Is a College Degree Worth the Cost?

If you are paying college tuition, watching your bills increase faster than the rate of inflation, you might be asking yourself this question. Over the course of a working life, it’s been estimated that college grads earn from $900,000 to $1.6 million more than workers without a degree. Yet, according to the a study conducted by PayScale for Bloomberg Businessweek, the dollar value of a college degree may be a lot closer to $400,000 over 30 years -- and varies wildly from school to school.

Of course, there’s the unquantifiable and undisputable personal value of a college degree, but if we seek to determine the true economic value, rather than simply factor in the extra earnings, we need to consider the debt many students take on in college. I recently read a compelling article by Randy Proto, the President of the American Institute, in the online publication The Huffington Post. His thoughtful analysis supports those who argue that a college degree is still worth the cost, even in today’s uncertain job market.

• The median debt owed by a Bachelor's degree graduate is about $20,000, according to a College Board study -- less for a public university, more for private schools. Proto compares that to the average debt level people assume when they buy a new car: $25,396, according to Experian Automotive. I agree with his conclusion that a college degree -- with its lasting economic, social, and personal value -- is worth far more indebtedness than a car, which begins to depreciate the day you drive it off the lot.
• While post-secondary education adds significantly to lifetime earnings, the economic argument makes even more sense once you examine who's been losing their jobs in the current downturn. According to data produced by Economic Modeling Specialists, eight out the top 10 occupations that lost the most jobs from 2007 to 2009 were ones that didn't require a degree.
• Finally, as Proto points out, according to UNESCO, post-secondary enrollment worldwide has increased by 53 million people from 2000 to 2007. In an increasingly global job market, that's a lot of competition for jobs.

For those saving for college in tax-advantaged 529 plans, your homework is about to get easier. Starting this fall, Morningstar will offer published reports on the 50 largest 529 plans. The reports will include a Morningstar qualitative rating, analyst commentary, and data on some of the largest options within the plan.

The “Giving Pledge” to Ignite Philanthropy

A few weeks ago, more than three dozen billionaires signed up for The Giving Pledge, an effort by Bill and Melinda Gates and Warren Buffett to encourage wealthy people to give at least half of their fortunes to charity.

According to Patrick Rooney, executive director and professor of Philanthropic Studies at the Center on Philanthropy at Indiana University, the idea has both potential and challenges. He estimates that if everyone on the Forbes 400 fulfilled the pledge, $600 billion would go to charity. That's about double the total amount of Americans' current annual charitable giving, meaning that some careful planning will need to accompany the generosity.

With such a massive increase of dollars into charitable organizations, it’s incumbent on donors to work with their advisors and charities to structure gifts effectively in ways that can make the greatest difference. Some of the smallest nonprofits, for example, simply may not have the administrative capacity to manage large gifts.

However you intend to express your philanthropic interests, I suggest sharing your thinking -- and your charitable volunteer work -- with your children. You will find this can both enhance your family relationships and lay the foundation for a rich legacy of giving.

If you are looking for more inspiration, you may want to read: The Ultimate Gift by Jim Stovall, The Giving Family: Raising Our Children to Help Others by Susan Crites Price or The Financially Intelligent Parent: 8 Steps To Raising Successful, Generous, Responsible Children by Eileen and Jon Gallo.

What’s Different About a Fiduciary Advisor?

I recently read a post by Kate McBride regarding the differences between an advisor held to a fiduciary standard and a broker held to a suitability standard.  It was short, accurate and to the point.  Therefore, I credit her entirely for the comments below:

What’s so different about a fiduciary advisor as compared to an advisor who meets the minimum requirements of the suitability standard?

It’s the legal duties to the client.

The suitability standard is a business standard, similar to the standard of a salesman, where you know you have to look out for yourself.

The fiduciary standard requires an advisor, like your family doctor, to be loyal and always put the client’s best interests first. This best interest requirement has practical consequences for investors. The fiduciary (best interest) standard means advisors must:

• Use the judgment of a professional to only select and recommend products in the investors’ best interest
• Either avoid or disclose and manage conflicts of interest
• Describe, before beginning work, all compensation, incentives, commissions, and expenses
• Ensure expenses are fair and reasonable
• And, of course, do only what’s best for investors.

An advisor only required to meet the suitability standard is not required to do any of these things.

In Fund Selection, Is It Wise to Reach for the Stars?

How often have you seen headlines on personal finance magazines touting Five Star Mutual Funds? You may figure that list generated by Morningstar constitutes great shopping ground. In fact, many professional financial advisors begin their analysis by evaluating those five-star funds.

It is human nature to be comforted by the idea that the investments you are buying are highly rated. The problem is that when we buy a “Five-Star” fund, we blindly extrapolate that the star rating translates into superior future performance. In fact, nothing could be further from truth. The Burns Advisory Group’s recent research paper, Star Gazing: Five Star Funds Revisited, went back to 1999 to study the subsequent 10-year performance of Morningstar’s five-star funds. The results were enlightening.

Burns found that of the 248 funds rated Five-Star by Morningstar on December 31, 1999, only four were still receiving that rating a decade later. Of the original sample, 87 had ceased to exist. And of those still existing, all had been downgraded to an average of just under three stars. And if this was not bad enough, the average performance for the five-star funds over this 10-year period was worse than the average for all funds in all categories except international stocks.

So what should you consider in making an investment decision? Clearly, a Five Star rating is nothing more than a starting point. You need a more broad-based evaluation, focusing on factors within your control. You might ask:

• Are the risks being taken related to return?
• Are those risks targeted in a reliable, consistent way?
• How diversified is the fund?
• What are the costs of the fund, i.e., expense ratio and turnover?
• Does it make promises it can't keep?
• What is more important - individual judgment or clear processes?
• Are the underlying strategies driven by forecasts?
• Does the fund take account of costs and taxes in its decisions?
• Does the fund manager communicate in a clear and consistent way?

While many of these attributes can lead to good outcomes, they cannot guarantee positive returns every year. However, the above characteristics can give you comfort that your money is being invested in a consistent, transparent way that ensures that when the targeted premiums kick in, you are positioned to receive them.

The bottom line is that we believe you should construct portfolios not around short-lived Five Star ratings, but based on the time-tested, enduring principles of asset allocation, broad diversification, passive management, and low costs.

Reaching for the stars today could mean you find yourself clutching at straws in the future.

Controlling Risk Mandates a Long-term Care Insurance Review

A note from a client thanking me for providing a complimentary long-term care (LTC) insurance policy review prompted me to think how a LTC review would be useful for many others.

Although you may have always figured your nest egg could cover your healthcare costs in retirement, the recession and continued volatility may require a re-evaluation of that assumption. With growth prospects low, LTC insurance may be an attractive risk-reduction strategy. Ironically, however, as consumers’ need for LTC insurance has increased, the recessionary environment has prompted insurance companies to re-assess their own risk levels, making the coverage more difficult and expensive to obtain.

Long-term care refers to the help you receive for a chronic illness, disability, or cognitive impairment that leaves you unable to care for yourself for an extended period of time. These services can be provided in a nursing home, assisted-living facility, or in your own home. Typically not covered by your health insurance, LTC can be expensive. In fact, a recent study by Genworth found average costs to be $74,208 a year, or $203 a day. Of course, these rates vary by region of the country.

So, should you buy LTC insurance and, if so, when? Cost has long been the reason for putting off purchasing LTC insurance until a decade or two before retirement. However, in this financial environment, the reasons for acquiring LTC coverage earlier in your adult life are compelling. In the midst of market uncertainty, adding a LTC policy can provide inflation-adjusted, guaranteed income for your healthcare needs later in life.

If you’re interested in determining if it’s still reasonable for you to self-insure or whether your existing LTC policy still meets your needs, please contact me. The LTC market is in constant flux and our consultant, Allen Hamm, is well-versed in everything from the newest riders to the financial stability of the insurance companies. In addition to ensuring you understand the coverage you are buying, Allen is also available to act as your advocate to protect your rights as a policyholder should you ever have a claim.

Looking for a Summer Time Read?

We’ve all asked ourselves questions like “Why do smart people make foolish choices?” In Sway: The Irresistible Pull of Irrational Behavior (Doubleday, June 2010) the authors, Ori Brafman and Rom Brafman, examine the reasons for our irrational behavior and suggest how we can make more rational choices.

According to Brafman, the most surprising element of researching Sway was finding out that most job interviews are terrible predictors of actual performance. They found that interviewers often form a quick opinion of a candidate and then ignore any evidence that contradicts their initial impression. I don’t know about you, but I have been there and done that.

“Because we’re so likely to misdiagnose, a much better alternative to the normal job interview is to prepare pre-scripted questions that focus on a candidate’s actual experience,” says Brafman. “Questions like ‘Where do you see yourself five years from now?’ and ‘What are your greatest strengths and weaknesses?’ aren’t very useful. Instead, focus on specifics. If you are hiring a web designer, does her portfolio match the style you are looking for? Is she up to date with her knowledge of web standards? What are her Dreamweaver skills? It is assessing those on-the-job skills that helps hiring managers stay on focus and not make irrational decisions based on initial gut reactions.”

Try that the next time you are conducting a job interview. If you are interested in learning more, check out this weblink for an interesting Question and Answer interview with Ori Brafman.

Where There's a Will, There's a Way

When the actor Gary Coleman died on May 28th at the age of 42 after suffering a brain hemorrhage, he left three different wills--including one that was handwritten. Legally, the last will written is the binding document. However, battle lines have been drawn, and it is likely his family and friends are in for a long court fight.

Coleman’s situation underscores the fact that without a well-executed and clearly written will, everything you worked for can go up in smoke. I would add that often overlooked in the estate planning process is the fact that proceeds from life insurance, investments in Individual Retirement Accounts (IRAs), annuities, and qualified retirement plans (such as 401(k)s, 403(b)s, and SEPs), as well as trust property pass outside your will directly to your named beneficiaries.

In fact, the beneficiaries you name for your IRAs and 401(k)s take priority over instructions in your will. That is, a beneficiary you forget naming for your retirement account twenty years ago will inherit those assets even if you later specify in your will that someone else will inherit everything you own. Accordingly, it’s crucial that you review your beneficiary forms on a regular basis.

Other documents that help ensure your wishes are carried out include a Durable Power of Attorney, a document that designates a person to act on your behalf during times of incapacitation, and an Advance Medical Directive, a document that lists your health care treatment preferences and designates a person or persons to make those decisions on your behalf.

Once you have developed and signed these documents, instruct your executor and family members where to find them.  And if you are uncertain about your documents, consult your attorney to discuss your need for a will, living trust, durable power of attorney and/or advance medical directive.

How Do You Solve a Problem Like Jobs?

The question posed in the title of this blog has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.

Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that’s where Steve Jobs comes in.

Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting within our borders.

According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000 full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S., there are 10 Foxconn employees building Apple products in China. Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?

Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S., particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others argue for protectionist measures to rebuild our domestic manufacturing base.

Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.

The Grim Reaper at Work without the Tax Man

The recent death of two billionaires has thrust back into the spotlight the fact that Congress let the federal estate tax expire .

You may recall that 2010 began with personal finance pages running headlines like “On Your Mark, Get Set, Die!” Because Congress failed to pass a new estate tax law before the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 2010 began without a federal estate tax. (Currently, if there’s no Congressional intervention, the estate tax will be re-instituted in 2011 at levels that applied prior to 2001--a $1 million exemption and a top tax rate of 55%. In 2009, the exemption was $3.5 million and the top rate was just 45%.

But let’s return to the families of the billionaires. In March, Texas billionaire Dan Duncan passed away with a fortune estimated by Forbes magazine to be worth $9 billion. Forbes estimates that had he survived until 2011, his estate would have been subject to approximately $4.95 billion in federal estate taxes. Also, last week when sports-business legend George Steinbrenner died of a heart attack, leaving behind a fortune estimated by Forbes worth $1.15 billion, his estate escaped paying an estimated $632 million in federal estate taxes--unless Congress makes whatever tax they settle on retroactive.

How did this happen in a nation where Ben Franklin famously quipped there are two guarantees--death and taxes? The fact Congress has failed to address the estate tax issue is a major breach of fiduciary duty as far as I am concerned. Their inaction has already cost the US government billions in taxes. Furthermore, it places families in the uncomfortable position of having to decide whether to unplug Mom or Dad to save millions in taxes.

Pay It Now, Or They Pay Later

Legislators in Congress are reportedly considering creating a kind of Roth IRA version of the estate tax. “On The Money,” a blog of the congressional newspaper The Hill, recently reported that lawmakers are debating whether to let taxpayers opt to pay estate taxes in advance so their heirs owe nothing. One version being bandied about would set the pre-paid tax at 35 percent on estates valued at more than $3.5 million.

The pressure is on to address the federal estate tax before the end of the year, when the rate jumps to 55 percent on estates worth more than $1 million. (Last year, estates were taxed at a rate of 45 percent on values greater than $3.5 million, a record exclusion.)

If you die this year, of course, you pay nothing—thanks to the repeal of the estate tax for 2010 that was part of a vast array of sunset provisions in the Economic Growth, Tax Relief and Reconciliation Act of 2001. Of course, Congress could still pass a retroactive estate tax for 2010.