Stock Market Runs, Costing Out College and the "Sandwich Generation"
Feb 24, 2017
Q: The Dow-Jones has been on a run since November. Do you expect the run to continue or is there a slow-down around the corner?
A: This has been a robust market, with a lot of opportunities for investors. But the investors who are best equipped to benefit in the long-run, are those with clearly defined life goals by which investment decisions take their cues. If goals and priorities are absent from or are inadequate in an investment portfolio, investing will be more reactive and a game of catch-up. Worse, an investor won’t feel satisfied because chasing market runs or timing the market, ultimately, is not an effective strategy.
However, ongoing contributions to a retirement account or saving toward the purchase of a second home are satisfying practices because you can measure progress and because goals have a disciplining effect on your day-to-day actions. So the question ‘how long will this run last?’ is a good one, but a far better question is ‘how efficiently am I progressing toward my life goals?’
Q: My high school senior will be expecting a few college admission letters to arrive in the next month or so. My wife and I want to help fund as much of the cost of college, but we are behind the curve when it comes to savings. Is there a resource out there that can help?
A: If time isn’t on your side, there are creative ways to reduce costs, the best of which is shopping college credit hours around. In most colleges, a student’s core curriculum needs to be completed on campus, but there’s nothing stopping a student from taking electives at a nearby community college or taking summer classes at a community college back home. Not only is the cost per credit hour cheaper, but students may finish school earlier. Also, the amount of federal grants and private scholarship monies that go unclaimed each year is huge. According to the latest figures from Sallie Mae, roughly $100 million in scholarship funds go unclaimed every year. One particular college student who went on to found a scholarship search app netted $1.4 million in scholarships after a seven-month search.
The other option that may not sound glamorous, is working part-time through college. Studies show that, besides earning funds, student employees tend to have higher GPAs, better graduation rates and more work experiences to add to their résumés.
For families with a longer time horizon, a 529 plan is your best way to realize tax-free savings and compound interest. 529 plans were designed to be like 401Ks for college education, so parents should give them careful consideration. I would even suggest parents open a 529 while they are expecting, with either spouse named as temporary beneficiary before the child is born. Since the savings for any goal is easier the earlier you start, the extra nine months can make a big difference.
With forethought, conversation and a little creativity, parents and their college-aged children can have peace of mind about graduating college with a good education and manageable or no student loan debt.
Q: I have kids (ages 4 and 6) and will likely be in a situation where I am caring for my mother (age 62) who is declining in health. I knew this was coming, but didn’t realize that what an incredible cost burden it would be, not to mention added stress. What are my options?
A: We studied this phenomenon at Merrill Lynch and found that 91 percent of people are seriously unprepared to take care of their kids and their aging parents. People who fall into this category are called the “sandwich generation.”
To be sure, this is a difficult place to be in. Caregivers feel the full weight of financial responsibility for their parents and children and often feel overwhelmed. But caregivers need to understand that they can’t do it all and that the responsibility cannot fall on one person or a couple.
The first, best and simplest place to start is to have a family conversation. Without it, the burden falls unevenly on one family member. Some lawyers and financial professionals have been trained to facilitate this conversation, so take advantage of people who can help.
One more important thing. Caregiver(s) may be tempted to borrow from their own retirement account to meet of present day financial needs. This is a mistake. Dipping into your retirement is like robbing Peter to pay Paul. In the end, when you compromise your own retirement, you run the risk of being a burden on your own kids down the road.