CFP Board eNewsletter
April 2008
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CFP Board eNewsletter |
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| CFP Board Prepares for Free Financial Planning Clinics in Washington DC, Miami |
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| About This Newsletter |
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| Saving for College with a 529 Plan |
Apart from buying a home, funding a college education — your child's, a loved one's, or your own — is the biggest investment many people will ever make. And higher education is an investment, one that pays off handsomely. The average male college graduate, aged between 25 and 34, earns about 77% more than the average male with only a high school diploma; among women in the same age bracket, college grads earn around 86% more than non-grads, according to a 2006 U.S. Census Bureau survey. Yet a recent study found that just 3% of U.S. households have saved enough money to pay for their children's college educations. The same study found that just over 50% of those currently saving for college use or intend to use a 529 plan. Less than half of those planning to start saving in the future intend to use a 529 plan, while more than half can't even explain what a 529 plan is. We hope to unravel some of the mystery of what a 529 plan is — and how it can be used as an attractive, tax-advantaged way to save for college. A 529 plan is simply a method of investing money for college in much the same way as you would invest for other financial goals like, say, retirement. Earnings from your investments in a 529 plan are not subject to federal tax or, in most cases, state tax — provided that you use the money for qualified higher education expenses, such as tuition, books, and room and board. The plans are rather unimaginatively named after the section of the Internal Revenue Code (Section 529) that authorized them. There are two basic types of 529 plan: pre-paid tuition plans and college savings plans. In a pre-paid tuition plan, you accumulate savings to buy credits at a participating college or university. The value of the credits is based on the current cost of an education at the participating institution. The plan managers then invest your money so that it grows fast enough to cover the expected costs when the beneficiary of your 529 plan is ready to go to college. The cost of a college education has been increasing at around 6% a year — all the more reason to start saving now. State governments, colleges or universities sponsor pre-paid tuition plans, and may have residency requirements to qualify. In a college savings plan, you deposit savings into your account, which the plan managers then invest — in mutual funds, for example, or money market funds — on your behalf. The growth of your investments, and therefore the amount of money you eventually save for college, is dependent on how well the stock or bond markets perform. A popular investment method is the so-called "age-based portfolio," in which investments start out more aggressively to achieve maximum growth and then gradually become more conservative as the beneficiary approaches college age. The earnings on your investments can be withdrawn tax-free to pay for qualified expenses at the college or university of your choice. Be careful, though. If you take money out of your 529 plan and use it for anything other than college, you’ll get hit by income tax plus a 10% penalty. Many states offer additional benefits to residents of that state. So, though it's possible to start a 529 plan in any state, it's worth checking out the plans in your home state first. (You can view 529 plans in your state by going to the College Savings Plans Network Web site and clicking on "My State’s 529 Plan.") And, of course, always look into the fees and expenses, which can vary widely among plans, before deciding which 529 plan is right for you. Another attractive feature of 529 plans is that anyone can be named as the beneficiary — a son, a daughter, a spouse, a family member, even yourself. And anyone can contribute to a 529 plan — parents, grandparents, siblings, friends, even in some cases corporations or non-profit organizations. The limit on the amount held in individual accounts is usually around $300,000. Plus, the person who starts the 529 plan controls the account, not the person named as the beneficiary. Should the beneficiary end up not going to college, you can redirect the money to another member of the original beneficiary's family. One potential downside: Money held in a 529 plan could reduce a student's eligibility for financial aid. The details and tax consequences of 529 plans are complex, and they vary from state to state, so you might want to seek professional advice before deciding whether a 529 plan is the right option for you.
Online Resources The Web site of the U.S. Securities and Exchange Commission has a detailed Introduction to 529 Plans that lists important questions to ask before investing, such as: What fees are charged by the plan? What types of college expenses are covered by the plan? Which colleges and universities participate in the plan? What types of investment options are offered by the plan? Does the plan offer special benefits for state residents? The Web site of the College Savings Plans Network, a national non-profit association, allows users to Compare 529 Plans by state or by plan features. The site also hosts a College Cost Calculator. The Web site of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator of securities firms doing business in the U.S., also offers a Comparison of 529 Plans. In addition, the site lists Tips for Choosing College Savings Options. The Savingforcollege.com Web site, owned by financial information site Bankrate.com, has an easy-to-use College Cost Calculator to help you determine how much a university education could cost by the time the person you're saving for is ready to enroll. Savingforcollege.com also has a section for Grandparents with information on how they can use 529 plans to help fund their grandchildren's education.
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| High Net Worth "Earners" Enjoy Greater Security During Economic Downturn |
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According to findings of a newly released survey of about 1,500 Americans by PNC Wealth Management, an overwhelming number of high net worth Americans earned their wealth and are more likely to feel secure during challenging economic times compared to peers who inherited their money. The fourth annual Wealth and Values Survey, conducted by PNC Wealth Management, a member of The PNC Financial Services Group, Inc. revealed that 69% of high net worth Americans with $500,000 or more in investable assets accumulated most of their fortune by earning it through work, business ownership or investments. This compares to the 6% who attained their wealth primarily through inheritance. The remaining 25% gained their wealth through a combination of inheritance and earnings. Those in the "earners" majority are more likely to be concerned about the likelihood of a recession, yet are more confident they can manage through a downturn, PNC found. When asked about a recession, 36% of high net worth earners said it was a concern, yet 77% agreed with the statement, "I feel I have a lot of control over my financial future." Meanwhile, 27% of heirs expressed concern about a recession. Yet, 10% fewer — 67% — expressed confidence about control of their finances in the future. The study found that earners also have a higher risk tolerance than heirs. Thirty-nine percent of earners rate themselves as moderate to risky investors compared with 21% of heirs. "There is a strong correlation between those who earned their wealth, their willingness to take risks and confidence that they can recover from a major negative financial event," said Thomas P. Melcher, executive vice president and managing director of Hawthorn, PNC Wealth Management's ultra high net worth division. "Those who inherited their wealth often view themselves as stewards for future generations. As a result, they tend to be more conservative in their approach to investing." "By understanding the psychology of wealth, wealth managers are better able to deliver holistic advice measured both with investment returns and quality of life, the success of which is measured both through investment returns and appreciation for the lifestyle that wealth allows," he added. Other survey highlights include:
For more information on the Wealth and Values Survey on high net worth Americans by PNC Wealth Management, visit www.pnc.com
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| If You Come Into Money, Here's How to Manage a Windfall |
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It's a financial problem we would all love to have. Imagine that you just won the lottery, inherited an unexpected fortune, received a major legal settlement, or sold your business for a hefty sum. Now what do you do with all that money? If any of these things happened to you, you might think that your financial worries were over. The reality is, this kind of "sudden money" brings with it a host of emotional and financial challenges that most people never anticipate. And properly managing these challenges is crucial to making the most of your money. Susan Bradley, CFP®, author of Sudden Money: Managing a Financial Windfall and founder of the Sudden Money® Institute, defines a windfall as "the unexpected receipt of an amount of money that is much larger than you are accustomed to dealing with. It is not the amount of money that matters as much as your past experience of having access to and being responsible for that amount of money. People are thrust into a situation in which they feel they have less time to figure out what is going on in their financial lives. More people want to advise them, go into business with them, or borrow money from them. And new friends come out of the woodwork." All the more reason, Bradley argues, for recipients of sudden money to enter the first phase of the windfall management process: the Decision-Free Zone (DFZ). No, the DFZ is not the demilitarized border zone between North and South Korea. It is a time, Bradley says, "when you make as few decisions as possible. Instead, you prepare to make decisions. Emotional bookkeeping and financial planning are your most important tasks — determining how you feel about your new money, listing the range of choices you have because of it, and deciding which goals you’d like to accomplish with it. Finding a financial planner and becoming familiar with the investment process is a necessity." Structure can be brought to what might otherwise seem like a chaotic time by dividing decisions into three categories: what must be done now, what must be done soon, and what must be done later. So much is changing at once because of the dramatic change in your financial situation — stress may be shortening attention spans; self-esteem and self-identity may be shifting; friends, family and co-workers may be treating you differently — that postponing all but the most necessary decisions can give you time to establish new boundaries, to find your new 'normal.' Bradley lists tax issues — finding out the tax consequences of your new money, for example, and whether it puts you in a higher tax bracket — among the necessary decisions to be taken in the immediate aftermath of a windfall. Among the choices banned from the DFZ are issues like moving to a new house, starting a business, and retiring early. These decisions, if you choose to pursue them, can always be made later. Indeed, Bradley believes people are more likely to make better decisions if they wait until the excitement and novelty of the windfall wears off. "These experiences are more life events than financial events," she says. "The status quo dissolves; people can lose a sense of self. Whether the event itself is regrettable or wonderful, they need time — sometimes a long time — to get their feet on the ground." Once your feet are back on the ground, phase two — putting your money to work by investing — can begin. Bradley encourages individuals to create a "bliss list, all those things that in a perfect world you would have or do for yourself, your family, and others." She then suggests separating the items on the list into short-, medium-, and long-term goals, and prioritizing them according to importance rather than likelihood. Then comes the reality check to determine how much income your new money could produce and how long that income could last, which will in turn determine which items on your bliss list are realistic. "People should think bigger and deeper about their vision," Bradley says, "and agree not to act on it right away. You can then do some scenario planning, deal with the realities as they exist, and look at the choices." Bradley describes phase three as "monitoring your annual progress towards the goals you have set, and sharing your wealth with your family and community." This stage includes all the basics of financial planning, including creating a budget and watching your cash flow. (For more information on budgets and cash flows, see "Beyond the Dog Food Fallacy: How to Prepare a Personal Cash Flow Statement" in the May 2007 issue of It’s Your Turn.) "Some sudden money experiences are planned for and others come out of the blue," Bradley says. "But all are personal emotional events that have a financial component. Work with an advisor to create a financial plan, establish your tolerance for risk, and understand the implications of the transition to wealth management. But don’t neglect your emotions." If you have recently come into sudden money and would like professional advice, you can locate a CFP® professional in your vicinity through the "Search for a CERTIFIED FINANCIAL PLANNER™ Professional" function on CFP Board’s Web site.
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| Taxes Done? Then It’s Time to Think About Next Year’s Return |
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The 2007 tax season is over — for most of us. But this is probably a great time to start planning for next year's tax-filing ritual. If you received, or are expecting to receive, a large refund, consider increasing the number of withholding allowances on your W-4 form. Although many taxpayers view a large refund as a forced savings plans, many financial advisers look at a refund as little more than an interest-free loan to the government. To help taxpayers find the correct amount to withhold, the Internal Revenue Service offers an IRS Withholding Calculator. Use the results to help complete a new Form W-4, which you then need to submit to your employer. And this is a great time to calculate your withholding allowances, as you'll need your most recent income tax return to fill out the fields on the IRS calculator. You'll have to enter information about your income and tax liability for the previous year and estimate your 2008 itemized deductions. Based on your responses, the calculator will tell you how many allowances to take. If you and your spouse file jointly, the calculator will also break down how many allowances each of you should take.
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| Financial Alerts |
Foreclosure Resources for Consumers If you are having difficulty making your mortgage payment, one of the most important things you can do is seek assistance. The Federal Reserve Board offers information and links from the Federal Reserve and other government agencies that may be able to help you. For more information, visit the Federal Reserve Board Web site at: What to Do if a Health Insurance Company Denies Your Claim Major illness or a stay in the hospital following an accident can be stressful. It's not a time you want to be worried about your insurance coverage. However, for some insurance consumers, this is when they are hit with a denial — notification their insurance company won't pay all or part of a claim. To help understand your options when a claim is denied, the National Association of Insurance Commissioners (NAIC) suggests a number of steps, which can be found at: Read more financial alerts.
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| Survey: Will Rising Energy Costs Crimp Your Vacation Plans? |
Recent increases in the prices of crude oil and gasoline have reached all-time highs and are impacting all aspects of our life — from the gas pump to the grocery store. As the summer vacation months approach, many consumers might have to make hard decisions about their vacation plans. Let us know how, or if, the run-up in energy prices will affect your vacation plans. In the February edition of It’s Your Turn, we asked readers to let us know what they planned to do with their 2008 tax rebate. The largest number (43%) indicated that they would use the rebate to pay down debt. Nearly as many readers (40%) said they would use the rebate to add to an existing savings or investment account. In a distant third, 11% of readers said they did not expect to receive a tax rebate. About 4% of readers planned to go shopping with their rebate, and nearly 3% planned to use their rebate to help secure their financial futures by spending it on financial planning services.
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| CFP Board Preparing for Free Financial Planning Clinics in Washington DC, Miami |
CFP Board is preparing to hold two free Financial Planning Clinics this year — in Washington DC on Saturday Sept. 13, and in Miami, Fla., on Saturday, Nov. 15. Both clinics will be held from 11:00 a.m. to 4:00 p.m. The Financial Planning Clinics are free events designed to give consumers an opportunity to address their specific financial questions to CFP® professionals who volunteer their time and expertise for the event. Volunteers will be seated at tables designated for a specific financial planning topic. It’s as easy as choosing a topic and heading over to the appropriate table. Volunteers will be separated according to these topics:
The Financial Planning Clinics also will offer Educational Workshops on a range of financial topics presented by leading experts in personal finance who are CFP® professionals. The clinics are part of CFP Board’s efforts to educate the public about the benefits of ethical and competent personal financial planning and the value of the financial planning process. Free online registration and additional information about CFP Board’s Financial Planning Clinics is available on CFP Board’s Web site, www.CFP.net.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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