By Brock Jolly
The College Funding Coach
President Jimmy Carter was fond of saying, “Go out on a limb. That’s where the fruit is.”
I tend to be a believer in taking calculated, or compensated risk. While, I believe it is important to take risks in many areas of life, planning for college, retirement or any financial goal, should not be one of them. Here’s why.
In financial planning, advisors often pontificate that high risk means high reward, whereas low risk means low reward.
In my experience, it is nearly impossible to eliminate risk; however, it is very possible to mitigate risk. My financial planning practice focuses heavily on creating strategies for families to send their children to college with minimal out-of-pocket cost.
As a financial advisor, one of my first focal points with clients has to be managing risk. As a case in point, we can create a great asset accumulation plan designed to send children to college; but it is worthless if we fail to plan for the “what ifs” in life.
What if the stock market tanks in the year prior to college? What if one of the parents dies prematurely, or becomes disabled? What if we’ve created a great college funding plan and the child never even attends school?
For many families, this “what if” became a reality with the so called Great Recession of 2008.
When the S&P 500 Index dropped by 37%, many families were left trying to figure out where all their savings had gone, and more importantly, they were trying to scramble to figure out a solution to send a child to school very quickly.
Unfortunately, the solution was often to attend a less expensive school, or perhaps a community college.
Many families took on an inordinate amount of unplanned debt in order to finance these educations. All the while, over the past three years, the average school has increased its cost of attendance by 5-11% per year, which hardly assuages the problem.
The goal is to create a multifaceted financial plan that works regardless of “what ifs.”
Think about what I call your “bucket strategies.” This is the idea of creating several well-diversified buckets from which to draw – the appropriate bucket dependent on prevailing market conditions.
The market has rebounded, but it will correct again. The problem is that we don’t have a crystal ball to know when. Because college must be funded at a specified time over a specified number of years, we have to control volatility and market fluctuation as much as possible. We simply can’t risk “what ifs.”
Here are Some Good Options to Consider: 529 Plans
A Section 529 Plan is a useful tool. This education savings plan operated by a state, usually in conjunction with a mutual fund family, is designed to help families set aside tax-advantaged funds for future college costs.
Other good opportunities include vehicles such as municipal bonds, fixed or variable annuities, and even cash value life insurance as ways of creating well-diversified buckets of money from which to draw for funding college.
If the stock market is up, or if taxes are up, the 529 plan is a great tool. However, if the stock market is down, taxes are down, or if the child doesn’t even go to school, the 529 plan looks significantly less attractive.
While most 529 plans inherently contain risk by virtue of being invested in the market, the other asset classes are utilized to mitigate this risk:
- Municipal bonds, for example, are reasonably low risk, as they are backed by the full faith and credit (i.e. taxing authority) of the issuing municipality.
- Cash value life insurance is an often-overlooked asset for purposes of funding a college education. When they think of life insurance, most consumers think of a monthly premium and a death benefit that will be around for someone else once they die.
What they fail to realize is how these policies can actually serve as a very safe asset accumulation vehicle that is not correlated directly to the stock market. In addition, the death benefit will eventually pay off, often allowing the family to recoup nearly every dime that is ever paid out for college.
So while a 529 Plan can be a great approach to paying for higher education, it is inherently risky and should never be viewed as a standalone approach to paying for school.
Instead, a family must learn to manage risk, so that whatever happens in the world does not derail the best-laid plans for achieving the goal of sending the children to earn college degrees. In turn, they will then have the opportunity to go out in the world, face challenges, and take calculated risks that are worth defying.
About Brock Jolly
Columbus, Indiana native Brock Jolly has been a financial planner at Capitol Financial Partners since 2001. He holds a certification in Long-Term Care (CLTC) designation, and since 2006 has had a Certified Financial Planner (CFP®) designation from the American College in Bryn Mawr. Brock was a Qualifying Member of the prestigious Million Dollar Round Table that year.
Brock hosts adult education seminars to help families save for college. His course, “Little Known Secrets of Paying for College,” teaches parents how to finance a college education without jeopardizing their own retirement savings.
Brock Jolly is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc., member SIPC. Supervisory Office: 1410 Spring Hill Road, suite 425, McLean VA 22102.