The cost of their children’s college education will take a big bite out of parents’ retirement savings.
The cost of attending a university has increased much more than inflation, which makes the problem much greater. When the time comes to write that first semester’s check for tuition, books, room and board, it’s not uncommon to tap the home equity or borrow from your 401-K.
If, by chance, you needed to tap your retirement plan this month, the recent drop in equities will sting even more. I’ll come back to that later.
New parents and families with teenagers have several options available to put money away for college. Just choosing to save some money is almost always better than doing nothing. For example, a savings of $150 monthly and a return of 6 percent will grow to approximately $25,000 in 10 years.
You have several options available to fund for college. Section 529 Plans are seen the most. Other available vehicles include Coverdell Savings Plans, Uniform Gifts to Minors, Annuities and even Life Insurance. Particular interest to Veterans is the Post 9/11 GI Bill. All of these can be attractive depending on your situation. But let’s focus on two of the opposite ends of the spectrum — Section 529 Plans and Life Insurance.
Section 529 Plans are the largest in number. Sponsored by the states these plans offer tax-deferred growth and tax-free distributions if used for approved educational expenses. Many states will offer the additional benefit of tax-deductible contributions, and that’s very attractive.
There are several positive benefits to these plans. Almost all colleges and universities accept these accounts. Family members may also contribute to a 529 Plan and the account holder may change the beneficiary if the child does not go to college.
As with all financial vehicles there are some downsides and 529 Plans are no different. The securities in a 529 Plan are subject to market risk and January 2016 has been a perfect example. Plans vary from state to state and it’s very tedious to review various plans’ investment options, sales charges and fees. Here’s another benefit of a fee-only financial advisor or money manager. If withdrawn funds are not used for qualified expenses, you are probably looking at income and penalty taxes. Finally, 529 Plans can potentially reduce your child’s ability to receive income-based financial aid.
On the other side of the spectrum is a vehicle designed for safety and that’s Cash Value Life Insurance. There are several positives to Life Insurance. Cash Value Life Insurance offers attractive interest rates, regular dividends and no downside risk. Further, there are no restrictions on how the money is used and a student’s chance of additional financial aid is not affected. Most importantly, a Life Policy offers guaranteed completion should the policyholder die prematurely.
The negatives associated with Life Insurance will be the lack of high returns as they are designed for steady growth. You won’t see 15-20 percent growth in a year. In the absence of a single premium, regular payments will be required.
Like 529 Plans, Cash Value Life Insurance designed for educational funding needs to be a special design and not all carriers offer such products. Purchasing a policy that won’t build a lot of cash will leave you very disappointed.
If you have young children and want them to attend college it won’t hurt to look at both options. Remember, there is no “one size fits all” in this area of your planning.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.
