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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529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary.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.

What Will You Do about Money If You Live to Be 100?

Experts think that any of us living today, who reaches age 65, healthy and vibrant, will easily make it to age 100.  Whoa! That will change things financially, to say the least.  In the “old days,” between 1960 and 1980, people who reached retirement age lived just four to eight years past retirement to about 69 for men, and 72 for women. It wasn’t too big of a stretch to have between five and 10 years of retirement income saved . But consider working 35 years, then retiring for 35 years instead of just 5 to 10.  I read an article in 1983 that said by the year 2000, many people would be retired as long as they worked. At the time I balked at that idea — NO WAY! I thought. But the fact is, those numbers are a reality now and that longer retirement period is presenting some very challenging problems we all need to think about:

  1. How will you afford to live 35 years into retirement? 
  2. Will you need to work more years than you had originally planned, until age 75, for instance? What if you can’t because of poor health?
  3. Will you have to reduce your living costs drastically to make ends meet?
  4. What about inflation? If the inflation rate keeps averaging 5 percent screen-shot-2016-09-16-at-2-31-17-pmper year as it has been doing, living on a fixed income for 35 years is not going to work very well.
  5. People may be living longer, but especially in the United States, where the standard American diet is so poor, you won’t be living to
    a ripe old age in good health. What if you’re one in four people who will require long-term care? This is expensive at between $2,500 and $6,000 per month.
  6. Social Security will be bankrupt in 2034, according to the Social Security Administration’s annual report, so what do you do if you can’t count on even that income in retirement?
  7. If you are one of the many retired persons who is divorced, what will you do to live on just one retirement income instead of two?

The old way of looking at retirement planning may not work for you anymore. Trying to save using a basic 401(k) is passe. It’s time to get creative and look at real estate, life insurance, annuities, and leasable resources as other options for creating a predictable retirement you can’t outlive. I suggest you read the book MONEY, What Financial Experts Will Never Tell You Full of case stories and practical, holistic approaches to financial planning and retirement that are easy to apply, this book is a BookCovermust-read. Get it in time for Christmas and give it to your kids as well. They will for sure be living longer than you, in most cases, and will have to be ready for a long retirement period. Why not prepare them for that now?  Get going, as time will keep marching forward. Will you be pleasantly surprised when you reach retirement age, or will you be horrified and shocked at what you have done to yourself financially by not taking things seriously today?

Just How “Liquid” is the Life Insurance Industry, Anyway?

Just recently, the CEO of United Services and Trust Corporation, L. Carlos Lara, wrote an article and shared his research on the current liquidity of life insurance companies: http://partners4prosperity.com/liquidity-of-life-insurance-industry.

He reviewed the balance sheets of these companies with one objective: to determine how liquid are they in being able to withstand a major downturn in the economy. The article pointed out that even highly profitable companies can run into financial trouble if they don’t have the liquidity to react to unforeseen events.  Even if they have a stockpile of assets on their balance sheets, they can still struggle with cash flow issues when the market crashes if those assets are not liquid.  Liquidity is the major concern when it comes to financial stability in the market.

To analyze liquidity, financial ratios are established to give leading indicators as to when the economy is going to drop off a cliff.  As this liquidity analysis is being done on various insurance companies, Lara noted in the article how impressed he was with the strength the insurance industry proves out, over and over again.  No other money intermediary in any financial market has this kind of liquidity.

Given the superior financial strength of the insurance industry, Lara and his team dug deep into the financials to find out why this is so.  Here is what he found:

  • 70% of the assets of life insurance companies are in AAA rated bonds, meaning they are liquid in and of themselves.
  • Their yield has been close to 5% with no market risk attached.

As all the risks must be factored into an analysis, auditors are required to take the most conservative claims ratios.  Each individual state has its own insurance department and applies these same conservative standards.  This gives every life insurance company 50 separate sets of eyes examining them, so even though the economy has created a low interest rate environment for many years, the true test of the financial strength of these life insurance companies is in passing the test of liquidity, within all 50 states. Passing that test is a huge priority for these companies.

Another factor that is helping keep life insurance companies financially strong is their mortality experience.  As people live longer and do not die, the reserves of cash grow and provide tremendous liquidity.  Even though quantitative easing is going gang-busters (government printing tons of money) and this is the main reason interest rates are as low as anytime in our nation’s history, life insurance shows true growth as they can add to their reserves year after  year.

In summary, when the top three rating agencies (Moody’s, Fitch’s, and Standard & Poor’s) give life insurance companies the thumbs up, you know they are doing something right.  “U.S.  life insurers can weather the storm!” these agencies are saying.

If you don’t  know the value of adding life insurance to your retirement planning, you are missing out on a very solid and safe way to build your future. Email me with questions, I’m happy to help out: peter@moneymastery.com.

 

Start Saving into Whole Life Insurance (And Stop Saving into a 401k)…

At the end of my last post called “Stop Saving Into a 401(k),” I promised to share options to save for retirement that could trump a 401(k) to provide, tax-free, vibrant funds. Here’s how to do it…

Create a savings account using a “High Early Cash Value” whole life insurance policy from Mass Mutual Life Insurance Company. This will yield incredible results.  Please feel free to challenge me on this. Here’s how:

Send any and all investment opportunities to me at peter@moneymastery.com and I will answer you with details, diagrams and numbers that will contend with what you suggest.  If your investment option is better than mine, I will send you a $25 Visa gift card. I admit it will be hard to balance all the benefits to analyze which is best, because there are so many wonderful features and benefits to consider when looking at a life insurance savings program that builds cash value.  But I am willing to do the work to add to anyone’s perspective. Please include the following:

  1. Your date of birth.
  2. The amount of money you want to save each year.
  3. Whether you are male or female.
  4. Include your financial goals, ever so briefly
  5. Contact information

Now the structure I am referring to is a high early cash value design.  The extra cash created in the first few years causes a larger dividend.  This bigger dividend allows you to purchase much more paid-up-additional life insurance, which creates a bigger dividend and compares very well to any other standard investment being sold in the market.

Remember that your investment option must beat my structured policy in these ways:

  • Keeps ahead of inflation.
  • Cannot have any market risk.
  • Can never create a tax liability of any kind.
  • Creditors cannot have access to the cash.
  • The money must be liquid, meaning available to you within one week.
  • The net rate-of-return, after all the costs that may be associated with your investment option, must be better than a bank or credit union’s 5 year Certificate of Deposit.
  • After being able to use this money to pay down debts, help with college education and invest in new businesses, the balance has to triple in value upon your death without any taxes.

Those are the parameters.  Best of luck!

Have Your Cake (Life Insurance Money) and Eat It Too!

If you purchased a specific “High Early Cash Value” kind of whole life policy from Mass Mutual, for example, all your premiums will be saved as cash values inside the policy.  For example, if you were to deposit a premium of $12,000 a year into this life insurance policy, you can have well over $60,000 by the end of year five.  This will certainly be more than what you deposited.  Building cash value such as this is like having your cake and getting to eat it, too!

In addition, you can borrow from you own cash values to pay off debts and then pay back to your policy the same payment you made to the creditor, thus recapturing all principal and interest payments.  These payments made to yourself are like eating your own cake without your serving ever Screen shot 2016-06-01 at 4.07.57 PMdiminishing…  Let’s examine the details.

Do you know how much interest you will pay out to creditors over your lifetime?  The average amount of interest that my clients pay is $194,000 over the many years of owning a home, buying cars and paying on some credit cards.  If you were to pay this $194,000 to yourself through your life insurance policy and get a 3 percent gain each year on all these payments, you would have accumulated $1 million of cash values over the life of the policy.

For this discussion, I am not talking about the death benefit, or the tax-free status on the growth, just the amount saved within the life insurance policy itself.  Pretty impressive, huh? Let’s say you never use your death benefit, but just use the cash value while living to pay off debts and then pay yourself back the principal and interest expenses.  You will have created over $1 million in the life insurance policy that can be used for retirement income, or starting a 8259new business, or paying children’s college tuition, or investing in rental income properties, or myriad other wonderful opportunities.

What might be the catch, you may be thinking… or is there one?  There is no catch. The only requirement is to act NOW and start saving money into a life insurance policy.  The money is safe as it can possibly be (much safer than your 401(k) money you keep squirreling away each month that is subject to serious market drama), and this is especially true for such companies as Mass Mutual, that has an A+ rating for financial strength.  They are over 150 years old and have helped millions of people with their financial needs through two World Wars and the Great Depression.

How can I get started saving money?  Please refer to my recent post in this blog called, 6 Tips for Finding Money You are Wasting.  From these “money-finding” activities alone, you should be able to save at least 5 percent of your annual income each and every month.  

Contact me for details of how to create a properly structured whole life policy that builds cash values. If you need help with saving money, I stand ready to help you with that too.  Here is my email:  www.peter@moneymastery.com.  

Cut Your Life Insurance Costs by 45 Percent…

At Money Mastery, we teach the importance of getting financial affairs organized in order to protect your assets from risk and theft and to be sure you are adequately but not overly covered in case of emergency.

That’s why it’s so important to understand your life insurance coverage. While you probably have adequate life insurance to protect your family, you may not need as much coverage as you think. You can save big by asking yourself the following questions:

  1. Would my death cause a financial hardship to someone? If you’re not married or you and your spouse (both of whom work) do not have children, OR your children are grown and you have a pretty good retirement nest egg, you may not need life insurance at all.
  2. Do I know how to buy life insurance on my own? Most people think, erroneously, that they must buy coverage through an agent. You can save money by buying insurance on your own.Docs and glasses
  3. How much coverage do I really need? You probably need a lot less than you think. You might be wasting thousands of dollars a year in unnecessary insurance costs. Before another day goes by, learn how to cut your life insurance costs up to 45 percent by spending just one week reviewing your policy.

Calculate How Much Coverage You Really Need

There are lots of calculators and formulas around that can help you determine exactly how much life insurance you need. One of the best is offered by Money Mastery. Another calculator can be found at www.kiplinger.com. Or, as is commonly advised by financial planners, use the rule of thumb that your life insurance should equal 8 to 10 times your annual take-home pay.

The Hume Group, Inc., a financial educational company, advises,  “Lean toward the low side of that range if:

  1. You have only one or two children to educate, if your spouse works full-time, or if you have a low outstanding mortgage.
  2. Lean toward the high side of that range if you have more than two children to educate, if your spouse does not work or works only part-time, or if you have a high outstanding mortgage.”

How Long Should You Insure For?

Remember, you don’t need life insurance if your death will not cause a hardship for others. Once the chance for hardship passes, so does your need for life insurance. Reduce coverage after your house is paid for, and your children are less dependent on you for education and other support. The Hume Group advises, “Once retirement for you and your spouse is secure, the most insurance you might need would be a small policy to cover burial expenses.”

Please contact the Money Mastery offices directly for your FREE life insurance calculator:  (801) 292-1099.

Millennials Are Turning Away from Parents’ Poor Financial Example

Recently the CEO of Mass Mutual Life was interviewed about what he saw happening with young people in the work force.  He said they have become spooked and do not trust the stock market.  He went on to say that these younger people are saving more money than any other generation and not doing 401(k)s and mutual fund investing as much as their parents did.  They are watching their parents and are shocked by what has happened.

So what happened to them? Baby Boomers are turning age 65 at the rate of 10,000 a day!  They are unprepared for retirement, with a total of $60,000 of assets, according to the 2010 U.S. Census.  I repeat, $60,000 is all they have for retirement… despicable! When do you think an age 65 couple will die?  ANSWER:  Age 84 for the male and 87 for the female, on average.  Now go back to the $60,000 of total assets and ask how that will last 19 years, plus?  This fact is forcing us all to change the way we are doing things.

Now take health care and then think of this $60,000 of total assets, obviously it just won’t be enough to cover long-term care, which more than half the population over age 65 will need between age 65 and 85. Oh-h-h-h this hurts.

And here is a further national statistic for all people reaching age 65:  They only have an average of $13,000 of equity in their homes.  Now think back to this same and only $60,000 of assets at age 65 and ask yourself if another measly $13,000 is going to do you much good if you live 20 years beyond retirement age.

Sorry if I have depressed you, but if you’re age 50 or younger, now is the time to do something different than your parents did. Don’t wait until you’re 65 StockBrokerand find that you have no way to take care of yourself in your senior years. Take a hint from the Millennials, who are now starting to get really nervous about the same old status quo financial advice they’re hearing that has been passed around for decades with little results and determine to do something different with your money.  That something different should include the following, something you won’t hear much about from your standard popular, so-called financial “experts:”

  • Get spending under control while at the same time eliminating debt. This is only possible if you have a Spending Plan and a Debt Plan that you live simultaneously.
  • Save using the 60/20/20 Rule, which means that you not only have long-term savings and emergency savings, but you also save for emotional needs as well.
  • Get out of ALL debt, including your mortgage (which is considered bad debt) in under 10 years.
  • Learn how to pay the right amount of taxes at the right time.
  • Learn  how to create a predictable retirement based on more than just a herd mentality 401(k) or mutual fund. Think real estate, rental resources, small business ventures, life insurance, and annuities.

In my experience, it all comes down to spending decisions made during emotional times in our lives.  Learn to control your emotions and you have hope for a predictable future. Learn to think outside the box so you will have more to look forward to than your parents’ generation. To learn how to do this, call me: (801) 292-1099, ext. 2.

The Truth about Life Insurance

I have learned much over 45 years of  helping people solve financial problems using insurance products.  I am sure I average 120 hours each year of  classroom continuing education.  If you add up 45 years of this, it means I have over 6,000 hours of advanced life insurance training.  I am at the very least, competent to discuss concerns you need to know about life insurance.

First of all, I would like you to think of life insurance like a parachute:  If you ever need a parachute and don’t have it, you will never need one again.  I am not trying to be funny.  I hope you can see what I have witnessed over and over again in my career as a financial coach when people choose not to be prepared. Most people have family values like college education for children, or income security, or family vacations, or a comfortable retirement.  But ask yourself what would happen to these values if you died today?  Usually upon your death, values will remain, but too many times these values and dreams associated become impossible to achieve financially.

When you purchase life insurance, it is to help in the event of death.  Life insurance is truly an act of love.  The person buying it will never see the benefit during their life.  They trust the insurance company will be honorable to their contract and pay when they die.  So in short, if a person is making an income of $80,000 a year and works for 45 years, that equals a $3.6 million potential income for Don'tWaitthat family. But if the person dies in the first ten years of employment and doesn’t have life insurance, spouse and kids will lose $3 million or more. Families struggle all the time when the main income earner in the family dies.

Questions and Answers about Life Insurance

  • How much life insurance should you have?
  • What kind should you purchase?
  • How will you pay for it over the years?
  • How should you select which company to work with?
  • How do you find an agent who holds your values and interests before theirs?

How much life insurance should you have?  Generally speaking you should purchase a policy that will cover seven years of income or you should have enough money to pay off all debts and funeral expenses, and leave enough money for children’s education and savings in the bank earning enough to pay for all expenses for the life of the surviving spouse.

What kind of insurance should you buy, term or whole life?  The kind of life insurance to purchase has mostly to do with your age and health, not your budget. Most people do not realize that you really buy life insurance with health, not so much with money.  For example, a 10-year term policy of $500,000 might cost $12 a month for a healthy male age 40.  But what if the ten years passes and premiums are going to increase because you are older and more likely to die?  How much can you afford then?  And what if your health changes and you cannot find an insurance company to give you a contract at all.  This is a bad position to be in, simply because if your health deteriorates you cannot buy life insurance.  When people have health issues, they will also die much sooner than normal life expectancy.  So term insurance is really only for those who are younger and healthier. They would purchase this insurance in the event that they got suddenly sick or were killed at a relatively younger age in order to protect their family.

Another statistic about term life insurance shows only 1 percent of all life insurance pays the death benefit.  People usually do not die until after the term life premiums get so expensive they have to quit paying, and then they die.  The only way to win is to purchase whole life that offers a level premium with cash values building up until you die, and is guaranteed to pay up and until age 121. The problem is, whole life can be very expensive the older you get.

In future posts I will discuss more how whole life works and when it is desirable to purchase. Understand that life insurance companies have millions of lives insured and they can predict with utmost certainty how many will die this year, or next. They know how to play the insurance game, and so should you. More to come about companies to consider, how to pay for whole life, and which agents to work with.