How to Avoid Putting “Needs” Money at Risk as You Approach Retirement

As you prepare for retirement, you will undoubtedly want to accumulate the maximum amount of money and you will be tempted to use high-risk investments to do so.  Your reasoning is you have many years before you will need this retirement income, so even if the market were to drop substantially you have time for the market to return to higher and higher gains.  But this simply isn’t so.

The problem with this thinking is that things will be different as you approach the final ten years before retirement and just because another 10 to 15 years of work seems like a long time to you, it isn’t a long time in terms of the market. If it takes a downturn, 10 years will not be enough time to recoup losses.

To combat the temptation to take unnecessary risks as you get older, I caution you to change from an “accumulation” way of thinking to a “conservation of assets” way of thinking a good 10 years before you plan to retire.  It can be hard to change to a conservative way of thinking when you have been in the accumulation stage for so long — in my experience people work and save and put money at risk to get the highest possible return, all the while checking the market weekly for 40 years as they form a habit of watching. But this habit keeps people from changing as they grow older.

For example, if you see the leaves on trees drop and snow on the ground, you prepare for winter.  But old habits of investing in high-growth assets don’t show you strong enough signs like “snow on the ground” so you keep on doing the same thing you have done for years. But winter for some of us is coming, so now be the time to prepare for it by switching from accumulating money to beginning to conserve it.

Here is a graph that represents enough money to fulfill your basic needs at retirement.  Once these are covered with investments that are safe, then  “wants” money to put at risk to keep ahead of inflation on the “needs” money and provide income much later in retirement.

Wants are just that, WANTS, not must haves. If you continue to stay fully invested in market-risk assets with all of your money as you approach and enter retirement age, chances are the downturns will destroy your ability provide the needs you will have for your entire life.   

It’s always wise to change investing habits with the seasons of your life.  Be alert and put it on the calendar so you change the way you invest and save your money about 10 years before retirement. Pulling out some of the crop by harvesting the seed and storing it away to protect it is always safer than continuing to harvest and replant all of your seed every year. Doing so puts everything you’ve worked so hard for at terrible risk. Okay, so you won’t make as much if you harvest some of the crop and put it away for safe keeping as  you would if you kept reinvesting, but do you want to take those kinds of chances this late in the game? I don’t.

Make sure NEEDS are taken care of so you know how much assets you have left to fulfill WANTS, then take chances with that money.  Contact me with comments or questions:  peter@moneymastery.com

When Did the Concept of “Retirement” Come to Be?

As you can well imagine, the idea of “retirement” did not exist in Roman times, nor medieval times, and certainly not when Pilgrims discovered America.  What about during the days of Lewis & Clark?  Or when the wild West was being settled?  History teaches us that a Roman peasant had to fight for food every day of their life.  A peasant could not even fathom taking life easy, sitting back to watch the evening news, or going out to eat and taking in a movie. How could an English Lord even conceive of “retiring?” He had to manage a kingdom and train new knights to protect him and his vassal serfs.

Some examples of newly created words, along with the idea of “retirement” in the last 100 years include:

  • Internet
  • World wide web
  • iPhone
  • Light bulb
  • Polyester
  • DVD
  • Contact lens

We have seen so many advances in technology and medical care in the last century that we have a lot more time on our hands than anyone born before the turn of the last century. That extension of life plus all that time we have available has been the reason the idea of retirement even exists.  “Retirement” is a new concept, only around since just before World War II broke out. Up until 1920, most people died before they reached the age of 60, so retirement wasn’t even an option.  When people started to live past age 65, some elderly folks started to save money for when they could no longer work, and thus the concept of retirement was born.

Four problems came along with this new concept. The first problem is outliving your income. Today 92 percent of everyone who is retired is totally dependent upon their Social Security benefit.

A second huge problem is inflation.  Just use your Web browser to see what one gallon of milk cost 20 years ago and you will be shocked.  You will most likely need to double the money you think is needed at retirement, because of inflation.

A third problem is continual taxation.  As you take money from you retirement savings plan to live, this income is taxed and can cause Social Security benefits to be subject to income tax as well.

A fourth gigantic problem is the cost of medical, long-term care and nursing home expenses.  The national average shows costs for a retired couple for medical/nursing care is $250,000 before they die.  This kind of cost is eating up all possible savings most people manage to squirrel away for retirement.  When all resources have been exhausted, the surviving spouse becomes destitute and is classified as being on welfare.

Considering these four problems, now is the time to decide what “retirement” means to you and whether you will be able to make that vision a reality. You have heard about the importance of planning for retirement your entire life, while those who lived before 1920 did not even have an inclination of what that meant. Before it’s too late, define what you want to happen when you reach age 65 because unlike your grandpa and great grandpa you will likely live longer than 60 years, so you will need to be prepared for that long life and how you want to live it.  It’s never too late to get going on this.  Go to moneymastery.com and sign up for the Basic online training package and see for yourself how much money you need to be saving for retirement, or calculate how long your money will last. For more help, contact me directly: peter@moneymastery.com.

Take Caution: Read Disclosure Notices on Investment Projections Before You Sit Back on Your Retirement Laurels

Following is a typical disclosure notice you might see at the end of an investment report. Take the time to read this disclosure,  you might be surprised what you find:

If a numerical analysis is shown, the results are neither guarantees nor projections, and actual results may differ significantly.  Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only.  Rates of return shown are not indicative of any particular investment, and will vary over time.  Any reference to past performance is not indicative of future results and should not be taken as a guaranteed projection of actual returns from any recommended investment.

If you reviewed a report that said your retirement is going to be adequate but then get to the small print at the bottom of the report and it says, “Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only,” how should you feel? How much credence can you place in the numbers from such a report when planning your future?  For example, if an assumed interest rate went from 5% to 3% in real time as you are saving for retirement, you might run out of money with 12 years left to live!

Or let’s say you use the past 40-year average market gains to forecast your future income and then read, “Any reference to past performance is not indicative of the future results.” You probably aren’t going to feel super confident about what your direction is going to be.

Of course we need to plan and project, using the best tools available, but how can you do any of those projections given all the unknowns?

In my experience, the best way to use forecasting projections is to keep track of each year’s projections and review from year to year.  As the years go by you can watch out for adjustments that will surely force some changes.  This way when something isn’t quite working out like you forecasted, you adjust. It’s the simple principle of tracking and you should be applying it when it comes to retirement funds, but what I have found is very few people do, only about 3 percent of us actually track and adjust each year.

Think of you being the navigator on an airplane.  As you fly from San Francisco to Dallas, you are seldom going straight to your destination because of wind and weather.  A navigator must keep adjusting and changing the course according to what affects the plane.  This is the same for each of us financially.  The forecasting is so important, but the adjusting to changes is critical.  So for the 97% of those who don’t forecast, they will not end up in Dallas, financially speaking, but probably Minneapolis.  I hope they like the colder north country. For information on how to create a more predictable retirement that you cannot outlive, contact me for a no cost consultation: peter@moneymastery.com.

What Happens to You Financially If Your Health Changes?

According to the Social Security Administration, 41 percent of all workers are required to retire earlier than planned due to a personal health problem — that’s four out of every 10 Americans. And the National Council on Aging has stated that about 91 percent of older Americans have at least one chronic health condition; another 73 percent have at least two.

What will you do if you’re one of the four out of 10 people who have to retire early?  How will you manage, and do you have enough money?  Get serious and create a plan based on the assumption that you might have this problem. After all, as stated above 91% of all seniors have a serious health problem — don’t gamble with those numbers and hope that whatever condition you get won’t keep you from working as long as you need to.  

Here are three things to do if you physically have to retire:

1.  Cut spending down to what money is available.

2.  Apply for Social Security benefits under handicapped status. This may take 6 months, but can help your income a lot.

3.  Stay mentally engaged with family, community and friends.

As you rearrange living expenses, this may lead you to consider downsizing your home.  This can help lower the cost of utilities and property taxes.  Think long-term when you are making these adjustments.

The Social Security administration has provided for those who get disabled at an age younger than 62.  This could be a source of income for the rest of your life.

When people finally retire, the most successful are those who stay actively engaged with the world.  They volunteer to make a contribution to the community around them.  By staying engaged, they are more alert and have a higher quality of life.

Plan for the event of bad  health and then if it doesn’t happen, you’ll still have the extra money plus you’ll have peace of mind, no matter what happens, and that is worth its weight in gold. peter@moneymastery.com.

Earn a $1,000 Credit for Saving…

The following information is taken directly from the IRS’s Web site on the Retirement Savings Contribution Credit (Saver’s Credit) program:

————————————————–

You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan.

You’re eligible for the credit if you’re:

  • Age 18 or older;
  • Not a full-time student; and
  • Not claimed as a dependent on another person’s return.

See the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions, for the definition of a full-time student.

Amount of the credit

The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A). Use the chart below to calculate your credit.

*Single, married filing separately, or qualifying widow(er)

2017 Saver’s Credit

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of your contribution

$37,001 – $40,000

$27,751 – $30,000

$18,501 – $20,000

10% of your contribution

$40,001 – $62,000

$30,001 – $46,500

$20,001 – $31,000

0% of your contribution

more than $62,000

more than $46,500

more than $31,000

The Saver’s Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

Rollover contributions (money that you moved from another retirement plan or IRA) aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.

Example: Jill, who works at a retail store, is married and earned $37,000 in 2016. Jill’s husband was unemployed in 2016 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2016. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $36,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.

In my experience, anytime you can get “free” money, go for it.  There are many people making less than $36,000 a year and to receive a $1,000 credit for saving $2,000 can make a big difference over 10 and 20 years.  In the above example for Jill, she is trying to save 10 percent of her annual income every year, so in her case that’s $3,600. When she adds this $1,000 credit to that annual 10 percent savings and keeps this money safe over 30 years it will grow to $265,000.  That’s a little over a quarter of a million dollars and an average annual growth rate of 8 percent! 

This may not seem to be a big deal, but a “free” $1,000 a year for someone making $30-35,000 annually, is like getting a 33 percent bonus.  If you will prepare a Get Out of Debt report and a Spending Plan using the Money Mastery tools, you will find even more money.  The younger you start, the better it will be.  Contact me for more information: peter@moneymaster.com.

Spend All Your Money on Paper so You Can See How to Create a Cash Surplus

We all want more money, but how can you make that happen?

First make a list of why you want more money.  Be comprehensive and make sure you don’t leave anything out.  Dream big and write down as much detail as you can so when you refer back to your list, you will be reminded of all these wonderful things.  Do this now.

Second, write down all the income sources, assets and other resources you have available to spend on this list.  Remember one of your assets is time, time to work extra hours, and time to get a better education and improve your ability to make more money.

Third, subtract the money you have from the list of wants and see if you come up short. This is the amount of money you need to find, learn how to earn, or acquire by selling an asset.

Let’s solve this money shortage problem right now.  In the illustration above let the circle represent all the money you will ever have in your lifetime.  Now you don’t know how long you will live, but just let this circle be the total amount of money you will have.  Don’t be critical of yourself for past mistakes in investments, don’t deride yourself for not getting more education, and don’t get depressed, just stay focused on this activity to the end.  I promise you will soon have more money.

Since this circle represents ALL the money you will ever have, why not spend it?  Use your list of wants and spend your money.  Take a slice of the circle and spend it on food and housing.  Then do the same for medical and dental expenses.  Spend some for vacations and fun activities.  Don’t use a monetary figure, just a percetage, like 1.5% for example.  Slice up your total money supply pie until it is all spent.  Don’t forget transportation costs and travel.  Now sit back and examine the money picture you have just drawn.  Remember you can have anything you want, you just can’t have everything you want.  So if you are a physician and will make $9,000,000 over your working life, you will not be able to spend more than that much money.

Your action item now, something for you to do immediately, is to take your “pie of money,” totaling all the money you will ever have, and spend it is such a way as to have a surplus and accomplish the essential goals of your life.  Don’t just spend it all, spend it so as to have a surplus. Doing this little exercise will help you see where you are spending money foolishly or help you see what you may need scale back on so that you can have a small surplus each month.

 Here are three case histories to put your “pie of money” into perspective in terms of creating a surplus:  The first case study is about a schoolteacher who lives in the mountains of Missouri making $23,000 annually.  She has debt and saves $300 each month.  The second study comes from Florida where he is a plastic surgeon making $100,000 a month, but has over-committed on leasing his building, equipment, plane and automobiles, so when he was called out of military reserves to serve a one year commitment in Afghanistan (making $29,000 a year), this forced him to have to file bankruptcy.  The third case history is a retired 87-year-old woman who lives in Stockton, California successfully living on $1,022 a month. We can see from each of these stories that it matters not how much you make but what you do with your money that counts. The school teacher isn’t making much and has debt but she still manages to create a surplus every month so she can save $300. The doctor is living large and has now lost that massive income on foolish living. He could have amassed a huge surplus by now but has spent it all. The elderly woman on a fixed income is managing her money by being smart about the way she spends so she has money to live on. Donald Horban taught this essential concept:

“We don’t need to increase our goods nearly as much as we need to scale down our wants.  Not wanting something is as good as possessing it.” 

Our financial peace of mind is to learn that a rich person is not one who has the most, but one who needs the least.

Don’t be discouraged, even though in my experience spending all your money on paper so you can see where you lack a cash surplus will be the hardest thing you will ever do.   Don’t procrastinate, create a circle representing your entire income of money and spend it.  Money is not the most important thing, but if you don’t have a surplus of it when you need it, it becomes really important.  I wish you all the very best! peter@moneymastery.com.

The Four C’s of Retirement Planning…

Recently I was sitting in a retirement income training class and the four C’s of retirement planning were presented that just made good sense.  I have changed the details a little so that they fit the Money Mastery Principles and philosophy, but here you go:

First C:  Clarity of thought and action is the first strategy to begin building a predictable retirement income.  I ask these questions of the clients I coach and would like you to answer them as well:

  1. How much income will you need in retirement?
  2. How many years might you live in retirement?
  3. What resources do you have to fund your retirement?
  4. What is your risk tolerance?
  5. Do you plan to leave any assets to your beneficiary?

Second C: Comfort during retirement is a big concern.  Imagine for one minute that you are retired and that Monday arrives and you act like it is Saturday.  Tuesday is tomorrow and you act like it is Saturday, and so forth.  When you are retired everyday is like Saturday and we spend like we do on Saturday.  That is why we tend to spend more money in retirement than when we are working.  It is important to consider what kind of comfort you want in retirement so you are more cautious now during working years and not spend everything we make. 

Third C:  Cost of living is another big strategy to plan for and manage.  Health care costs will be the largest expense in retirement that you must prepare for. These expenses will be well beyond what you spend for food, transportation or living expenses.  In addition, inflation can slowly sneak into your pocket book and erode 20 to 30% of you purchasing power.  Be aware and make sure you are doing something to manage this creepy crawler.

Fourth C:  Certainty of income at a time we can not afford to run out of money.  Though you worked for 40 years, it is entirely possible that you will live 20 and 30 years more in retirement.  Market risks can be a huge drain if you are trying to make money last longer by investing more money, which adds more risks and chance of loss.

These 4 C’s are strategies that must be addressed for you to be at peace when arriving at retirement.  I have lots of great experience and advice with how to deal with these 4 C’s and am happy to share them with you: peter@moneymastery.com. 

What Is a True Financial Coach and How Do They Differ from and Adviser?

Many people confuse financial coaches with a financial adviser. These are two very different animals that need distinguishing.

Financial Coach:  A true financial coach focuses on your knowledge, your habits, and your ability to make wise decisions.  They don’t superimpose their feelings upon you.  A true financial coach knows that each person is unique with different goals, different attitudes about money, different challenges with math, and different strengths/weaknesses.  A true financial coach will know how to strengthen your where you are weak.

Financial Planner or Adviser:  This person is most often selling a product.  A financial adviser wants to profit on the money you have already accumulated.  The problem is that this is not what most people actually need.  Most people need and want to know how to create the money in the first place and then how to manage it wisely, perhaps with the help of a financial adviser, once they acquire it.

Think about how a salesman wishes to make money.  They sign up with an institution and then submit to their training.  What kind of training will that be?  Will it be training on five other competitor products so they can sell for them as well?  Absurd, not ever!  This employer wants to train you on his or her own products.  In the Time and Moneycase of a financial adviser, who are truly not a lot more than sales representative, they are encouraged to acquire knowledge and even
seek degrees like Certified Financial Adviser, to show the public that they are knowledgeable.  All of this effort by the sales representative can be helpful to you with a small part of the puzzle, but they very rarely have all the answers to every part of your financial life.  Have you ever thought about asking a financial adviser about what to do about your overspending? Of course not, they wouldn’t be likely to have much information about how to help you with this, and even if they did, this is not what they’re paid to do. What about how to get out of debt, or to create a passive income from better managing  your own money? They wouldn’t know the first place to start helping you with these important matters.  Where they can sometimes help is in what to do with extra money you have created, but that’s really where their “advising” ends.    

Here is the real difference between a coach and an adviser.  A coach helps you with problems you are having with managing your money and your emotions. People have lots of emotions surrounding money. The products financial advisers sell have very little to do with how to manage emotions and get in control on a grassroots level. They don’t teach you principles of financial management, they only sell tools that can help you once you have money to manage. A coach, on the other hand, offers solutions on how to control spending, get out of all debt, save for retirement, and pay the right amount of taxes. If you don’t have someone who can teach you how to do all of these things (at the same time) then you aren’t getting advice from the right place.

Here is a test question to ask a sales representative to determine if they are an adviser or a coach: “What do you recommend I do?”  Then listen carefully as to how fast they go directly to a product that they think you need.  If they make a specific recommendation they are a financial adviser.  If they say, “Tell me more about what you are trying to accomplish, today and in the near future?”  Then they search out your true feelings and even coach you along these lines before identifying options.  A true coach will strengthen you until you are making good decisions. Once you are making better financial decisions, then you can talk about what to do with your money from there.  

There are huge differences between a coach and an adviser, but it will take some time interviewing and asking questions of these people before you will see  how they approach helping you.  Most likely you will find 1 out of 25 advisers that will serve you like a true coach will.  For true financial coaching without the pushing of products, visit www.moneymastery.com

Fixed Indexed Annuities Are a Good Tool If You’re Getting Close to Retirement

When you see an investment report on a 401(k), for example, it most often shows the average rate of return on funds over the last 40 years.  Averages do not show the impact on retirement of periodic drops in value.  Reports give averages over a long-range period of time, but fund managers never want you to focus on the big drops that happen during the shorter periods in between. For example, in 2000 the S&P 500 dipped by -10.14%, then again in 2001 by -13.04%, and then again in 2002 by -23.37%.  That is a total of 46.55% drop in values in three years.  If you took the average gain per year for just those three years it was negative, at -15.5% each year!  So what does that mean to you? Well, if you’ve got a lot of time to make up those losses, then maybe not too much. But it would take eight years at an 8% gain just to get back to where you were three years earlier. If you don’t have 40 years to make up these big dips in the market, then frankly you’re getting bamboozled.

This is a lot of math, but my point is that most people don’t know how to calculate the math.  They just look at a report showing a 40-year average and say, “Not bad.”  Not bad if you have lots of time, but what if you’re getting within 10 years of retirement?

Indexed annuities can be a great way to overcome market dips. When you invest in indexed annuities, you get only the gains and no downs — you are “sharing” the ups but not having to experience the downs.  Don’t know what an indexed annuity is? Contact me for more info: peter@moneymastery.com.

Do not confuse indexed annuities with variable annuities. Variable means you are in the market and must therefore be subject to the full ups and downs. Even if you placed your money in a strong New York Life variable annuity, remember, your money is in the market, not invested in New York Life, so it is subject to market ups and downs. Many people have made the mistake of assuming they were safe because of the financial strength of New York Life. But in my experience variable annuities can experience drops in value and then you still can’t get your money out during a bad drop because annuities aren’t all that liquid.

Now indexed annuities are even less liquid than variable annuities, so there is some disadvantage there. They may not work for you because they are not liquid enough for your needs.  But indexed annuities are guaranteed not to lose money and to share in the increases of the market.  And that’s a good thing.  If you are close to retirement and want a safe rate of return, and no downside risk in the market, these are great tools to use.

As a final note, there is one way to overcome to some degree the liquidity problem with indexed annuities and that’s by “laddering” them. You have probably heard about laddering CD’s and it works the same for indexed annuities. For example with a CD, let’s say you had $100,000 and wanted a good 5-year rate of interest on your safe money. You could split up the $100,000 into five $20,000 CDs.  Schedule each CD to mature one year apart, so $20,000 for a one-year CD until it matures, then place the next $20,000 in a CD that matures in two years, and so forth. Then in one year, the first CD matures, which if you need the money, you take it. But if not, it rolls over into a 5-year CD. In this manner, you have $20,000 maturing each year and in five years you will  have a five-year CD providing a top rate of return. To get the same impact for indexed annuities, you can “ladder” these annuities and provide better liquidity while getting the best possible rate of return.  

Contact me for more information on better ways to fund retirement than just dumping money into a 401(k) and hoping for the best: peter@moneymastery.com.

Why 529 Plans Aren’t the Best Way to Save for College Education

Here is an explanation of 529 plans to fund college educations  taken from a well-respected college planning firm.  Review this accurate treatment, then allow me to add my perspective:   

Offered by states and some educational institutions, 529 plans let you save up to $14,000 per year for college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.
 
While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.
 
In addition, grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.  Keep in mind, 529 plans are counted as available assets on the FAFSA [Free Application for Federal Student Aid] and can affect eligibility for student aid and loans.

Here are my observations about these plans:

Point 1:  The more money you have in a 529 plan, the more it will diminish the chance of receiving any FAFSA funds that may otherwise be available.  This is free money, or “aid” money.  Most likely your student will  not be eligible for student aid if you hvae a 529 savings plan. All 529 plans are required to be disclosed when applying for aid.

Point 2:  Why not use the proposed 529 savings money to purchase a cash-rich-savings life insurance policy on yourself, so that when your child/grandchild decides to go to college they can use the money from there?  There is no tax on this cash value build up, if structured correctly, and it’s not hard to set up. And if you die before the college money is needed, the death benefit will pay into your living trust a multiple of five to 10 times more than any money you could have saved in a 529 Plan.  So you will have the same  cash available plus no taxes due on growth, AND you will have the enhanced death benefit to pay for a lot more than just one college education — think two, three or four educations!  This is a no brainer

Point 3:  If your child/grandchild does not go to college, then if you have set up a cash-rich-savings life insurance policy instead of putting the money into a 529, you still have all the cash to redirect or you can just leave it inside of your living trust so upon your death it can bless other family members as you choose.  This is also a no brainer.

Point 4:  Why not have the options to pay for rent, food, or other necessities for your college student and not be “required” to pay for only tuition, as the 529 forces? There are many expenses outside tuition and books.  And if your student gets a scholarship, then you won’t be able to use the money inside of the 529 plan anyway.  Things change over time, but 529 plans are rigid.

Point 5:  Although the explanation above notes that the 529 plan money can be used at colleges out of the state, most states do not allow the tax deferral you get on the 529 to be transferred, so this induces the student to attend school in their geographic location and may deter them from applying to a college across country. Rules vary, but why place your money into a restricted environment when it isn’t necessary?

Point 6:  And what if your student wants to attend college outside the country? Unfortunately, the 529 plans don’t provide the tax deferral when a child goes out of the country.

Summary:  I hope you can see nothing but limitation using a 529 plan to pay for a college education.  They sound good and upon comparison can look good, but no one knows what will happen in the future so why even risk so much for such a little tax deferral benefit?  This again is a no-brainer.

For more information about how to structure other college saving options, including a cash-rich-savings life insurance policy, contact me: peter@moneymastery.com.