Posts Tagged ‘savings’

College Financing 101

October 5, 2010

College might still be in the distant future, but it’s not too early to start thinking about how you’re going to pay for your child’s education. Here are a few interesting facts I found in a recent article in the Wall Street Journal

Over any 17-year period, college costs go up by about a factor of three. The average in-state tuition for a public four-year university for the 2009-2010 school year was $7,020, which means children born in 2009 going to school 17 years later should reasonably expect to pay an average of $21,060. New parents looking to start saving for college now should probably save at least $200 a month from the birth of their child to cover the cost of a public four-year university and $430 for a non-profit four-year university.

The Free Application for Federal Student Aid, or FASFA, determines a student’s eligibility for federal financial aid, which includes Pell grants, Stafford loans and Perkins loans, by looking at the applicant’s “available income.” Available income includes taxed and untaxed income, but excludes some tax credits such as the Earned Income Tax Credit and funds from public assistance such as Temporary Assistance for Needy Families. IRA deductions, child support, and capital gains from investments are included in the calculation.

There are several different types of savings plans designed to help families set aside funds for future college costs.

There are two different types of 529 Plans—a prepaid program and a savings plan. The prepaid plan works like an annuity contract, essentially allowing you to pay for one to four years of college at today’s cost. These don’t tend to be as popular, because the guarantee is usually based on tuition at in-state public schools and most people can’t predict where their kids will ultimately go to school. The savings plan is similar to an IRA or 401(k), where savers invest their contributions in products like mutual funds and can make withdrawals tax-free if the money is used for higher education.

Coverdell Education Savings Accounts – also known as Education IRAs – are trusts that can be used to cover qualified education expenses for college as well as for kindergarten through 12th grade. Currently, the maximum contribution allowed for a Coverdell is $2,000 per year per beneficiary and can be made until the beneficiary is 18 years old, but this is slated to change at the end of the year when a 2001 tax law expires. At that time the contribution limit will fall to $500 a year unless Congress acts to extend the benefit. The law’s expiration also means that withdrawals to pay for K-12 expenses will no longer be tax-free, but they will remain tax free for college expenses.

What is the difference between a 529 college-savings plan and a Coverdell Education Savings Account?  Income-based contribution phase-outs for Coverdells begin between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for those who are married filing jointly. In contrast, there are no income limits for 529 college savings plans, and contributions are considered completed gifts, meaning that generally speaking, an individual can contribute up to $13,000 annually per beneficiary or a married couple can contribute $26,000 annually per beneficiary without incurring a gift tax. A special rule for 529 plans allows a contributor to make five years’ worth of gifts in one year to the plan without incurring a gift tax. Also, tax-free withdrawals from 529 savings plans can be used only for college-related expenses, such as tuition and fees, room and board, books and required supplies.

College savings plans like a 529 or Coverdell can affect financial aid. FASFA looks at both the assets of the parents and the students to determine eligibility for financial aid, and savings plans are generally considered to be assets, not income. However, distributions from savings plans not used for qualified educational expenses would be considered taxable income. College savings plans in either the parents’ or child’s name are reported as parental assets on FASFA, while those held by others like an aunt or grandparent are not reported, despite the child being the beneficiary.

Families often overlook Hope Scholarship Tax Credit, which is a program targeted at middle-income families. The credit is worth up to $2,500 per student per year for qualified higher-education expenses during the first four years of college, and income phase-outs start at $80,000 up to $90,000 for single filers, and $160,000 up to $180,000 for those married filing jointly. As of 2009, the credit is not subject to the Alternative Minimum Tax.

May is National Elder Law Month

May 7, 2010

It’s a good opportunity to share some information I’ve come across that you might find helpful.

Retirement planning calculators can be misleading
How much do you need to save for retirement? You can get an idea by using any of the dozens of retirement calculator tools offered for free on the Internet. But a recent study by actuarial experts on retirement forecasting shows that many popular calculators have serious flaws. These problems could lead to serious miscalculations when you’re plotting your retirement. The report by the Society of Actuaries analyzed 12 retirement calculators created by financial services firms, software companies, nonprofits, and government for consumers and financial planning pros. All but one of the six consumer calculators were free, but they had a host of problems. “These tools take a project that is fairly complex and boil it down to something simple,” says John Turner, an economist and co-author of the report. “They don’t ask you to consider a lot of important variables.”

It’s important to be aware of these variables when it comes to online retirement calculators.

2010 Cost-of-Care Survey
Genworth Financial has released its 2010 annual survey of the cost of various long-term care services around the country, including average costs of home care providers, adult day health care facilities, assisted living facilities and nursing homes.


Long-Term Care Services National Median Increase over  2009 5-Year Annual Growth
Homemaker Services (Licensed)

Provides “hands-off” care such as helping with cooking and running errands. Often referred to as “Personal Care Assistants” or “Companions.” This is the rate charged by a non-Medicare certified, licensed agency.

Hourly Rate $18 3.0% 2.4%
Home Health Aide Services (Licensed)

Provides “hands-on” personal care, but not medical care, in the home, with activities such as bathing, dressing and transferring. This is the rate charged by a non-Medicare certified, licensed agency.

Hourly Rate $19 2.7% 1.7%
Adult Day Health Care

Provides social and other related support services in a community-based, protective setting during any part of a day, but less than 24-hour care.

Daily Rate $60 12% Data not available
Assisted Living Facility (One Bedroom/Single Occupancy)Provides “hands-on” personal care as well as medical care for those who are not able to live by themselves, but do not require constant care provided by a nursing home. Monthly Rate $3,185 12% 6.7%
Nursing Home (Semi-Private Room) Provides skilled nursing care 24 hours a day. Daily Rate $185 5.7% 4.6%
Nursing Home (Private Room) Provides skilled nursing care 24 hours a day. Daily Rate $206 5.1% 4.5%

A nifty clickable map allows a snapshot look at state averages.

New Wisconsin law increases penalties for swindling seniors
A new state law gives tougher penalties to those caught swindling money from the elderly. The law allows double the punishment and higher restitution payments for those who con victims 65 and older. Patricia Struck of the state Department of Financial Institutions says up to half the securities fraud cases it investigates now involve older victims. Last year, all but 10 of the agency’s 27 enforcement orders were for cases involving victims older than 65. Going into this year, the department had 93 investigations still pending.  Struck says many older investors are worried that they’ll outlive their retirement savings – and swindlers prey on those people.

Lessons Lost

January 19, 2010

Our parents (parents of baby boomers and earlier generations) emphasized savings. We were told that credit was a last resort. There were layaway plans in which desired products were set aside by shop keepers until the price was fully paid in installments. There were Christmas Clubs at the local bank or savings & loan so we could sock a little away each month and have the money for Christmas presents in December. Even most cars were purchased largely with cash (until the early 60s when financing became freely available). About the only thing purchased with credit was houses, but you were expected to have at least 20 percent for the down payment. Again, it wasn’t until the 60s, with the acceptance of mortgage insurance, that people started buying houses with as little as five percent down. And, as we all know, by 2005 purchases were being made with zero down.

Prior generations had two frequently expressed rules. First, you should have at least six months of living expenses saved before you used credit or invested in anything. Second, you should pay off your home mortgage before you retire. With the financial meltdown of the last couple of years, many believe we should return to these principles and this view of credit.

Here’s my take. In order to have a financial safety net, access to cash (financial liquidity) is important. Many of us thought having an equity line of credit was enough. Clearly it is not. Financial institutions called them due during the crisis, leaving borrowers with no way to pay them off much less meet other needs. Our parents were right. You need ready cash available for emergencies. Six months worth may be enough but for us baby boomers I think it should be more.

Because I think having cash is so important, I don’t necessarily agree with the second rule. If you want to stay in your home and have cash protection, the best alternative may be getting a long-term, flat rate mortgage while you are working and still can. This requires some figuring out because you will need to be able to pay the mortgage after you retire, and for as long as you want to stay in your current home. Seeing a good financial planner is recommended.

That’s what I did. I got a 30-year mortgage at age 61. I took enough cash out of my home to pay 2+ years of expenses, and put it in safe, short-term investments. I have always slept well and now I am assured I will continue to do so.