Do you have this egg in your financial basket?

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Do you have this egg in your financial basket?

[podcast src=” andard/autonext/no/thumbnail/yes/autoplay/no/preload/no/no_addthis/no/direction/forward/” height=”360″ width=”450″]Happy New Year! This is our first podcast of 2017! Welcome! This week join Karl Susman and guests as they talk about one financial tool that everyone should be utilizing. Transcript to follow:

JIM: Welcome to today’s program. A lot of times we’ll go through life a little bit confused as what the best solution is. Everybody’s looking for the best solution no matter what we’re doing, cooking chicken or saving for retirement, what’s the best way to do things. Well sometimes there is no one right answer, and sometimes a combination of different strategies might actually help you optimize what you’re trying to accomplish. Joining me today is John Wheeler, who we’ve had on several times talking about how of all things life insurance can be a solution in stabilizing some of our financial goals. One of those goals is saving for college, and many of us talk about 529 plans, and I know I had the misfortune with my kids, having graduated from high school in 2007, 2008, and 2009, so we were getting ready to tap into those 529 plans right at the same time the market was crashing, and even though we had what I thought was a conservative portfolio being predominantly in bonds at the time, we had a situation where stocks, bonds, and real estate were all crashing at the same time, and it really had an impact on those retirement funds, so John, welcome to the program today.


JOHN: Thank you. Pleasure to be here.


JIM: I’ve heard you talk about how to rescue a 529 or how to hedge 529 plans. What had you even looking into this as a strategy?


JOHN: Well, as you just mentioned, unfortunately a 529 plan is no different than any other investment because it’s still subject to market volatility, and if that volatility occurs at the wrong time, the very purpose that you set out to use it for might not be effective because tax free only means something if in fact there’s something to tax. Then a situation where there’s a market correct at the time that you need to use the money, coffee can planning would frankly have been better. Mark Twain said, it ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so, and when we count on the issue of it’s always going to be there then that’s where part of the problem comes.


JIM: Let’s talk about today. Obviously, people need to do a better job of planning for college. That’s real evident when you see the one plus trillion dollars of student loans that are out there and that number keeps exp anding. What are the typical funding strategies that are used?


JOHN: Well the most common ones are of course people always hope that they’re going to be able to get a scholarship, whether that be academic or based upon athletics, or in some situations for lower income individuals, grants. If not, obviously student loans is a major portion. We’ll talk a little more about that. Sometimes people count on getting money out of their retirement plans. There can be limitations there, as always, which people sometimes aren’t aware of those limitations. Some people end up taking a home equity loan, or for those that really tried to save, their current savings in advancement that was allocated for that, and here again, whether it’s in the form of a 529 plan specifically for that, a prepaid tuition plan, whatever, market volatility can still come in to play, but unfortunately a large portion of college is paid for just as you go from current income and trying to scrap nickels together at the right time.


JIM: It seems like there’s a lot of things I’m seeing in the media about this rising college tuition, almost to the point where people are really starting to take notice because it’s well beyond the inflation rate. What’s the latest on the cost of tuition these days?


JOHN: Tuition just continues to rise. It has risen faster than the rate of inflation. In fact, it’s risen more than 50% since 1999, and continues to go, so I mean the issue with tuition is it’s going to keep going, there’s no sign at all that it’s going to be slowing down, that becomes even more of a problem. The average college cost in 2015-2016, the four year in-state was $19,548, four year out-of-state $34,031, and a four year private nonprofit was $43,921; that’s per year and rising, so that’s about the most current actual statistic that I’ve seen.


JIM: I just heard about a book called Fail-U. You know you got a lot of people coming out of college with large student debt and one thing they’re missing is a degree. What have you seen about that?


JOHN: Well that’s absolutely correct. Not only the debt, which you know as you said, the average graduate owes over $35,000. In fact, people who get MBAs have an average debt of $42,000 a Master of Education, over $50,000 as a Master of Science, Master of Arts goes up to $58,500, law is over $140,000, and for medicine and healthcare almost $162,000, so when you got $162,000 in student loan debt, that’s like having a house you’re not living in.


JIM: Let’s start talking about the options now, because the tuition cost is something that people should be planning for. I know you mentioned earlier scholarship and grants. I think so few people actually qualify for those resources, while it is something you should look into, it’s really not something that people can really count on, is it?


JOHN: That’s absolutely right. A very, very small percentage actually get any scholarships or grants that are anywhere close to covering the cost.


JIM: Then if we look at the student loans, I mean a lot of people think ah, no problem, but where the problems begin is when the payback begins, and man, you come out of college, you don’t have a degree, you can’t get a job, what do those folks do, and what’s happening as far as student loans are concerned, is that a realistic way of paying for college today?


JOHN: Well, you know, the issue is the delinquency rate on student loans is about 11.6%, and it becomes very difficult to do. It becomes a burden. Like I said it’s like buying a house that you aren’t living in, and as a result of that you’re saddled with a monkey on your back for years to come. In 2015, 17% of all borrowers were either behind or in default.


JIM: So student loans, while it is a viable option, a lot of people are getting trapped by the heavy payments coming out of school. Then we’ve always got the home equity loan. I know that used to be a real popular option, but then we had the housing crisis in 2008 and people were banking on equity that no longer was there. Do you see any other problems with home equity loans?


JOHN: Depending on what your credit score is, what your equity position is, in addition that the home value what’s happened. If you take a student loan and you do get it in the form of that home equity loan, all that does is affect adversely your credit score as well, because now your overall debt is higher plus most of those loans are variable interest rates, and when interest rates start going up that can cause a problem as well. But, like any form of loan we go to the bank for, you have to prove you don’t need it before the bank wants to give it to you.


JIM: Now I’m a big fan of 529 plans, and I know some people just use current savings and investments, but I think if you’re going to save for the future, one of the options that people should be looking at is 529 plans, would you agree?


JOHN: I don’t disagree, I mean a 529 plan or a prepaid tuition plan can be, if it works properly, a very good instrument. The challenge is what type of actual growth rate are you going to get, because it depends upon the market timing of returns, and are you even going to have your principal back, as well as it pigeon holed for strictly certain types of education, that being at a secondary education basis, volatility can still occur at the wrong time, and like we said tax free only matters if in fact there was growth. Not all of us have another family member that we want to transfer the money to if it wasn’t used by our child for whatever reason. Maybe they got a scholarship, maybe they didn’t go to school, whatever, just to avoid taxation, and of course then you have taxation and penalties if it isn’t used for education.


JIM: Well I know the 529 is a real popular tool, and one of the things that I like about it is many h ands can make light work. People can pay money in, other people can contribute instead of buying a toy that might be broken or lost, and it does have, as you mentioned, the flexibility of changing it to another family member, but I’m afraid a lot of people never get started because of some of those restrictions, and that’s probably the biggest travesty of all. I’m a big believer you’re better off paying a little penalty on something than avoiding all penalties on nothing because there’s nothing there to penalize, so it’s important that people get started. I’ve heard you talking about whole life as a potential solution, and one thing I didn’t say in the beginning of the show, you’re kind of uniquely positioned, and there’s a lot of folks out there that everything needs to be one way, or everything needs to be another way. What really attracted me to having you on this program is talking about how you might coordinate a real popular option like 529, and using life insurance as a hedge against market volatility and putting those both together to really in my opinion, optimize how you can save for your child’s college education or your gr andchild’s college education. Your unique position is not only are you a CFP, but I think you’re one of only one or two others that are out there that are teaching all the CFP courses, so I think you come to this with a much more unbiased opinion than someone who is just an insurance agent or just an investment guy, you’re looking at the whole world of tools in the toolbox and trying to do what’s best in coming up for a solution. Talk a little bit about how you came up with life insurance as being a possible good vehicle for college savings.


JOHN: Well see the issue, Jim, is, in the investment world we all, I think, believe diversification is an important factor and not to put all our eggs in one basket, all those analogies that we’ve heard before, and I’m a full believer in that. When we’re doing something for a singular purpose and we’re counting only on that one thing to perform, it’s wrought with potential jeopardy, number one. Number two, what happens if I die and I’m the one who is doing the saving for my child, or I become disabled, who’s going to make those savings for me. Even if I’m using a 529 plan, unless I am just operating a high wire act without a net, I’m going to have to have additional life insurance and disability coverage to protect me against that. In addition to that, with any other funding medium outside of whole life, once I spend the money and I write the check to the college it no longer earns anything, so any future growth then is forfeited. I’m never going to get any money back after it’s spent, and the ones involving loans also have to have interest paid obviously, but the big issue is my goal is not completed also if I die or become disabled, so by utilizing whole life as a part of a strategy, the money would continue to grow even after I write the check if I’m utilizing loans or withdrawing dividends, and over a period of time I’m going to get all or part of my money back. If I were to ask a parent how would like for your money to continue to grow even after you write the check to the college, and have the ability to get all or part of your money back that was spent on college over a period of time, and it would provide access on a tax free basis without restriction, not only to be used for college expenses or to have an outst anding loan automatically paid off a debt and could be self-completed in the event of disability. Obviously most people would say well gosh, that sounds terrific but there’s nothing like that. A properly structured, especially limited pay whole life insurance contract is the only thing I’m aware of that can provide all of those guarantees.


JIM: Obviously guarantees are based on the credit paying ability of the insurance company. Let’s talk about that, you mentioned whole life several times. I heard years ago whole life was a poor investment. You talk about it like it’s a pretty decent one and life insurance, obviously we’re told that’s not necessarily an investment, but it does have a cash value component. How is whole life so special compared to maybe some of the other life insurance policies like term insurance.


JOHN: Term insurance is only going to be a benefit if I cooperate and die. I can protect the risk of death against that, but otherwise it’s nothing but a pure expense. It’s just like renting versus owning. Whole life is like an installment obligation of an asset, where I’m acquiring an asset under an installment basis. I’ve got a fixed annual premium for a fixed period of time, but when that’s paid there’s no further any costs associated with keeping it, and it’s guaranteed to increase every year. No other form of insurance can absolutely guarantee me that I’m going to have an increase in equity every year. A 529 plan or any market investment should outperform a whole life contract. I would never disagree with that, but the situation is what if it doesn’t? When it’s time to pay the college I need to have the money there then. They don’t care that there’s been a market correction or not. They don’t care how good a saver I’d been. It’s do I have the money there, so as a hedging strategy, if I have something that’s guaranteed to increase that I can access if need be when the market is down, allow the market to recover on my other investments, if I’m not selling at a loss I’m obviously going to be better off.


JIM: As you were talking, I’m thinking of a couple of my clients where I did reviews with them whether or not they want to take money out of a 529 to pay for their kid’s college and they just kept pushing it off, pushing it off, and then they were disappointed to find out they couldn’t pay the loans off with the 529 because that wasn’t an eligible expense, so you really got to be careful. It’s just like in retirement, they talk about the red zone. Well you can talk about the red zone of college as well, because when you got to take the money out you can’t just call the institution and say hey I’ll just pay in a couple years when the market bounces back, your kid’s not going to be able to attend too many classes with that. The thing is it’s having that money there when you need it and being able to count on it. I for one can talk about that because the timing of my kid’s college was when we had a 40% to 50% decline in the market and that timing wasn’t too good, especially those couple early years, we thought we had enough money for four years and it ended up being a two year plan, so that really had an impact. Hey, we’re going to take a short break. When we come back let’s talk about how we coordinate these different vehicles to have maybe an optimal college savings plan. Please stay tuned.




JIM: Welcome back as we continue to visit with John Wheeler, who is a 30 plus year veteran in the industry and he’s a teacher of advisors, as he teaches all the courses for the certified financial planner course and brings a unique perspective when it comes to saving for college. John, before the break you were talking about whole life as something that people should look at when saving for college, and talked about how it can be something that’s safe and can grow and can be dependable. But you also mentioned how 529s should earn more but may not because they’re subject to the market fluctuations and the timing might be off. How do you put both of these solutions together to help people maybe get the benefit of an opportunity for more returns, while having the safety of whole life, how do you put those together for someone who’s saving for college?


JOHN: Well in an optimal world where we start saving for college as soon as the child is born, we’ve got 18 years to plan for college, my preference would normally be to build the foundation before we start building the house. If I’ve got an absolute guaranteed source I can fall back on that’s going to be there, in the market I should, in a perfect world, be able to as I said outperform, so my performance base is going to catch up if you will quicker in the market potentially, but by the same token, if I start with the market first and I don’t have the other risk covered or if the market adjustment occurs at the wrong time, then I can find myself in trouble. Just as an example, if we had someone who was wanting to plan for four years of college with a newborn, and they wanted to provide $20,000 a year in today’s dollars for their education for four years, if we just assumed a 4% college inflation, when they reach age 18 it’s going to take $50,645 to do that. Now, if I’m going to have to have over $200,000 to put my child through school and some estimates, depending on the college you see $250,000 to $300,000 easily, I’m going to have to be serious about saving. Let’s say we’re coming up on the holiday season and maybe the gr andparents want to help out on something, and you can give up to $14,000 per year, so maybe the gr andparents alternate the $14,000 for a few years and so on, and if we had a 10-pay type scenario, someone 35 years old, if we had $14,000 a year going into it by the time I’m ready for college I’m going to be able to pay that full $50,000 a year just with that. Now if I’ve got eight years left to invest, if I’ve got a four year or a 5% rather rate of return on $14,000 over the next eight years, that’s another $133,000. The issue is then I use the money out of the 529 plan when the market is up, I use the money out of the whole life when the market is down, but it’s going to come back and over a period of time I’m going to get all my money back in the scenario I just did on a 35 year old by the time they were 70 they’d have $174,000 in cash back even after spending $200,000 on the college when they only put in $140,000 over 10 years. The question is do I eat the chicken or do I just eat the egg. If I use the 529 plan or any other form of liquidation I’m periodically eating the chicken so when it’s gone there’s never going to be any more eggs. If I don’t eat the chicken and I just eat the eggs, now I can have that chicken to continue to lay eggs or even get more chickens if I want. It’s just a form of diversification, depending on the timeframe that I have, because most of those quality contracts by about the fourth or fifth year the values are growing every year by more than what you’re putting in them, and if I look at the rates of return, I’m going to get anywhere from a 4% to 6% rate of return, whereas if I’m looking in at a market situation, since 1935 through 2014 the S&P 500 10 year rolling average has been less than ten percent 49% of the time and greater than ten percent 51% of the time on volatility, so that means I’ve got a 50% chance, a little better than 50% chance to have a good return, and then again I could have a loss. Depending upon what those losses are and when they occur that’s where putting the strategy only in that frame is dangerous. Because if I had a 40% market correction as we had, it has to gain 67% for me to even be back even, let alone going forward, so with the whole life slow and steady winning the race, it’s kind of like the tortoise and the hare, not all about speed or rate of return, sometimes faster and higher doesn’t always mean who wins, especially when we can have no tax situation if taken proper.


JIM: Now obviously you threw a lot of numbers out there, and a lot of those numbers are assumptions based on historicals, so it could happen, it may not happen, but that’s all the more reason why it’s important to diversify. The CFP courses always talk about non-correlated assets, which means they don’t perform the same. When we’re talking about diversification we’re not talking about picking two different stock funds and calling it diversified, it’s getting money out of the market that’s not subject to those market fluctuations, so depending on what the market decides to do, you know none of us are blessed with a crystal ball and none of us know if the market is going to up, down, or stay the same in any given day, much less what it’s going to do 8 years, 10 years, or 18 years from now. By building two buckets of money, one that’s not subject to any fluctuation, having another bucket that has the opportunity to have those market like returns, but we have to go through a lot of peaks and valleys to get there. If it happens to be going through a valley at the time our kids are ready to go to school, we got a safe place to pull money from and allow that to recover. I’ve seen many white papers by some people a lot smarter than me that have talked about using non-correlated assets as a way of hedging their retirement, which is the same thing as funding a college, only retirement doesn’t stop after four years, it keeps going. Whether you’re using it for college savings or for your retirement planning, it’s something you should be talking to your professional about that’s sending you this program, you want to be talking to them about hey if we’re going to set up a retirement plan or a college savings plan, what things can we do to hedge against a downturn or a flash crash in the market place so we can still realize our goals of sending Jonnie to school or retiring comfortably. Would you agree with all that?


JOHN: Absolutely, and just to make a couple other points along that way is, especially the 529 plan, as good as it is, and like I said I’m very pro 529 plan, don’t get me wrong, but the 529 plan is also limited on the expense. Because if the child ends up carrying less than the required hours, as an example, they might not qualify for a qualified 529 distribution. In the whole life otherwise if it isn’t used for education you can always use it for something else and it also gives another medium that mom and dad can put money back into it if they choose to for additional retirement for themselves but also has some of the flexibility. Just based upon the flexibility issue it’s as important, because at the end of the day as a hedging strategy, like you said the low correlation of the market is very important, there’s no doubt about it, but we just want to be sure that it’s there, number one.


JIM: What I look at is, and I’ve never been a huge believer in whole life, but in today’s low interest rate environment, I look at the alternatives that we have like passbooks and money markets and CDs, and many of the whole life contracts that I’ve seen, they give you an opportunity on a fixed basis to maybe earn a little bit more interest rate than some of those other traditional type of low risk investments, and it’s something that also gives some tax benefits where you’re able to do those loans tax free if you play your cards right, so it is definitely something to sit down with your professional and see if that’s a possibility as part of an overall diversified strategy in saving for the future. John, thanks for joining us again, and hopefully people take the time to look at that. It’s a little difficult to describe in a 20 to 25 minute segment here, but it is something that people should take a look at.


JOHN: Well thank you for having me; it’s been a pleasure as always.


JIM: Look forward to having you on again real soon. Thanks John.

JADE: The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by any registered representative. Before taking any specific action, be sure to consult with your financial professional.

Any guarantees or ratings are based on the claims-paying ability of the issuing life insurance company.

Investors should consider the investment objectives, risks, and charges and expenses associated with 529 plans before investing. More information regarding 529 plans is available in the issuer’s official statement which can be obtained from your financial professional. Please read the official statement carefully before investing. Investors should also consider, before investing, whether their home state or the home state of the beneficiary offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.

Although plans are established and maintained by states, the states do not provide guarantees against investment loss, except in certain very limited cases. As with any investment in a mutual fund or other equity security, an investment in a 529 college savings plan can decrease in value. Earnings on a distribution not used for qualified expenses may be subject to income taxes and a 10% federal penalty. Please note that the availability of tax or other benefits may be conditioned on meeting certain requirements such as residency, purpose for or timing of distributions or other factors as applicable.

The St andard & Poor’s 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.

Diversification helps you spread risk throughout your portfolio, so investment that do poorly may be balanced by others that do relatively better. Neither diversification nor rebalancing can ensure profit or protect against a loss. Past performance is no guarantee of future results.