draw 3% more in year two (due to inflation) without breaking the bank. Furthermore, this 4% number is an after-tax amount. So, for example, if the funds you accumulate are all traditional 401(k)/IRA funds, then every retirement withdrawal will be subject to income tax. If we assume a 25% income tax rate, your withdrawal rate just went down to 3% and your multiplier just went up to 33.33.

Third, you may have other assets that should be included, for example if you have equity in your house. At some point, your house could be sold, downsized or you could consider a reverse mortgage. In each cases, these funds would reduce your “number”.

Here’s a better way to do retirement planning:

  1. Instead of using income, use your actual expenses as a starting point. On the first day of retirement, what will your expenses likely be? If some expenses will drop off in a few years, put those in a separate column. If you have wants and wishes in retirement, for example travel or a second house, show those separately for each item, number of years of payments, etc.
  2. Using actuarial tables modified by family and personal longevity likelihood, calculate the number of years you (and your spouse) will likely live.
  3. Identify before retirement what your annual additions to your investment portfolio will likely be and separate it between qualified plans and taxable amounts.
  4. Review your risk profile and determine your likely asset allocation while you are working and after retirement.
  5. Prepare a year by year analysis of your financial retirement plan, while you are working and during retirement. For each year, this will show the beginning investment portfolio, investment additions, post retirement income, investment earnings, income taxes, expenses during retirement and ending portfolio value. And, of course, inflation needs to be incorporated into the calculation as well.
  6. Then use a Monte Carlo or similar simulation. It incorporates all of your data in a random order to account for the uncertainty and performance variation and produces thousands of scenarios of possible outcomes. The result- the likelihood of “success”, i.e. having enough money for your lifetime.
  7. Stress test your plan for such items as early death or disability, social security being reduced or eliminated, long-term care costs, etc.
  8. Regularly (at least annually) review the above assumptions and see if you are still on plan or if revisions are necessary.

I’m sure that the above seems overwhelming. It doesn’t need to be. There is good software available to help in the calculation and illustration of the above. We use MoneyGuidePro and, of course, we expedite the process of our clients. If you’re not working with us, you might attempt to do this calculation on your own.

It will take more time than the simple calculation that some use to find their “number.” However, it certainly will provide a more accurate target for you for the future and give you greater peace of mind about your finances. After four decades of doing this for clients, I can assure you that the process is well worth the investment.

What Will Be Your Legacy?

Family fourth of JulyMoney or family values? Hopefully, both.

A 2012 study by Allianz found that 86% of baby boomers and their parents agreed that family stories and values were more important life legacies than financial assets. This echoed findings in 2005 when a similar study was conducted and 77% felt that memories, stories, life lessons, family traditions and values were 10 times more important than money.

We’re seeing more multi-generational planning in our business these days. Our clients are families and in some cases include three generations; grandparents, parents and children. Multi-generational planning has become an extremely important and growing part of our business.

There are a number of reasons:

  1. People are living longer. The older generations are more actively involved with the younger generations and the younger generations may become caregivers for the older generation for a longer time.
  2. There is more communication in the family. We’re not seeing the traditional patriarchal model as often these days. Males and females of all generations have a voice in family matters and with the internet and social media there’s lots of communication.
  3. Families seem to have more assets than the past. The Great Generation and Silent Generation have made a substantial amount of money and not spent it. Despite the Financial Crisis of 2008 and the current slow economic recovery, America has been a wonderful place to live and make money for decades.
  4. Minimizing estate taxes is no longer the primary objective of family wealth management. Back in 2001, the lifetime exemption for federal estate tax purposes was only $675,000 per person. Today it is $5,250,000. Hence, if planned properly, a couple could transfer $10,500,000 or more to beneficiaries without estate taxes. Furthermore, many states no longer have estate or inheritances taxes or have high thresholds before such taxes start. Hence, taxes still need consideration, but they are not necessarily the focal point of planning.

Today, some families create 100 year family plans. They believe that the assets of the family are the human capital of its individual members. They communicate their family history and culture and pass it down through generations. They discuss shared values and develop family mission statements. They focus on each family member’s individual pursuit of happiness. Some families hold regular meetings and make a major commitment toward financial education. Many share philanthropic initiatives. Alan Alda said it well, “I’ve come to believe that giving feels good, but I think giving strategically feels terrific.”

Of course, successful families also consider their wealth objectives and dealing with strategic issues or risks that may stand in the way. They discuss preparation for major life events such as birth, death, divorce, marriage, illness, sale of a business, etc. Communication of intentions is critical in these areas. Research shows that wealth transfer is best accomplished when heirs are aware, informed and prepared. Lack of information can lead to misunderstandings about intentions and values. Some of our families are mentoring beneficiaries, and, of course, paying special attention to the long-term selection of trustees and advisors.

We now see three steps of planning: 1) Financial planning is often described as preparing, planning, protecting and growing your assets during your lifetime. 2) Estate planning prepares your assets for your family. 3) Multi-generational planning prepares your family to receive their inheritance in both money and family values.

Regardless of your age, if you would like to talk about multi-generational planning, please give us a call. We’d like to talk with you and we’re passionate about helping families to create and pass along legacies- of all types.

Long-Term Care: What’s Your Plan?

LTC- Ostrich head in the sandLong-Term Care (“LTC”) is a big deal. 70% of those over 65 will need LTC before the end of their lives. One in eight Americans over 65 has Alzheimer’s. 40% of those currently needing LTC are between the ages of 16-64. The 2012 national average annual cost of LTC was $81,000. Costs are escalating 4-5% per year. People are living longer and the cost of care continues to rise.

As a review, LTC means the help needed when someone suffers from dementia or needs assistance with at least two “activities of daily living,” such as bathing or dressing. The care can be provided at home, an assisted living facility, a skilled nursing facility, or a continuing care retirement community.

It’s no surprise that we at DWM consider planning and financing for LTC a key element of financial planning. When we are reviewing MoneyGuidePro simulations of the future with our clients, we usually stress test the plan for LTC. Can the plan sustain the burden of 2-5 years of LTC costs per individual? There are public programs such as Medicaid that pay for LTC, however, our typical client would not qualify for Medicaid. Hence, it is typically a question of “Do we self-insure or do we get a LTC policy?”

Traditional LTC policies are priced based on age, health, years of coverage, the inflation factor selected, and other details. Joint plans are available that provide a couple with a pool of money, that can be used by either of them. Premiums are increasing due to three main factors: claims have been higher than expected, policyholders are not allowing policies to “lapse,” and insurance companies aren’t earning as much these days on the investments of the premiums they collect.

In addition, women are starting to be charged higher premiums than men. It’s not surprising: 2/3 of every LTC benefit dollar is paid to women. They generally live longer than men and have no caregivers at home. Genworth Financial, the country’s largest LTC insurer, plans to start charging women as much as 40% more than men. In addition, in an attempt to minimize future claims, underwriting at insurance companies is getting much tougher.

If you decide to insure, it’s important to work with knowledgeable LTC professionals and make sure your insurer is strong financially so they will likely still be in business if you need to submit claims. You also want your LTC insurance agency as committed to being your advocate when you file benefits claims as they are to have you sign on as a new policyholder.

Lastly, many seniors these days would prefer to stay safely, comfortably, and independently in their chosen residence as long as possible. LTC policies generally provide coverage for both assisted living facilities and benefits for care at home and services for aging in place.

Planning for LTC is very important for everyone, but more so if you are 50 or over. The decision to self-insure or get a LTC policy is often difficult. DWM, of course, doesn’t sell insurance, but we work with excellent LTC professionals in both Chicago and Charleston/Mt. Pleasant who can provide information and answers so that you can make informed decisions for your and your family’s future. If your LTC plan is not in place yet, give us a call. We can help.