Education Savings

Matt: 00:00

Welcome to real financial planning broadcast on WKXL and available wherever you get your podcasts, I'm Matt Robison joined by Mike Morton, the host of financial planning for entrepreneurs and the owner of Morton Financial Advice. You're not just the owner, you're also well, you're not really a client, do you listen to yourself?

Mike: 00:20

Sometimes, isn't there something about the cobblers kids have no shoes, something like that. Right?

Matt: 00:24

It's like coals to Newcastle. Do your own kids have like awesome financial planning habits

Mike: 00:32

They have zero financial planning habits. Terrible.

Matt: 00:36

Listen, either way, people don't take this as bad news. Because like another one of these aphorisms is like, if both of your parents are psychiatrists, you're bound to be screwed up. I'm sorry, for all our listeners out there that fit that description. I'm sorry. And I think if you're a talented financial planner there's a good chance that you're gonna follow in your footsteps. But, let's just say you want to try, at least you want to try what we thought. Like, you're gonna give it a try. Alright, so look, what we thought we would do in this episode is talk about your kids saving for education, and what are the best general practices. And I think we'll do that in this episode, we'll talk about the broad topic of how to think about saving for education, and kind of like, what's the 30,000 foot on that, and this might be good for parents, grandparents, even who want to contribute. Look, if you're a young person, you even want to lend an ear to this, because some of this involves your active participation. And then we'll do another episode. And we'll get specifically into the savings vehicle that has been set up by the government for you to specifically save for education, the five to nine accounts. And you can listen to this as a two parter. But hopefully, when we're done with this, you will have the full toolkit, and you will do better than Mike Morton's children, in terms of saving for education.

Mike: 02:06

This is probably less for the young kids and more for the parents, I'm thinking they might throw a few hundred bucks in there, I don’t know, but, student loans kids.

Matt: 02:20

It's time you learn some hard truths about life. For everyone who does not want to turn this entirely over to student loans, who has any chance of making this not an entirely, you know, you're in debt to the federal government for the rest of your life type situation. Just kind of at a high level. Look, you and I are both parents, we're in the mode right now, of this very much being undermined. So when you talk to your clients, and they're in this situation to how do you start talking to parents about saving for their future education costs for their children?

Mike: 02:56

So it comes that comes in the context of saving for all your future spending, right? So how do you think as a parent about saving for your education is always competing against saving for retirement and your other goals. So it's definitely in that context, and it's hard to tease it out. Because I save for more in my retirement account, than I save more from my education. I say retirement always comes first more of a priority because no one's going to loan you money for your retirement, but they will loan you or your student money for going to school. And so we always, you know, work on that goal first and make sure that that's getting really well funded. Now, the thing about that is it's really hard to tease out because there's all trade offs. Well, I could work till 60, or 65, or 70. Well, that makes a massive difference, you know, five more years of income. So should you work five years longer and save for education or five years less, get into retirement and save a little less for education. So that becomes very kind of personal at that point. But we always start with a retirement, the things you need for especially living now. And in the future. You know, we've got goals, and so put it in that context, saving for education is part of it, and then how important that is for you the value that you place on those education goals or paying for those education goals.

Matt: 04:27

Now, I imagine there are so many variables that go into everyone's individual situation, what your personal financial picture is already and what your job is, how much you make, what's your cost of living, all those things. But I imagine it's also super important, like how many kids do you have and how old are they?

Mike: 04:47

Yeah, it definitely is. And that's just the context like if you have a child who's just born, well we were just talking about compounding and getting started as soon as possible. In fact, you can do this for unborn children as well. Start saving for them, and getting that compounding going. So that will definitely give you more of a head time on that, you know, if they're going to school, you know, here we are almost in the month of August, if they're going to school now, then you might be a little bit behind on saving for them. So there's definitely the context of where to save and how much to save. But I also want to throw out this context, because we don't have to make it super complicated for everyone, either. Here's another way of thinking about it, if you don't have enough to save anything, for college, you're just saving as much as you can for retirement and living now, then this question doesn't matter, you don't really have any extra to save. If you have so much, you can pre save all of it and that's important to you, then go ahead and do that. And this question again, becomes pretty straightforward, like, oh, great, I will just save all of it and be ready to pay for all of it and no problem. Most people find themselves in the middle, I probably can't save everything, I only have a certain amount I could save. So just save that amount. You know, put it in there and save it and your future self will be happy for whatever you saved, you're going to feel good now, because you are saving towards something that is important to you, and you're doing as much as you can. So that's great. ~Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meetmikemorton.com. All one word, meetmikemorton.com.~

Matt: 06:38

Now, all that being said, from a high level, I think any parent out there will identify with kind of my next thought, which is, I still want to know what ballpark we're talking about here. Right? You just kind of want to know what you're getting into. So I'm a spreadsheet kind of guy I did this for our kids a few years ago, I sat down and I did a little bit of the math, it's actually not that hard. It's very easy to get wrong. But it's you know, you're not going to be like if you do a little googling, you're probably not going to be insanely wrong, you'll get the ballpark. And boy, was it depressing. So I guess mine…

Mike: 07:23

How was that evening for you guys. After you had worked.

Matt: 07:27

I just set a number out there. I mean, you know, look, I was being a little tongue in cheek about how easy is to get wrong to specify a little bit more. The problem here is that education inflation has been high, the cost of education, especially Higher Ed has been going up at a faster rate, even then recent inflation for everything else that we've all been living through the the rate of inflation of the cost of higher ed has been sustained and high. And so you got to make some assumptions. And one of them is that rate of cost increase is going to continue into the future. So what I ended up doing was doing a conservative estimate, meaning I'm estimating on the high side, like, you know, what's kind of a bad scenario just so I'm prepared. So the answer to your question is, I kind of, I swung a heavy bad at it. And I was hopefully at least preparing us for the worst. But boy, it was bad. It was bad. So here's my question into a question. Is this an exercise that you do with your clients that you recommend that people do if they're that in between zone where it's like, you're not in the category of you have nothing to save and you're not in the category of like, you're so rich that this is like yeah, it's easy, it's a layup for you. If you're in between and you're trying to just kind of know where you are on the ‘how goes it curve; is this an important part of the exercise?

Mike: 08:55

I like to do it because like you found it just gives, it doesn't give you comfort what was the word I was thinking of it doesn't really give you comfort, but it does give you a sense of knowing you know, having more information and feeling good about the planning process which is always what I want to do with my clients like some of the numbers can be scary whether you have enough for retirement or not. Whether you're ahead or behind on saving for certain goals maybe a down payment for a home or the education thing you know, are you saving some now in for future expenses? It can always be a little scary but I find that you know you go through the exercises you did Matt you get some numbers in front of you and then it starts feeling better even if it's still scary it starts feeling better knowing where you are you know, knowing is half the battle.

Matt: 09:45

Maybe even a little bit more, GI Joe used to say knowing is half the battle and by the way, winning half the battle means that you lose the battle which is terrible. I will say that what I found it helpful is analysis. What it told me is worst case scenario like, my kids are high achievers and they go to the most expensive colleges that continue to have their costs increase at the current sky rate, you know, what that can look like. And then what am I able to save? What is that gap? And what it began to do for me as scary as the big numbers were, is it's kind of like the old aphorism, how do you eat an elephant? One bite at a time? And so it let me know, okay, I can break this problem down into, here's how bad it would look in the worst case scenario. Here's what it would look like, if I were able to save just a little bit more. And then okay, how do I do that? And so when I started to break it down, I started to think to myself, well, it's a huge difference for my kids, if they have to take out a loan of x versus a loan of y, which is way, way more than x. That's like, Okay, this is manageable. And so anyway, I actually did find it to be a useful exercise for me but that's just me.

Mike: 11:10

I think what I found is exactly that experience. So I've had during that analysis, all kinds of results, right from people who have only saved 10% of college up to over 100%, but most are in the middle, you know, and I think it does provide a lot of comfort, we make changes for some of my clients like, oh, I'll save a little bit more, but a lot of them just find comfort in okay, we know we're gonna have saved 40% of potential future college costs. Okay, that's pretty cool, that's great. It's 40% that we're gonna have that's awesome, or whatever it is. So I do think it's worth an exercise a couple other points that you said, the inflation of higher education has been out of hand, it’s been about 6% a year for about 20 years, which really compounds, there's some idea that's coming down so it may not be as bad in the future. Another reason that inflation has been high for so many years, is because of how few people pay the sticker price. There's been an arms race amongst colleges to have you know, higher perceived value, i.e. the cost of our college. But they give so many discounts, more and more discounts. And this was a model I believe some some colleges in Ohio or somewhere started about 20 or 30 years ago, oh, we're gonna compete with these other schools and has this like perceived value, here's how much it costs, but give massive discounts to a lot of students. And then it became this arms race. And there's some really good books and information about this, that have come out recently that I found pretty insightful.

Matt: 12:42

Well, I guess that is kind of like finger crossing exercise that maybe it won't be as bad. But you know, look, I think that the upshot to me just thinking about this from a high level, and we're here for your advice, not for my musings. But I think getting started, I hope people find this reassuring that there's a big difference what you just said a moment ago, maybe you can save 40%? Well, there's a reason that if you're playing football, you'd rather it be third and five than third and eighteen, because your chances of making it are a lot higher. And there's a big difference between saving 40% and saving nothing. And it that plays out in the burden that your kids are going to face, and also the options that they're going to have in terms of the places they're able to go. And again, hope is not a strategy. But it's possible that your worst case scenario is not going to pan out. And so all of these reasons, I think there's real value to the exercise and kind of like a good news version of all of this. I don't want to get too too bogged down in mechanics, if you're interested in its specifics of okay, I want to do a five to nine. How do I set that up? What do I do? What do I think about? This is the show for you next time, we'll get into that in the next episode. So subscribe to this podcast. If you're listening to right now you'll get it. But just real high level, could you just walk us through maybe what are the kinds of accounts that you can use? And what are the considerations here in in setting up and putting money into accounts?

Mike: 14:19

Yeah, there's definitely some different types of accounts that you can use for saving for future spending on education, specifically, the Roth IRA, I will mention first because it's very overlooked for this. So if you have that, you really can't save a whole lot. And you also were looking at saving for retirement having that competing goal, a Roth IRA should definitely be at the top of the list for funding account funding priorities. You can look at the feed we had a whole episode on that. But the Roth IRA shows up here because you can use it you can pull the money back out from your Roth IRA if you have to and use it for education costs. So that one, I'll highlight right away of course the 529, and you just mentioned, we're gonna have a whole episode on 529’s, they're fantastic. There's other ones that have been used in the past with the 529’s really trumping them. Now, there's the ESA accounts and there's also savings bonds, these tools that might have been used couple decades ago, but the 529’s have really kind of outweighed them recently. And then you can just save in a checking or brokerage account, of course, because it gives you a lot more flexibility to how you use that money potentially, than education specifically. So a couple of ones to look at Roth IRAs, 529’s, brokerage accounts.

Matt: 15:34

Well, that of course, for all of our Jewish listeners out there, you will recognize from your Bar or Bat Mitzvah, the fact that your grandma probably gave you a $50 savings bond for your future education expenses, and it sat in a drawer for seven years, or 10 years, or whatever the term was, and then you found it at one point, you're like, hey, this is something.

Mike: 15:55

It's worth 51 dollars now.

Matt: 15:57

Maybe you framed it anyway, we don't do things like that anymore. I'm just saying that because that used to be invoked, that's what you got for your Bar Mitzvah. And I don't know, although I will say, I got about 1000 bucks worth of those, and I cashed them in, and I used them, Swarthmore College got that value. So thank you to everyone who came to my bar mitzvah. Couple other just ins and outs here. Again, this is all just high level stuff. So you're going to set up, we'll get into more of this, you know, with 529’s, but you're gonna set up one of these accounts, a Roth IRA,529, et cetera. Are you setting up one account? Are you setting up multiple accounts? If you've got more than one child?

Mike: 16:39

Yeah, it really depends on which direction you're going. Okay? So like the 529’s would be multiple accounts for those because you only have one beneficiary. So you got multiple kids, you want to have multiple 529’s, but checking a brokerage account that you can just lump all the money in your Roth IRA, you can only have one, or you can have more than one, but their contribution limits. So you only have one Roth IRA. So it really depends on which type of account that you would use.

Matt: 17:05

And one final question, it comes up all the time, people say, Well, wait a second, given what you described before, the situation where colleges are kind of monkeying around with exactly how much you're able to pay and make you pay that exact amount. So it's like you're facing 100% tax on anything you save. Why bother? Like, you know, why not just hold back and get a ton of financial aid or whatever? I mean, any thoughts on that? In general? Like, is it stupid to save anything?

Mike: 17:35

No, the other way around is a terrible idea to just blow all your money, because you think you're gonna get to spend it on college anyway. The reason why is your savings are counted at 5%-6%, the contributions I mean, it's not that much, of course, you know, it's counted. Yeah, it's a thing, the FAFSA and all of that the family contributions, all of that is definitely done. But do not go out of your way, don't screw yourself and not pre-saving. So definitely save as much as you can. There might be ways of saving it in the right places, you know, for the FAFSA, but really, those guys do a pretty good job of finding everything. So there's not a lot of tips and tricks.

Matt: 18:13

When you put that out, you're not going to escape the rebirth. But that's really interesting in that, you know, 5-6% thing. So bottom line is, yes, save this is worthwhile. Yes, figure out where you're at. And if you want to dive into the 529 things specifically, stay tuned for our next episode. Mike Morton, thanks so much.

Mike: 18:34

Yeah. Thanks, man. It's awesome. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or a question, please email me at financial planning . Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed as of the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.