Are 529 Plans The Right Option For Your Boomer Clients?

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Producers and financial advisors who want to increase sales of 529 college savings plans need to develop a close understanding of their clients finances, experts agree.

Right after developing the clients financial plan is the time to determine whether a 529 is even an option for them, they say.

Before college financing consultant Judy Miller considers a 529 as a possibility, she asks the client three questions:

“Do you have a satisfactory cash reserve? Are you adequately insured for health, life and property? And are you contributing to a retirement account?”

Only when the client can answer “yes” to those questions, is it appropriate to look at 529s as an option, says Miller, principal of College Solutions, Alameda, Calif.

Miller, who specializes in advising parents and their children on all aspects of funding a college education, insists that 529s can sometimes be the wrong solution.

When parents come to Miller seeking help, she has them identify their education goals, she says.

“What part of the cost are they willing to pay for themselves? What part will their child pay? Will the child get aid? Can he or she get a scholarship? Will it be a public or private school?

“Once we identify the mix, then we start crunching money numbers. Now we know how much they need and project out what their savings need to be monthly or annually to meet that goal.”

Finally, Miller helps the parents calculate whether a 529 plan will work within their cash flow.

“We know everyone wants to retire and meet current income needs,” she says. “Sometimes, the cash flow doesnt permit all of the objectives to be supported.”

Relatively young boomers, who have some time before their kids go to college, are prime 529 prospects, notes Robert Cusick, an advisor with Investor Insight Ltd., Cortlandt Manor, N.Y.

With these clients, the first step is to figure out what their ultimate college costs may be, notes Cusick. He finds data released by the College Board, New York, useful in helping the client project those costs for years down the road.

In one recent case, Cusick projected $288,000 as the cost to educate a child at Duke, assuming he or she would enter in about 15 years and complete all four years there. That also assumes an annual rate of inflation for private college costs of around 7%, he says.

“Most recently, public colleges have been increasing at an even faster rate than private colleges,” Cusick notes.

Where a child is about to enter college, its too late to start thinking about opening a savings plan, experts note. In that case, there may be an alternative.

“I try to deal with the grandparents,” says Donnie Golson, first vice president, Wachovia Prudential Securities, Atlanta.

“Grandparents, by and large, are looking for better ways than savings bonds to provide for their grandchildrens education,” agrees Miller.

“Its much better to help the child with their college education while the grandparents are alive,” adds Cusick, “than leaving a bucket load of money after theyve passed on and the child has $100,000 in student loans.”

Paul Padovani, vice president/financial advisor, Cotto and Padovani Financial Strategies Group, Mt. Kisko, N.Y., says many older clients are unaware of the 529 option.

“I had an 80-year-old client come in last night, and I suggested a 529 to help pay for his grandchildrens college education,” Padovani says. “Until then, he knew absolutely nothing about 529s.”

An important point to get across to most clients is their tax advantages, advisors agree. Many states give a tax exemption for earnings on accounts held by residents.

Then, too, the money placed in the account takes the money out of the donors taxable estate. That can have a considerable impact on estate planning, Padovani points out, because 529s allow one person to give up to $55,000 per child, so two grandparents can gift $110,000 per child.

Whether selling to boomers or their parents, the 529 has another significant selling point, advisors point out: The client keeps control of the money.

“Lets say they have three kids, and they give equally to each. If one turns out to be a bad apple, they can give the money to the other two,” points out Wachovia Prudentials Golson.

“Every advisor has a horror story of someone who was gifted [funds for college] and then didnt go to school,” adds Padovani. “When they turned 21, that money was theirs, and they then basically blew through all the money that was given to them.”

Where there is a long time to complete the savings plan, Padovani likes to place the client in so-called age-weighted funds.

“With an age-weighted fund, the money is largely going to be in growth funds for a one-year-old child, he explains. “Then it will be rebalanced every year, decreasing equities and increasing bonds automatically so by age 16, the account is more heavily concentrated in fixed income or cash.”

Although some clients prefer to manage more actively their own 529s, age-weighting gives the assurance the clients account will be managed according to sound investment principles, he explains.

The important thing is to position yourself to the client as an advisor, not as someone selling 529s, producers agree.

“Help the client plan through the process and help reduce the amount of anxiety associated with it,” counsels Cusick. “Help quantify their goals, and hold their hand along the way by monitoring progress. Then these plans will sell themselves. Theyre a great tool.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.