Hello, My name is Mark Porter, I am a Certified Financial Planner with ...
Hello, My name is Mark Porter, I am a Certified Financial Planner with Northeast Planning Associates with securities offered through LPL Financial. I’m going to wrap up today’s presentation by talking about 4 questions I am commonly asked by parents. First, what is EFC? EFC stands for Expected Family contribution and EFC is the amount they expect YOU to pay, not the aid you will receive. Therefore Total Cost of School – EFC = Loans, Grants, Work Study, Scholarships There are two general ways EFC is calculated, on the federal level and at the institutional level. Since we couldn’t possibly talk about the methodology for every school out there, we’ll focus on the federal methodology, which will determine your EFC with regards to any federal aide. Here you can see some of the major factors and how they increase your EFC EFC.
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Now that you know how EFC works, you may be asking “What is the best way to save for college?” Whenever you save, you fight 4 battles: Financial Aid, Taxes, Flexibility and Inflation. Each of the vehicles here wins some battles and loses others. My job as a Financial Planner is to match you with the right combination of vehicles such that their strengths fit in with your situation 529 Plan: These plans offer many benefits including tax free withdrawals for qualified higher education expenses and investments that can be expected to keep pace with college inflation. However, if the dollars are not used for qualified higher education expenses, they will be taxed and penalized by the IRS. 529 Assets are generally regarded as a Parent’s Countable Asset by the Federal Formula g of tax free withdrawals and Coverdell ESA: These plans also offer the advantage offer flexible investments. The definition of qualified withdrawals is also wider than the 529 plans. However, these plans count as the CHILD’s asset and have low annual contribution limits. UTMA / UGMA: These trust accounts offer flexibility in the sense that dollars are not required q to be used for college g and also p provide a wide investment selection. However, you will pay taxes every year on the realized gains and at 18 or 21, your child will have full access to the funds to spend as they please.
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Roth IRA: These plans also provide a wide array of investment options and because they are considered retirement accounts, are not countable assets under the federal program. Since they are retirement dollars, there is great flexibility after your age 59 ½. This can be a good option for parents who will be in their 60s when their children are in college. However, you should be careful not to sacrifice your own retirement savings for your children’s college. Taxable Account: These plans offer the most flexibility and the most investment options in exchange for no tax benefits. Funds are counted as parent assets. Savings Bonds: These bonds offer flexibility and tax benefits, but their low interest rate means you actually lose money every year when compared to the cost of g college. Cash Value Life Insurance: Can be flexible with good investment options, a low tax burden and limited financial aide impact. However, the fees of these policies can be quite high and you will be paying for insurance (which is not a problem if you need it). The policies are also relatively inflexible for the first 10 years, making them a bad choice for p parents starting g to save for college g late.
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Another common question I am asked by new parents is ‘How Much life insurance do I need?’ Of course, it depends on several variables. First, you should understand what SS covers, then, you need to think about the expenses in your situation and your goals. Once you’ve done that, it’s a simple math equation. But what type of insurance should you get? Group Term is what you typcially get through work. It is usually age banded so it starts out inexpensive and gets more expensive as you get older. It is usually not portable, meaning that if you leave your job, you lose your insurance. It is often easier to get and less expensive for people with below average health (and therefore slightly more expensive for people with above average health). y get g on yyour own with a fixed premium for a fixed Individual Term is a policyy you period of time. It may start out more expensive than group term but may end up less expensive since the premium does not rise. With more underwriting requirements, it may be more difficult or more expensive for people of below average health to get, but it may be less expensive for people with above average health.
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Cash Value or Permanent insurance includes an asset portion. You pay in much more on a monthly basis than the actual cost of insurance. The additional you pay in is invested and should grow. This cash value may later be used to ‘pay up’ the insurance policy or the cash value may be taken out as a tax free loan. Cash Value policies are very complicated and often rely on many long term assumptions. If you choose to use a cash value policy, consider all of the options carefully and review the performance of the policy regularly like any other investment.
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Finally, I find that people generally understand life insurance pretty well, but don’t know as much about what would happen to them if they are disabled. There are two types of disability coverage, long and short term. Short term may pay out from day 7 of your disability to day 90 which long term pays out from day 90 until the day you return to work (or reach age 65). In general, short term is more expensive because even though the total payout is lower, the likelihood of a claim is higher. In general, if you have a cash reserve equal to 3 to 6 months worth of your expenses, you may not need to spend extra money on additional short term disability coverage. When assessing your need for long term disability insurance, you should start by examining these factors How much of your income is needed to run your family? H How much hd does your employer l offer ff th through h work? k? D Do you pay ffor it or d does th the company? Policies paid for by the company often result in a taxable benefit while policies paid for by you often result in a tax free benefit. Once you know what you need and what you receive for work, ask yourself these 3 questions. If the answer to #3 is below #2, you might need additional coverage, if #3 is i less l than th #1 #1, you need d additional dditi l coverage.
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1
Now that you know how EFC works, you may be asking “What is the best way to save for college?” Whenever you save, you fight 4 battles: Financial Aid, Taxes, Flexibility and Inflation. Each of the vehicles here wins some battles and loses others. My job as a Financial Planner is to match you with the right combination of vehicles such that their strengths fit in with your situation 529 Plan: These plans offer many benefits including tax free withdrawals for qualified higher education expenses and investments that can be expected to keep pace with college inflation. However, if the dollars are not used for qualified higher education expenses, they will be taxed and penalized by the IRS. 529 Assets are generally regarded as a Parent’s Countable Asset by the Federal Formula g of tax free withdrawals and Coverdell ESA: These plans also offer the advantage offer flexible investments. The definition of qualified withdrawals is also wider than the 529 plans. However, these plans count as the CHILD’s asset and have low annual contribution limits. UTMA / UGMA: These trust accounts offer flexibility in the sense that dollars are not required q to be used for college g and also p provide a wide investment selection. However, you will pay taxes every year on the realized gains and at 18 or 21, your child will have full access to the funds to spend as they please.
2
Roth IRA: These plans also provide a wide array of investment options and because they are considered retirement accounts, are not countable assets under the federal program. Since they are retirement dollars, there is great flexibility after your age 59 ½. This can be a good option for parents who will be in their 60s when their children are in college. However, you should be careful not to sacrifice your own retirement savings for your children’s college. Taxable Account: These plans offer the most flexibility and the most investment options in exchange for no tax benefits. Funds are counted as parent assets. Savings Bonds: These bonds offer flexibility and tax benefits, but their low interest rate means you actually lose money every year when compared to the cost of g college. Cash Value Life Insurance: Can be flexible with good investment options, a low tax burden and limited financial aide impact. However, the fees of these policies can be quite high and you will be paying for insurance (which is not a problem if you need it). The policies are also relatively inflexible for the first 10 years, making them a bad choice for p parents starting g to save for college g late.
3
Another common question I am asked by new parents is ‘How Much life insurance do I need?’ Of course, it depends on several variables. First, you should understand what SS covers, then, you need to think about the expenses in your situation and your goals. Once you’ve done that, it’s a simple math equation. But what type of insurance should you get? Group Term is what you typcially get through work. It is usually age banded so it starts out inexpensive and gets more expensive as you get older. It is usually not portable, meaning that if you leave your job, you lose your insurance. It is often easier to get and less expensive for people with below average health (and therefore slightly more expensive for people with above average health). y get g on yyour own with a fixed premium for a fixed Individual Term is a policyy you period of time. It may start out more expensive than group term but may end up less expensive since the premium does not rise. With more underwriting requirements, it may be more difficult or more expensive for people of below average health to get, but it may be less expensive for people with above average health.
4
Cash Value or Permanent insurance includes an asset portion. You pay in much more on a monthly basis than the actual cost of insurance. The additional you pay in is invested and should grow. This cash value may later be used to ‘pay up’ the insurance policy or the cash value may be taken out as a tax free loan. Cash Value policies are very complicated and often rely on many long term assumptions. If you choose to use a cash value policy, consider all of the options carefully and review the performance of the policy regularly like any other investment.
5
Finally, I find that people generally understand life insurance pretty well, but don’t know as much about what would happen to them if they are disabled. There are two types of disability coverage, long and short term. Short term may pay out from day 7 of your disability to day 90 which long term pays out from day 90 until the day you return to work (or reach age 65). In general, short term is more expensive because even though the total payout is lower, the likelihood of a claim is higher. In general, if you have a cash reserve equal to 3 to 6 months worth of your expenses, you may not need to spend extra money on additional short term disability coverage. When assessing your need for long term disability insurance, you should start by examining these factors How much of your income is needed to run your family? H How much hd does your employer l offer ff th through h work? k? D Do you pay ffor it or d does th the company? Policies paid for by the company often result in a taxable benefit while policies paid for by you often result in a tax free benefit. Once you know what you need and what you receive for work, ask yourself these 3 questions. If the answer to #3 is below #2, you might need additional coverage, if #3 is i less l than th #1 #1, you need d additional dditi l coverage.
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