How to Pick Between 3 Types of Life Insurance

 For most couples, having life insurance during the wealth-accumulating years can make a lot of sense. Also, some people may consider having a policy even in retirement, if their goal is to leave a financial legacy.  Life Insurance has a lot of potential benefits to consider such as:

• Replacement for the loss of income of a spouse
• Paying off liabilities such as a mortgage, auto loans, or credit cards
• Covering education costs for children
• Providing a lump sum for the surviving spouse to utilize in retirement
• Leaving a legacy to family or charitable organizations

When it comes to life insurance, it’s not simply deciding if you want it. It’s also deciding which kind. Here are three main types of life insurance:

Level Term Insurance

 This is the easiest type of insurance to understand because it is similar to other types of insurance you have (auto, home, disability etc.).  With Level Term Insurance you pay a premium each year and, if you die, the insurance carrier will pay a death benefit to your beneficiaries.  Typical term periods are 10, 20, or 30 years.  While you are in the level term period, your premium will remain the same.  Once your policy is outside of the level term period, the premium will begin to increase; oftentimes it will increase substantially. A few reasons where this type of insurance is appropriate:

1.  Replacing income in the event of an untimely/unexpected death
2.  Paying off liabilities
3.  Funding education goals

Universal Life Insurance

This is sometimes referred to as “permanent term insurance”.  This product is usually underwritten to make sure a death benefit remains in place until age 90, 95, or 100.  Sometimes there is a cash value in the earlier years of the policy, but this is usually eaten up by internal costs and expenses as the policy reaches maturity.  This product is often used when someone wants to leave a financial legacy to their kids, church, or charity. Also, it can be used to ensure alimony or other similar court settlement agreements are paid, even in the event of an unexpected death.

Whole Life Insurance

This type of insurance is conservatively underwritten, and because of this, it is often the most expensive type of insurance.  It does have a cash component that takes several years to begin accruing.  A lot of the products I have seen take approximately 10 years to break even from what you have paid in premiums compared to what’s available in cash value.  This is another type of permanent insurance that is frequently used in legacy planning.  When Estate Taxes were an issue for many Americans (back when the exclusion amount was $3.5 Million or less) these policies were purchased to provide liquidity to pay Uncle Sam at death.

What is the right type of insurance for you? 

We typically recommend Level Term Insurance for clients when the primary goal is income replacement during the wealth-accumulation years. It’s the most affordable, and usually isn’t a significant burden on cash flow.  However, if your goal is to leave a financial legacy, and you can afford it, then Universal Life or even a Whole Life policy might make sense.

The best strategy, when making these decisions, is to work with a qualified financial professional that understands all the moving parts of your personal situation and is making a recommendation that is in your best interest.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning Inc. and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and type and amount of insurance purchased. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. C14-019165

The Investment Pulse: What we've heard in the Second Quarter

We’re always very busy with research, but this quarter has been full of broad and diverse perspectives.  In addition to off-site conference attendance, we have also met locally with many experts.

Vanguard: Active and Passive management discussion

Melissa Joy met with Joseph Brennan and Lee Norton from Vanguard Group in May at our offices. Mr. Brennan runs the Index Equity department. He is responsible for managing index portfolios with the firm. Mr. Norton monitors and reviews management teams on both active and passive strategies at Vanguard. Highlights from the conversation included: 

• With more than $1.5 trillion in index investments, they are one of a very small group of dominant players in the index investing world. We discussed what indexes they decide to make available for investment and how the portfolio review team monitors their internal index teams.
• Vanguard was featured in Michael Lewis’ recent book, Flash Boys. Having read the book, Melissa was curious about their take since they were prominently mentioned. They both acknowledged the real problems uncovered by IEX (a fast growing alternative trading system that avoids dark pools and high frequency trading) which was featured in the book.  They also believed that the desire for an entertaining and appealing financial book may have resulted in some additional hype that might not be warranted.
• We talked about Vanguard’s process for identifying active managers for their funds. Not surprisingly, cost was an important factor in hiring managers. Other factors that were favored included enduring teams, teams from employee-owned firms, and teams with ability to hand off succession from one generation to the next.

JP Morgan: A fixed income discussion

Priscilla Hancock from JP Morgan Asset Management sat down for a conversation about bonds, especially municipal bonds with Melissa Joy and Angela Palacios. We’ve known Priscilla for a while and have heard her speak in 2012. We’ve caught up with her three times since then. She has a great conversational way to talk about bonds and how they typically behave in rising rate environments. With many of the investors we like to speak with, it’s not always the first conversation that brings us the most value – getting to know each other over time provides robust information and is a critical part of our research and monitoring process.  Priscilla shared these perspectives:

• The aging US population is helping to keep bond yields lower. As boomers retire and age, they want more bonds, keeping demand high. Likewise, pensions are working to lock in stock market gains and are snapping up bonds any time rates creep up. It’s an interesting dynamic working against rising rates even though it doesn’t completely compensate for the push to higher rates that will probably occur at some point.
• Municipal bonds were last year’s trash with rising rates and headlines about Puerto Rico and Detroit taking the wind out of the municipal market. We discussed the situation in Detroit and why shifting rules on bankruptcy alarm municipal bond investors. That said attractive tax equivalent yields have increased interest in the municipal bond market and rewarded municipal investors this year.
• Proceed with caution when using passive indexes for bond exposure.  Issuers you want to avoid are the ones issuing the most debt.

Columbia: “Lose less in down markets”

This is not the first time that Scott Davis, Director at Columbia Dividend Income has checked in with us and we find that with time we are able to have more nuanced conversations with the portfolio managers. He noted that although stock prices have been headed north, he’s always reticent. In his words, “I don’t want to party like it is 1999 because it was a hell of a hangover.” He then elaborated saying the time-tested secret of investing is to lose less in down markets. Of concern is increasing merger and acquisition activity. On the more optimistic side of things, Scott says that companies are being run in a manner that’s better than he has seen in his almost 30 year career investing at Columbia. As a dividend-focused investor, Scott reminded us that buying dividends alone without understanding the source of dividends can be a dangerous proposition. He compared it to “picking up nickels in front of a steamroller.”

Water Island Capital: Event-Driven Strategy

Angela sat down with Ted Chen, Portfolio Manager of Water Island Capital’sArbitrage Event Driven Strategy, to discuss equity special situations.  Opportunity can abound here because most money managers don’t understand how to evaluate these situations.  The companies take on a negative stigma creating a potential buying opportunity for someone who specializes in understanding special situations.  We also discussed the volatility in the stock market and how it has become so minimal that the cost of hedging a portfolio is very low right now.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

401(k) After-tax Accounts: Preparing your checklist

 In my last blog, I answered four common questions about an after-tax 401(k). If you’ve decided that this savings options might be right for you, your next step is to sit down with your financial advisor.

Getting ready: A checklist for the meeting

Your financial advisor can help you review your plan documentation to establish whether you have an after-tax contribution option; and, if so, whether it would make sense for you to set aside some of your pay on an after-tax basis. Before you meet with your financial advisor, you may want to gather some important information and documents:

• The most recent statement from your 401(k) plan
• Any plan documentation you may have, such as an SPD (your human resource department can provide a copy or you may be able to access it online)
• The telephone numbers of your current and former employer’s benefits administrators so you and your financial advisor can confirm information
• Any retirement income planning documents you may have accumulated
• The contact information for your tax advisor should you have any tax-related questions

First, review your plan documentation with your financial advisor to establish whether you have an after-tax contribution option. Then determine with your tax advisor whether you should make after-tax contributions to your 401(k) plan and/or proceed with a conversion. Be sure to discuss any potential tax and penalty implications, as well as expenses and sales charges that may result from your decisions.

Rolling after-tax savings into a Roth IRA

Explore whether a conversion of all or a portion of your after-tax account to a Roth IRA or designated Roth account would be a strategy that advances your retirement savings and income planning goals.

If you decide to make after-tax contributions and/or execute a conversion of all or a portion of your after-tax account, work with your financial advisor to execute the proper documentation and authorizations. And, as always, we’re here to answer any questions that may crop up as you consider making contributions to an after-tax 401(k) plan.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Converting a traditional 401(k) into a Roth IRA has tax implications. An investor should carefully consider the source of funds used to pay the taxes owed on a Roth conversion. Penalties and taxes may apply if the investor uses money from the 401(k) as the source for conversion taxes. Consult a tax professional for details. C14-016529

Team Members Mark Milestones

 Founded in 1985, The Center is celebrating our 29th year! Our success and longevity would not be possible without the support from our team members.

It is with warm appreciation that we acknowledge all of our team members’ Centerversaries! Congratulations to those who joined our team in July! In the words of Matt Trujillo, “Time flies when you’re having fun!”

Client Service Manager Jennie Bauder is the veteran of our July hires, marking 11 years with the team. Gerri Harmer, a Client Service Associate celebrates 7 years with us  “Wow – lucky seven!” Gerri says. “That’s exactly how I feel, lucky. Lucky to work with a great team with great values.”

We’re also honoring a trio of relative newbies. Nick Defenthaler, Kali Hassinger and Matt Trujillo all joined The Center last July. Nick and Matt are both Associate Financial Planners and Kali works as a Client Service Associate. After a year with us, Kali says, “I’ve learned so much in 12 months, and I’m excited to see what the next 12 months will hold!  Thank you to The Center team and family for being so welcoming.”

401(k) After-tax Accounts: The forgotten contribution feature

 Roughly half of 401(k) plans today allow participants to make after-tax contributions. These accounts can be a vehicle for both setting aside more assets that have the ability to grow on a tax-deferred basis and as a way to accumulate assets that may be more tax-advantaged when distributed in retirement.

As you discuss after-tax contributions with your financial advisor, you might consider the idea of setting aside a portion of your salary over and above your pre-tax salary deferrals. By making after-tax contributions to your 401(k) plan now, you could build a source of assets for a potentially tax-efficient Roth conversion.

Here are some questions to consider:

Does your plan allow for after-tax contributions?

Not all plans do. If an after-tax contribution option is available, details of the option should be included in the summary plan description (SPD) for your plan. If you don’t have a copy of your plan’s SPD, ask your human resources department for a copy or find it on your company’s benefits website. You can also talk to your financial advisor about other ways to obtain plan information, such as by requesting a copy of the complete plan document.

What does “after-tax” mean?

After-tax means you instruct your employer to take a portion of your pay — without lowering your taxable wages for federal income tax purposes — and deposit the amount to a separate after-tax account within your 401(k) plan. The money then has the ability to grow tax-deferred. This process differs from your pre-tax option in which your employer takes a portion of your pay and reduces your reported federal taxable wages by the amount of your salary deferrals and deposits the funds to your pre-tax deferral account within the plan.

Are there restrictions?

Even if your plan has an after-tax contribution option, there are limits to the amount of your salary that you can set aside on an after-tax basis. Your after-tax contributions combined with your employee salary deferrals and employer contributions for the year, in total, cannot exceed $52,000 (or $57,500 if you are age 50 or over and making catch-up contributions). Your after-tax contributions could be further limited by the plan document and/or to meet certain nondiscrimination testing requirements.

How does a 401(k) after-tax account help me acquire Roth assets?

When you are eligible to withdraw your 401(k) after-tax account — which could even be while you are still employed — you can roll over or “convert” it to a Roth IRA or a qualified Roth account in your plan, if available. A conversion requires you to include any pre-tax assets that you convert in your taxable income for the year. That means if you convert your after-tax account, only the earnings are included as ordinary income for the year. And if you have pre-1987 after-tax contributions, special rules allow you to convert just those contributions without including any of the associated earnings.

If your plan allows for after-tax contributions and you think they may be right for you, it’s time to talk to your financial planner. In my next blog, I’ll walk you through what you need to take to your meeting.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Converting z traditional 401(k) into a Roth IRA has tax implications. An investor should carefully consider the source of funds used to pay the taxes owed on a Roth conversion. Penalties and taxes may apply if the investor uses money from the 401(k) as the source for conversion taxes. Consult a tax professional for details. C14-016528

Elder Care Planning: Housing

 Who will change my light bulbs? How will I get an ice cream cone? Who will I have lunch with? These three questions have been the crux of intense research at the MIT AgeLab. Researchers there believe answers to those questions will provide invaluable insight when addressing issues of housing and quality of life for older adults.  The questions can also serve as great conversation starters to address the all-important question, “Where will I live as I age?” This question is often avoided until a crisis occurs.

I am finding the housing issue is coming up more and more often as I meet with older adult clients and their families.  For most, the decisions are less about the money (although the financial component is an important one) and more about the 4 “C’s”:  Comfort, Convenience, Companionship and Care.  Think about MIT AgeLab’s 3 questions with the 4 “C’s” in mind:

Who will change my light bulbs?

Consider who will do the day-to-day maintenance tasks and make sure that the living environment is safe and comfortable. If the older adult cannot do this on his or her own, bring in help to the home or move somewhere that provides these services.

How will I get an ice cream cone?

More than just ice cream, consider how the older adult will be able to access the big and small things that make them happy.  Answers to these questions may help determine where it might be feasible to live based on transportation challenges/needs, proximity and availability of shopping, worship and entertainment.

Who will I have lunch with?

Many older adults face a decline in the number of friends and relatives in their social network; socialization is vital to happy and healthy aging.  Consider availability and access to other people in the older adult’s social network when reviewing housing options.

The options for housing are many – age in place (may require home modifications), independent living retirement communities, assisted living, and Continuing Care Retirement Communities, and many other variations.  It’s important to fully consider the challenges, preferences and current and future needs when making the decision. And a team of advisors, including your financial planner, can help you consider the options.

In future posts, we will look more closely at each of the most common housing options in more detail.

This blog is part of an ongoing series that addresses Elder Care planning topics.  If you have a specific question or issues you’d like addressed, please contact me at Sandy.Adams@CenterFinPlan.com.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012-2014 Sandy has been named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-020079

Eldercare: Roadmap for Aging Parents encourages Team Approach

From financial strain to the emotional effects, there are many layers to the issues a family faces as a parent ages. At a recent Center-sponsored event, Eldercare: A Roadmap for Aging Parents, our expert on eldercare issues Sandra D. Adams, CFP® teamed up with Peter Lichtenberg, Director for Wayne State University’s Institute Of Gerontology program and Becky Eizen of Feinberg Consulting.

Eldercare Topics of Conflict

When it comes to the most common “topics of conflict” between aging parents and their caregiving adult children, Lichtenberg recommends developing new and more positive communication strategies. One such strategy includes:

1. Learning your older adult’s story

2. Expressing your views and feelings to them

3. Problem-solving together

When a parent and adult child take a team approach with open lines of communication, the important decisions that come with eldercare can be much easier to make.

Caregivers Finding Balance

Caregivers often get lost in the mix and finding time to take care of your own needs can be difficult. There are emotional, physical, and financial effects of being a caregiver and Becky Eizen says you need to know when it’s time to ask for help. That includes knowing how to ask for help, finding the right resources, considering your options, and putting together the right team. It’s important to look at short- and long-term needs and identify different housing options, such as living at home vs. assisted living facilities. Eizen says one question that can be overlooked is: Do you qualify for VA benefits?

Eldercare Resources for You

The Center has a list of resources that available from both speakers.  If you would like more information, call or email Gerri at Gerri.Harmer@Centerfinplan.com. We have a wealth of information on the subject and would love to share it with you. Contact Sandy if you want to know how we can help you build your eldercare team.

Any opinions are those of Sandy Adams and not necessarily those of RJFS or Raymond James. The opinions and services of Peter Lichtenberg, Becky Eizen, WSU Institute of Gerontology, and Feinberg Consulting are independent of Raymond James. C14-018035

Making the Most of your Empty Nest Years

 In a recent meeting, I asked a client how their year had been and they exclaimed:

“It’s like being in college, only with money!”

The words struck a chord. After raising two children, educating them, and seeing them move away (fully employed) my clients were busy starting their empty nest years.  As they explained, after years of doing the right things financially, they were ready and excited for the next chapter in their lives before retiring.  Fortunately, they are healthy, both physically and financially, and have begun weaving more leisure and travel into their schedules.  Their new lifestyle is a fine reward for years of delayed gratification in some areas and I couldn’t be happier for them. 

Planning for the Empty Nest

Here are some of the keys to living well during the empty nest years:

• Make time to plan – ideally over multiple years
• Spend less than you earn – this may be financial planning 101 but it takes commitment and discipline
• Save for college – it is not always necessary to save 100% of the costs, but going into the college tuition years with substantial savings (i.e. 529 plan) will allow you and your kids to avoid significant debt
• Save for your own retirement – systematically contribute to your 401k, 403b or other tax advantaged plan

My client’s story also gave me reason to pause and reflect, or plan, on what might be “next” for our family.  While I am used to dispensing advice for a living and helping others plan an ideal life, I am fortunate to have so many clients and meetings like the above to inspire me to continuously think about and plan for a life well lived.  While my wife Jen and I (we celebrated our 22^nd wedding anniversary this month) are not quite empty nesters, two of our three children will be full time college students living on their own for most of the year.

Wyman Nest Dwindles

Our oldest Matt will be in his third year at The University of Kansas.  Matt, a soccer player in high school, walked on to the football team and won the starting position last season.  His year was highlighted by kicking a game-winning 52-yard field goal as time expired.  Matt will return to KU in the fall for his second season after interning here at The Center this summer. 

http://www.youtube.com/watch?v=HyYWj5lsFmk

Our middle child, Jack, just graduated from Bloomfield Hills High School, the first ever class at the merged high school.  Jack finished a stellar baseball season as his team won their district and he was named team MVP, All League and All District as a pitcher and third baseman.  Jack is undecided on his college choice but has been accepted to Albion College and Belmont University in Nashville.

http://www.miprepzone.com/oakland/results.asp?ID=13633

Our youngest, Kacy, just finished 5^th grade and continues to be an inspiration as she manages a rare disease called Cystinosis.  A highlight of Kacy’s year was being to be Principal for the Day at Bloomfield Hills Middle School where extra lunch time and recess was the call of the day! Kacy also enjoys swimming year round with a little dance thrown in for variety.

Words of encouragement from our principal....

"Good morning BHMS! Please excuse this interruption. This is your Principal for the Day, Kacy Wyman. I just wanted to wish you a great day - have fun and work hard!"

Jen and I look forward to our empty nest years and living the “college life” like my clients described.  However, for now, we are mostly excited to be traveling to Kansas and other parts of the country for football and baseball as well as being with friends at Wing Lake beach or Kacy’s swim meets. 

From our family to yours, have a great summer and take pause to plan what’s “next” for you and yours :)

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-019071

Paying for College at Your Expense

We all want the best for our children.  In an ideal world, if we could pay for 100% of their college and allow them to graduate with no student debt, most parents would gladly do it. However, anytime you use cash flow to pay for college there is an opportunity cost.  “What else could I have done with that money if I had not used it to pay for my kid’s college?”  The simple answer is that you could be using that money now to put toward your retirement.  You can take loans for college, but you can’t take a loan for retirement.

Opportunity Cost of College Tuition

For some of you reading this, opportunity cost might seem like a foreign idea or an abstract concept that can’t be measured.  However, it is very real and although it can’t be measured to the exact penny, you can make some educated estimates about the potential growth of your savings.

For illustrative purposes, let’s take a look at a hypothetical scenario and measure the potential opportunity cost of paying for college.     

Scenario: John and Jane Smith (both age 35) have 1 son Joe Smith and intend to fully fund 4 years of undergraduate school for Joe.  Their son was born in December of 2013. John and Jane are both U of M graduates and, assuming Joe is as bright as mom and dad, they would like him to go there as well.   In any case they intend to pay for 4 years of U of M starting in 2031. The Smiths consider these costs:

• The cost of U of M for tuition, room, and board is approximately $20,000 in today’s dollars and is estimated to inflate at 6% annually over the next 18 years.

• So the Smith’s estimate the first year of college will cost $57,086, 2nd year $60,511, 3rd year $64,142, and 4th year $67,991. 

• The total estimated cost for 4 years of college is $249,730.

Adding Up the Opportunity Cost

Unfortunately, the cost doesn’t end there.  This is where the concept of opportunity costs comes in. You see, the Smiths didn’t have to set aside these funds for Joe. They could have put them in their retirement accounts instead.  To fully understand the true cost of utilizing those dollars to pay for education, you also have to measure what that money could have potentially grown to at John and Jane’s retirement age of 65.  When Joe starts college John and Jane would be 53.  That means the $249,730 they have set aside could have the opportunity to grow for another 12 years. Assuming a 6% rate of growth the hypothetical account would compound to $502,505.   John and Jane would have the opportunity to add an additional $250,000 to their retirement account.

Having said all of this I’m not advocating kicking the kids out at 18 and changing the locks.  However, I am advocating being informed about the ripple effects of the financial decisions we make.  For people under the age of 40 with no pensions (and social security looking like a shaky proposition) it is imperative that you be efficient with financial decisions.  One of the benefits of working with a professional planner is putting these decisions under a microscope and creating a plan to decide what you can truly afford to do while still maintaining your financial independence.  

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. All illustrations are hypothetical and are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and investors may incur a profit or a loss. C14-017739

Raymond James Bank Deposit Program simplifies FDIC coverage

If you’re not familiar with the Raymond James Bank Deposit program, a quick read here could save you a big hassle. The program is designed to help you take advantage of up to $2,500,000 of FDIC coverage without putting any extra work on your plate.

What is FDIC?

The FDIC (Federal Deposit Insurance Corporation) covers cash deposit accounts, dollar for dollar, including principal and accrued interest up to a limit in the event of a bank failure.  It is funded by the premiums paid into the corporation by banks on the deposits they hold.  Historically, in the event of a failure, funds are available to depositors within days after the closing of the bank.

How much does FDIC cover?

Until October 2008 coverage was limited to $100,000 per depositor.  During the financial crisis in the fall of 2008 the government stepped in and increased the insurance limit temporarily to $250,000 to prevent bank runs from occurring as the financial crisis and subsequent bank failures accelerated.  Later in 2010 the increase in the limit was made permanent. 

How do you calculate the coverage you have?

For example, let’s say Joe has $250,000 at a bank between his checking, savings, CDs and money market accounts maximizing his coverage there.  If Joe was married to Sally, and these accounts were titled jointly, then they could have a combined coverage of up to $500,000.  The coverage is per bank meaning if Joe and Sally had $500,000 at 10 different banks they would have $5,000,000 in FDIC coverage.  But, for Joe and Sally, or anyone, having money spread out between multiple banks could be very confusing and time consuming to keep track of everything.

Gone are the days of playing games to maximize your FDIC insurance coverage on bank deposits! 

Insuring more than $250,000 per depositor

One account at Raymond James through the Raymond James Bank Deposit Program (RJBDP) can provide up to $2,500,000 ($5,000,000 for joint accounts) of total FDIC coverage.  The work is done behind the scenes by Raymond James as available cash is deposited into interest-bearing deposit accounts at up to 12 banks automatically for our clients.

Another way to qualify for more coverage is by holding deposits in different ownership categories (account types).  Below is a table of the categories and limits.  The RJBDP can then increase these limits according to the above numbers as well.

Source: Raymond James

As with all insurance, you hope you never need to use it.  Cash can play an important role in an overall financial plan and knowing it is protected can lend confidence.  When it comes to FDIC insurance coverage you likely have much more than you realize!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Laws, coverage, and program rules are subject to change. Hypothetical example is for informational purposes only, and does not represent and account or investor experience.

Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a federally chartered savings bank. Unless otherwise specified, products purchased from or held at Raymond James & Associates or Raymond James Financial Services are not insured by the FDIC, are not deposits or other obligations of Raymond James Bank, are not guaranteed by Raymond James Bank and are subject to investment risks, including possible loss of the principal invested. The FDIC insurance limit per depositor is $250,000. Coverage applies to total holdings per bank per depositor. Visit fdic.gov for more information.