All Things Financial Planning Blog


Funding Your Child’s College Education

In addition to purchasing a home, funding your child’s college education could be one of the largest expenditures you ever make.

According to the College Board, the average tuition in 2010 for a 4 year in-state public school is $33,300 and a staggering $119,400 for private colleges. That’s just the tuition! Now factor in living expenses, cost of dorm and board, computers, and textbooks, you are all of a sudden looking at close to $200,000 for a 4-year undergraduate degree. Furthermore, with most states still reeling from the latest financial storm, the College Board anticipates that college tuitions will increase at a rate almost double that of inflation.

Despite the cost, the economic benefit of having a bachelor’s degree is undeniable. According the US Census Bureau, in the year 2009, the average male college graduate, aged 25-34, earned 85% more than their counterparts who only have a high school degree. Among women the same age group, the advantage is a resounding 111%.

So how does a family go about saving for a college education? There are basically 4 options – write the check, borrow now and pay later, find scholarships and grants, or better yet, set aside money today and let it accumulate over time.

Write the check
Plenty of families simply write the check as the tuition bills arrive in the mail. This approach is fine as long as you have enough money socked away and it is readily available. Most families run into trouble with this approach when they start tapping into their emerging savings, or even retirement accounts. Some families even take out lines of equity on their homes to help pay for the tuition bills. As a general rule, parents should never jeopardize their own retirement or financial well-being in their attempts to fund the children’s education. After all, there is always college aid, but there is no retirement aid.

Borrow Now and Pay Later
For those who don’t have the means to fork out tens of thousands of dollars, there is always the option to borrow. Not surprisingly, there are plenty of entities willing to lend to students and families. These entities may include the federal government, the school itself, and private sector. The Federal Student Aid Programs offer several low interest rate loan programs such Perkins Loans, Stafford Loans, and Direct PLUS (graduate and professional degree student borrowers). These loans can typically be paid back over an extended period of time following graduation. Additionally, you may also take out student loans from many banks, credit unions, and other private lenders.

Apply for Scholarships and Grants
Fortunately, there is also free money available from both the federal government and the private sector. The federal government has several programs that provide free financial assistance, called “grants”, to those in need. Some schools also provide grants to help make up the difference between college costs and what a family can be expected to contribute. There are also other grants, known as merit awards or merit scholarships, that are awarded based on academic achievements. Additionally, many companies, non-profit organizations, or foundations also offer scholarships to those that fit specific criteria set forth by these organizations.

Start Saving Today
Arguably, the best option a family has is to simply plan ahead and start saving today. There are several options depending on your objectives (maximize return potential, safety of principal, liquidity concerns, time/age restrictions, etc). The most popular options are 529 plans, Coverdell Education Savings Accounts, Qualified US Savings Bonds, custodial accounts, or savings accounts. Each account has its advantages and disadvantages, and families should thoroughly research their options or consult a professional before making a decision.

Andrew B. Chou, CFP®
Senior Portfolio Manager
Westmount Asset Management, LLC
Los Angeles, CA


The New Reality of Retirement

“Retirement” is different now than it was for previous generations. Retirees used to be able to count on a solid pension, full healthcare benefits for them and their families, and relatively subdued inflation. Unfortunately, that is no longer the case. Companies are cutting back significantly on pension benefits, individual health care costs are skyrocketing, and some even fear a return of the 80’s hyper-inflation environment.

As a result, people are retiring much later in life (either by choice or not), and a significant percentage of the work force are working well into their “retirement” in order to maintain their standard of living. As a matter of fact, a recent survey conducted by Employee Benefit Research Institute and Matthew Greenwald & Associates shows that almost 70% of employed Americans expect to continue to work some amount during retirement.

In addition to dealing with the potential issues such as lack of pension, high cost of health care, and inflation, retirees are also living much longer than ever before. A study shows that if you are 65 today and married, there is a 91% chance that either you or your spouse will live to be 80 years old, and there is a 52% chance that one of you will live to see your 90th birthday (source: Society of Actuaries).

With the prolonged life expectancy comes the challenge of finding affordable health care options. Data indicate that only 27% of retirees are fortunate enough to have access to employer medical coverage, while the rest have to count on Medicare or Medicaid. For the 73% who retire without employer medical coverage, a recent study shows that it will cost approximately $200,000 in savings to fund out-of-pocket health care costs during retirement (Source: Employer Benefit Research Institute, Issue Brief No. 351, December 2010).

So how does one plan for the new reality of retirement?

The single most important decision individuals can make about retirement is to take responsibility for funding it themselves. Living costs, health care expenses, social security, pensions, and future employment income are all uncertain. But saving today is one concrete way to prepare for a more predictable retirement.

The question for most retirees is, what percentage of one’s own retirement should he or she be prepared to fund? You may have heard Financial Planners refer to the “3-legged stool” retirement income model. The 3-legged stool is a terminology used to describe the three most common, and somewhat equal, sources of retirement income — social security, employee pension, and personal savings. However, this income model is no longer the reality. For today’s retirees, diversifying their sources of income is as important as diversifying their investments.

According to a recent study, a typical retiree today will have 5 sources of income – social security (42%), pension/annuities (14%), personal savings (20%), work/earnings (20%), and other (rental, family support, etc). As the statistics suggest, retirees now have to fund close to 50% of their own retirement income through a combination of drawing down their personal assets and/or working in retirement.

It goes without saying that the sooner one starts planning for retirement the better. As a matter of fact, delaying your saving plan by as little as 5 years can have a significant impact on the end result. To illustrate the point, let’s take a look at several different scenarios.

As you can see, Susan is able to accumulate a significant nest egg of almost $850,000 by investing a total of only $50,000 between the age of 25 and 35 and let it accumulate. Bill, on the other hand, who delayed his saving plans by 10 years, has to invest significantly more ($150,000 total), and invest over a much longer period of time than Susan (30 years vs. 10 years), and still end up with a much smaller nest egg. Chris, the most diligent saver of the three, started early at age 25 and continued until his retirement age of 65. His consistency allowed him to accumulate a sizable nest egg of about $1.5 million.

Now that we have demonstrated the importance of saving, let’s talk a bit about spending. As most Financial Planners would attest, determining one’s spending needs in retirement is a complex exercise because there are numerous “unknowns”. One often has to make an assumption about not only life expectancy, but also tax rates, inflation, investment return, as well as other unforeseen costs.

As a rule of thumb, assuming a typical market return, a $500,000 portfolio consisting of 60% equities and 40% bonds can historically sustain a withdrawal rate of approximately 4% for well over 30 years, even in the worst historical time periods for investing. However, if a retiree ratchets up the withdrawal rate even by just 2 percent per year, the portfolio can now potentially only last about 21 years. The situation is even more dire if you happen to retire at the beginning of a cyclical bear market (see chart).

As we stated earlier, the only way for modern day retirees to ensure a comfortable retirement is to take responsibility for funding it themselves. With proper planning and sensible investing, it is still possible to enjoy your golden years. Remember, saving today is one concrete way to prepare for a more secure retirement.

Andrew B. Chou, CFP®
Senior Portfolio Manager
Westmount Asset Management, LLC
Los Angeles, CA

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Insider’s Guide to Finding a Financial Planner

“Hi, I think I’m interested in a financial planning but I’m not sure of the scope of a financial planner. My priorities are reducing my personal debt, planning for retirement and planning to support an aging parent. Would a financial planner design a debt-reduction budget as well as a long-term financial plan?”

Answer –

Finding a financial planner is, in many ways, similar to finding a family doctor. Many characteristics that help define a “good” doctor also apply to a good financial planner. A good financial planner should be able to understand your needs, desires, and fears, and be able to distill all that information down to an understandable and actionable financial plan. 

Of course, financial planners come in many different forms and it is extremely important for you to understand your options. Are you looking to work with a financial planner on an on-going basis? Are you looking for someone to analyze your current situation and provide you with an action plan? Or are you looking for someone to help you review your situation annually once the plan is set up? You should first have a clear understanding of your needs before contacting a financial planner as it will help you narrow down your search quite a bit. 

Keep in mind that financial planners are paid in several different ways, including commission-only, fee-only, salary, or a combination of these methods. In general, you may receive more objective advice from a fee-only planner who doesn’t have an incentive to steer you toward a particular investment or insurance product. The only downside is that the fee you pay a fee-only planner might be higher than what you’d pay to a commission-based planner. Financial planners typically work with you in person, but also may be able to consult with you over the phone

It is also important to keep in mind that many planners specialize in different areas of financial planning. Some may specialize in retirement planning, while others may focus on insurance planning. Some financial planners might even have expertise in college planning or elder care planning. It is important to ask plenty of questions about the planners’ expertise and qualifications before engaging them in an on-going relationship. 

Here is a list of things that a qualified financial planner can help you do –

  • Set realistic financial and personal goals
  • Assess your current financial health by examining your assets, liabilities, income, insurance, taxes, investments, and estate plan
  • Develop a realistic, comprehensive plan to meet your financial goals
  • Put your plan into action and monitor its progress
  • Stay on track to meet changing goals and circumstances
  • Keep you informed of changes in the industry, markets, and tax laws that may affect your plan.

So how do you get started? You can start by asking for names from friends or business associates that you trust. You can also approach your attorney, accountants, insurance agents, bankers, or other trusted advisors. You can also obtain a list of financial planning professionals through the Financial Planning Association website.

Best of luck in your search for a financial planner who can help you meet your goals.

Andrew B. Chou, CFP®
Senior Portfolio Manager
Westmount Asset Management, LLC
Los Angeles, CA

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How to Give Like a Billionaire

Legendary investor Warren Buffet and billionaire entrepreneur Bill Gates created the “Giving Pledge” in 2010.  The Pledge was a way to encourage the wealthiest individuals and families (read: billionaires) in the U.S. to give away a majority of their wealth to charities either during their lifetime or at death. Buffet’s and Gate’s passionate call for compassion has received strong support from the wealthiest in the country, and over 60 families have since made the pledge as well. Some of them have already started giving away their fortune, while others will give away their wealth in the form of a bequeath.

But just exactly how does one give away millions, or even billions of dollars? It is a lot more complicated than you might think. While the general population tends to prefer to give to charities via spontaneous methods, such as collection tins or writing checks directly, the wealthy are often more strategic in the ways they give in order to maximize tax benefits and retain control over the use and timing of their generous donations. For the likes of Bill Gates and Warren Buffet, a well-funded Private Foundation is often the right choice as it gives them complete discretion over the use of the funds. For others who are looking to give over time, a Charitable Remainder Trust is frequently considered.

What about those donors that do not have billions of dollars at their disposal? The establishment and running of a Private Foundation can be very costly for small endowment funds, and Charitable Remainder Trusts would require one to give up access to some assets, which can be a scary proposition for someone with limited resources. For these donors, a self-directed Donor Advised Fund (DAF) is often the right choice.

A Donor Advised Fund (DAF) is defined as a “charitable giving vehicle administered by a public charity and created for the purpose of managing charitable donations on behalf of an organization, family, or individual.” Giving through the use of a Donor Advised Fund offers an easy way to establish a low cost, flexible vehicle for charitable giving as an alternative to direct giving or creating a private foundation. 

In order to set up a DAF, a donor would first establish an account at a qualified 503(c)(3) charitable organization that is capable of managing DAF’s. Many large community foundations, national charities, or brokerage firms possess this capability. The donor has complete discretion over the naming their DAF once the account is established, or they can choose to remain anonymous. Some popular choices are “The John Smith Foundation”, “Memorial Fund of Mrs. Johnson”, or “The Scholarship Fund forRoosevelt High School”. 

The donor will then deposit either cash or appreciated assets (eg. stocks, mutual funds, bonds, etc) into the account. Because the fund is housed within a public charity, the donor receives maximum tax deduction available, while avoiding the cost or hassel of setting up a private foundation or Charitable Reminder Trust.

Once the donation is made to the the DAF, the donor can claim charitable deduction for that year. However, the donor has the flexibility of gifting either in lump sum, or over their lifetime, to one or several charities. Anything that is left in the DAF at time or death can be bequeathed to other charities or continued to be managed by a successor administrator.

Obviously there still are situations where a properly structured charitable trust or private foundation is more advantageous to both the donor and the charities they support. But a Donor-Advised Fund can be an attractive option to those who are feeling charitable this holiday season.

Happy Holidays!

Andrew B. Chou, CFP®
Senior Portfolio Manager
Westmount Asset Management, LLC
Los Angeles, CA