I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

Choose a planner that put his/her attention on tax planning

Remember my beliefs.  The first one is that retirement savings and planning depends on you, you, and you (as opposed to the government, your employer, and you).  The second one is that you’ve got to keep your eye on market volatility, inflation/deflation (even if only medical expenses inflation), and TAXES.  Taxes could potentially be your biggest expense in retirement.  If you’re not diversifying your investments to provide tax-free income in retirement, you’re missing out on an opportunity to save on that expense and therefore have more money to spend in retirement.

Here are the Cliff Notes (remember Cliff Notes?):

1. As investors accumulate retirement assets, they should put money in three buckets: one that’s tax-deferred, one that is tax-free, and one that is taxable for savings and investments outside tax-advantaged accounts.
    
2. Investors often can stretch their retirement dollars further if they have the flexibility to manage distributions in a tax-efficient way.  This is a process that must begin in the accumulation phase.
    
3. Directing money to tax-free accounts can be the most challenging and needs to start early.
    
4. In the example given, because the couple was able to draw money from a variety of sources, the couple had $120K in retirement income and was able to keep an effective 7.7% tax rate and also realized these potential benefits: they will qualify for lower Medicare Part B premiums, potentially qualify for the lower capital gains tax, and improve their ability to deduct health insurance and/or long-term care premiums.
    
5. If cash is king, flexibility is queen:  A tax-diversified retirement portfolio gives investors more flexibility to deal with unknowns like changing tax rates and the potential means testing for Social Security and Medicare benefits. 

See, I’m not the only one who says these things.

How to make the most of family bonding time

When I’m working with clients, I will often ask questions like these:

• Do you think you will inherit money from your parents or extended family?

• Do you believe you will have to support your parents or other family members financially now or in the future?

• Do you think your parents would be willing to contribute toward college education?

• How is the health of your parents? Are they taking any medications?

I would guess that somewhere around 80% of the time, I get blank stares or guesses as a response to these questions.  What that tells me is that aging parents are not sharing with their adult children the status of their financial lives.  This probably started generations ago and was passed down when the adult children were young and parents didn’t want to share financial information with young children who might share that information with friends and neighbors.  The habit stuck.  Now the information is not shared for any number of reasons—privacy, embarrassment, unequal inheritance allocations, etc.

This is bad news for everyone.  It’s bad news for aging parents who need to assign the task of Power of Attorney to someone, who want to maintain family harmony, who may need financial or other support in the future as they age.  And it’s bad news for adult children raising their own children, probably instituting the generations-old habit into the next generation, and are clueless about what their parents might need or what they might be able to anticipate inheriting in the future (or not!)

Take time during your family vacations to talk, bond and laugh.  You do not need to talk finances.  But you do need to start building the relationship and trust with your family members so that when there is an opening to talk about serious financial issues, the bridge is there to make that conversation happen easily, timely, and when everyone has their faculties.  The last thing you want to do is have this conversation when someone is medically, physically, or psychologically impaired by illness or old age.

Get the conversation going.  Start with the weather.

The good, the bad, the ugly, and my directions for use

The good: This is a great product for those who have 25% equity in their homes, have positive cash-flow annually if not monthly, and are committed to paying off their mortgage aggressively.  I find it a more financially sound strategy than taking out a standard 30-year fixed-rate loan and making extra principal payments.  The 30-year fixed-rate loan is an extremely expensive loan over time. The Homeownership Accelerator is far less expensive and serves the client rather than the lender.  The product is also kept with an investor.  There are no Fannie/Freddie underwriting guidelines in play.

The bad:  The one aspect that I don’t like is that I believe that once you’ve paid off the mortgage to a particular level, it is arguable by the IRS that the interest is no longer deductible for a portion of the loan balance.  Now, there are relatively so few people using this loan that the IRS is unlikely to waste its time trying to figure out what is/not deductible.  You’re probably safe.

The ugly: The only thing that scares me about this loan is that it’s an equity line and lenders are notorious for reducing or closing down equity lines these days. In my conversations with the folks at HOA, the chances of the equity line being closed or reduced are slim because the underwriting is strict and it’s only issuing loans where it knows its collateral is sound. You’re probably safe.

Directions for use:  Take a look at the videos. Talk to your mortgage professional.  Talk to your financial advisor.  You must have 25% equity, good credit, positive cash-flow, and a willingness to try something “new” (it’s new here, but my Australian counterparts have 30% of their clients in this loan).  Use the loan to capture low daily interest calculations.  Do not change your spending habits.  Take the savings that you do reap and make additional investments. Over time, your loan balance will go down faster, your investments will increase faster, and you will be in a “debt-free” place (as you have the ability to pay off the loan with assets at a moment’s decision) sooner.

The smart use of debt

Equity repositioning is nothing more than the concept of using debt wisely.  When we use other people’s money to make more money because we are making more money by investing than the borrowed money is costing us, we come out way ahead on very small margins over long periods of time.  I never advocated financial irresponsibility, frivolous spending, or unnecessary risk-taking.  To the contrary, my message was this:  Financial security is defined as having the ability to weather any financial storm or be able to take advantage of any financial opportunity that comes along.  When we tie up all the money in our homes by paying down our mortgages we are (1) forgoing the opportunity to make money on that money because the rate of return of home equity is ZERO; and (2) we are putting that money in an illiquid place that can be difficult to access.

Never has the consequence of a decision to pay off one’s home been more dire than it is now.  Lending is so tight that people can’t borrow against their homes to help meet cash-flow needs due to unemployment or illness. People who don’t have access to cash can’t buy all those things that are on sale right now, like real estate.  People who have put all this money into their homes are not only watching that money “disappear” with declining home values but they’re also kicking themselves for not having the ability to buy the house next door.  For those who did it right—they bought a house, put little down, kept other assets working for them—they are sitting in a much more financially secure place.  Ironically, these are also the folks who are getting their loan modifications approved and even having their second mortgages forgiven.

Am I glad I told clients that cash was king and to sock their money away somewhere other than their homes?  You bet.  So are they.

Remember, Cash is King

So far, it is still impossible to take your ATM card and stick into the side of your home or your investment properties and pull out cash.  If you are in the habit of accelerating your mortgage pay-off, stop. Review what you’re doing and why. Just because that seemed like a good idea years ago doesn’t mean it’s a good idea now.  It’s hard to get that money back once you’ve put it in your house, especially in this lending environment.  Often, you’re better off keeping the mortgage, getting the mortgage interest deduction, taking the money you would have used to pay off that mortgage, having that money make money for you, and in the future be at choice as to whether to pay off the mortgage or keep it going.  The potential upside is more retirement income and more liquid assets available to you. To me, that equals financial security.  Having to sell a piece of real estate in a potentially down market to generate cash for retirement or other needs is terrible. Often it results in lower sales prices and less proceeds in the seller’s hands. What I want for my clients is options.  Keep your options open.  Keep your assets balanced.