[et_pb_section admin_label=”section”]
[et_pb_row admin_label=”row”]
[et_pb_column type=”4_4″]
[et_pb_text admin_label=”Text”]
At Lighthouse Financial Advisors, we strive to educate our clients that the location of their assets is often just as important as the funds they invest in – this rule is no exception when it comes to utilizing 529 plans. While most investment companies have faced an increased pressure to reduce their fees, most 529 plans have not. Why?

  1. Most states incentivize their residents to participate in 529 plans by offering a tax deduction for contributions.
  2. States only offer a limited menu of 529 plans (usually 1-3 different plan options).

The combination of these two factors has resulted in parents/grandparents simply settling with one of their state’s 529 plan offerings. With the steady flow of participants to state-designated 529 plans, fund managers have had little incentive to reduce their costs.

What many folks don’t realize is that a number of states (16 to be exact, NJ is one of them!) offer no substantive benefits (i.e. tax deductions) for using their state-designated 529 plans. To add insult to injury, Morningstar has just downgraded NJ’s Franklin Templeton 529 College Savings plan (1 of the 2 plans offered by NJ) from neutral to negative. REASON: The NJ Franklin Templeton plan’s most popular option, their “Growth” age-based plan, has an average fee of 1.19% while the national average expense ratio of 529 plans is .55%. Morningstar wrote about the NJ Franklin Templeton plan, saying that “subpar oversight at the state and program manager level decrease our confidence in the plan’s long-term prospects.” NOT the most promising review…

If you invested $24,000 when your child/grandchild was three years old and left the funds untouched for 15 years, an average annual return of 7% would result in the NJ Franklin Templeton plan growing to $55,990 while the “average” 529 plan would have reached $61,291. An even lower-fee 529 plan (like one offered through Vanguard*) would have grown to $63,665 over that same period.

NJ Residents: Given NJ’s lack of 529 tax incentives and less-than-compelling 529 plans, we advise clients to explore their options. Great options to consider include:

NY Residents and beyond: Single NY tax filers can reduce their taxable income by $5,000 by making a $5,000 contribution to a NY 529. This amount increases to $10k for those who are married and file jointly.

  • BEWARE: While it’s great that NY (like many states) offers a tax deduction, be aware that participants have to choose between “Advisor-Guided Plans” and “Direct Plans” – always opt for the direct plans. Advisor-Guided Plans typically charge just over 5% for every 529 contribution. That is, each time you contribute money to the child’s 529 account, 5% of your contribution (no matter the size) goes directly to a financial salesperson’s pocket.

Don’t let fees drag down the precious funds you are setting aside for the next generation’s continuing education. As always, please feel free to contact our team to discuss this further

*Vanguard’s average 529 expense ratio is .28%

I find myself having more and more general financial literacy conversations with people as word gets out about my obsession with the Fee-Only-Fiduciary Financial Planning world. Based off a recent conversation, I was inspired to write this post. For those reading, the younger you are – the better this may serve you.

Two good concepts for people to know about are the Time Value of Money and the Power of Compounding Returns. Finding information on either topic is simply a Google search away, however I’d like to illustrate both concepts – and the power of each – in a way that (hopefully) resonates better than a financial journal. A quick overview of each:

Time Value of Money: A dollar is worth more today than it will be in 10, 15 or 50 years.

Compounding Returns: Your investment portfolio, over a long time horizon, will generate returns. Those returns will then generate additional returns on top of your original investment. What this gives you is, returns on top of returns on top of returns (hence, “compounding”).

Rule of 72: The rule of 72 is an easy, quick way to figure out how long it will take to, at least hypothetically, double your money. If you expect annual returns of 5%, then it will take roughly 14.5 years (72/5 = 14.4) to double your money.

Since the professionals of young and old can enjoy a bottle of wine, let’s use that for our example.

Essential information
•If you are 21 years old and go out to buy one (1) bottle of wine today, keep in mind that if you invested that money instead and got a 5% return each year, you could buy almost seven (7) bottles of wine at age 65.
•If you are 40 years old and looking at a nice bottle of Silver Oak, you could put off the purchase and invest the funds, to afford almost three of those bottles at age 65.

If you would like more detail or would like to discuss your own particular scenario, please get in touch. We love to educate and we love to help.

Footnote: All information assumes 5% annualized return