Monthly Archive for September, 2009

Saving For College Not Adding Up Financially

Published by JS Wolff on September 28, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

Several significant trends are signaling a reset of how families plan and think about college costs. The evidence suggests that creative solutions will be required as key economic factors are conspiring to make a college degree financially more elusive.

Let’s look at the new realities of saving for higher education:

  • Trend # 1 – College costs are spiking due to reduced funding
    College costs have traditionally escalated 5%-6% per year already doubling the normal rate of inflation.  But now in many States, budget shortfalls have taken fees increases to a new level.

    California is a particularly dramatic example.  University of California Regents will soon vote on a 32% fee increase which is in addition to last year’s nearly 10% fee hike. This story is being repeated in varying degrees throughout the country. 

  • Trend #2 – Growth expectations of college savings accounts have been unrealized
    According to the Boston consulting firm Financial Research, the value of 529 college-savings accounts sank 21% last year.  For many families whose son or daughter was on the verge of starting school, this loss could easily represent a year or more of college funding.

    While the investment world may suggest that 2009’s year to date market recovery supports remaining in the market, many burned college savers are reluctant. A look at market history suggests that their hesitancy may be well founded. In the last 100 years there have never been two significant downturns as close together as the 2000-2003 tech bubble and 2008’s global meltdown. Especially for those families whose kids are already in their teens, the prospect of another near term sell-off is a chance not worth taking.

  • Trend # 3 – Parents are saving less for college
    Even before the downturn parents were struggling to save for college. A 2007 study by Sallie Mae, the country’s largest source of funds for higher education, found that parents of high school children applying for college had saved less than half of what they needed to cover the expected expenses. What’s more, one in five hadn’t saved anything at all.

    In May of this year, in another survey released by Sallie Mae, 47% of parents reported saving less or aren’t saving at all for their kids’ education due to the current economic crisis.

    While the points listed above may feel like the obstacles are growing insurmountable, there are ways to be proactive in this tough environment. And remember, while there are varying opinions of how much a college degree is worth over a career, there is little debate that it remains a solid investment.

So while a college degree may be more difficult to pay for in the future, here are some strategies to pull it off:

  • Make college planning a family affair – get grandparents and other willing extended family members in the game.  Anyone can make a contribution to a 529 Plan and rather than giving something that will end up at next year’s garage sale, have them contribute to the college account.
  • Use Conservative Asset Growth Projections and Allocations – Obviously stock market exposure is more tolerable the longer you have before your student reaches college. That being said, it may be more realistic and comfortable in today’s world to position college assets for a 6% or 7% long term return as opposed to a 9% or 10% return.
  • Manage Expectations – Young people are very resourceful if they need to be. Let your kids know in their junior high years that getting through college will be a team effort and everyone will be required to pitch in, including them. My son’s college roommate knew well in advance that his parents could only afford a total of $10,000 for college costs. By holding down a couple of jobs he graduated with an engineering degree with minimal outstanding loans and somehow seemed to have a smile on his face in the process.
  • Consider a Low Cost General Ed Track – Employers typically don’t care where a candidate started their degree, but rather where it was finished. By taking transferable community college courses before moving to the graduation school of choice, overall education costs can be significantly reduced. Among other benefits, this allows both you and your student two more years to save.

Rethinking the 401(k) Pitch

Published by JS Wolff on September 14, 2009 in Benefits, Economy, Financial Wellness and Investment. 0 Comments Tags: , , , .

For nearly 30 years, employees have been coached that the best way to save for retirement is to take advantage of tax deferred investing, most prominently through their 401(k) plans. This strategy has always been anchored in the hope that lower tax brackets await us during our retirement years. But current economic realities are causing many in the financial community to question whether tax deferred saving remains a healthy long term strategy for employees.

When 401(k) plans were first rolled out in 1981, the income tax rates and bracket structure were very different than today.    The top federal tax rate was nearly 70% and there were 15 different income tax brackets separated by just a few thousand dollars of income (See Tax History).  Given those conditions 401(k) contributions presented a great opportunity to both avoid high current rates and reduce W-2 income in the contribution year just enough to move into a lower bracket.  So it seemed like a double win, lower taxes in the contribution year and in the future, when the Plan was accessed during retirement.

Since 1981 the sustained effects of “Reaganomics” led to a steady decline of both tax rates (highest federal bracket from 70% to 35%) and the number of brackets (from 15 to 6). During this period, with few exceptions, the US economy experienced robust economic growth.  401(k) Plans got even better as a result. To attract and retain employees, employers with healthy bottom lines began to offer generous matching incentives linked to 401(k) participation.

But the length and depth of the current recession is now changing the outlook for today’s 401(k) savers in two significant ways. First and most importantly, the government funded stimulus packages and propensity to grow overall government spending must be paid for at some point. This future “balance due” can only offset by higher taxes or a devaluing of the dollar (inflation).  The second effect of the current recession is that many companies have cut back or eliminated matching 401(k) contributions.

So the question for the employee now becomes, “if I no longer receive any company matching, and I may have to pay higher taxes on withdrawals in the future, is the 401(k) still the right way to save?”

Enter sound savings principles and the Roth 401(k) to the rescue.  Match or no match, automation and consistency are two key factors in any saving’s strategy.  401(k) plans are still great because the money is automatically deducted from every paycheck before it can get spent.  The recently introduced Roth 401(k) addresses the more daunting issue of higher taxes in the future by allowing after tax contributions now and tax free retirement withdrawals in retirement.

So rather focusing on the now suspect virtues of tax deferral, maybe it’s time to pitch the 401(k) as primarily a great way to save, period.  Wise portfolio allocations and a balanced approach between the Traditional 401(k) and the Roth 401(k) will address the constant winds of change that remain outside of the investor’s control.

The Health Wellness – Financial Wellness Connection

Published by JS Wolff on September 1, 2009 in Benefits, Financial Wellness and for Employers. 0 Comments Tags: , , .

It’s been well documented that effective corporate health wellness programs have produced positive results for employees and employers over the past twenty years. Probably the most studied, extensive and longest running program is Johnson and Johnson’s “Live for Life”(now called the “J&J Health Wellness Program”) which was rolled out in 1979. Incredibly, due to both financial incentives and a corporate culture that actively promotes healthy behavior, 90% of J&J’s US employees have participated. And considering this includes a pool of 45,000+ employees, the statistics derived from the study are significant.

Defining that a successful health and wellness program, “…must demonstrate that they can improve the risk profile of employees as a whole, and, in particular, those employees at highest risk.”, the study found that J&J’s program has done just that.  Additionally, as I’m sure they had hoped, helping their workforce become healthier also helped J&J’s bottom line. Overall it was calculated that their Health & Wellness program saved J&J $38 million from 1995 – 1999.

When they detailed where the savings was realized, which approximated $224 per employee per year, over $70 of that figure was due a reduction in mental health visits.  Certainly, a significant portion of these mental health visits were stress related. A Yale University Study cited on the National Institute of Occupational Safety and Health(NIOSH) website found that 29% of employees “feel quite a bit or extremely stressed at work”.

Apparently the J&J health wellness program did a good job addressing stress related issues. And they probably picked up a bonus here as well. While more difficult to measure, it’s not hard to imagine that someone who is less stressed is also likely to be a more productive employee.

But there’s good reason to believe that health wellness programs alone are not dealing with the primary root causes of stress. According to a 2007 survey by the American Psychological Association 73% of the respondents cited money as a significant source of stress in their lives. And a recent WebMD article cited an AP-AOL study which revealed that “debt-related stress was 14% higher in 2008 than in 2004. Those who report high levels of debt stress suffer from a range of stress-related illnesses including ulcers, migraines, back pain, anxiety, depression, and heart attacks.”

When law enforcement officials are trying to track down criminal activity, their first step is often to “locate the money trail”.  Similarly, I’ve found that for employees, their personal money trail is the source for all kinds of self defeating, stressful behaviors. While the term “work-life balance” implies a healthy lifestyle, gaining a “money-life balance” provides a vital dimension in the process toward personal wholeness and health.

The right Financial Wellness program can help your workers achieve this vital balance, while complementing and driving enhanced returns for your existing Health Wellness initiatives.

Here’s what to look for as you consider this critical addition:

- Its best to select a provider that is not associated with a financial provider even though it may be tempting to default to your 401(k) vendor. Trusted information is paramount here.  If someone has something to gain by selling more mutual funds, there is reason to suspect the objectivity of the education.

- You’ll want a program that reaches employees in multiple ways including leveraging current web trends. New “Web 2.0” formats are being introduced to deliver financial education in engaging formats that deliver lots of information in just a few minutes.  Blended with onsite workshops and personalized, education-only money coaching, employees can interact with the information however they feel most comfortable.

- And finally, to get buy-in from other key decision makers, look for a financial wellness program that provides the methodology, metrics and reporting tools to document year over year financial health improvement. While some measures may not be as direct as the Johnson and Johnson study, measuring a reduction in personal financial stress is doable.  In fact, there is a well researched assessment tool called the “Personal Financial Wellness Score” which measures personal financial stress and compares an individual’s results to national averages.