Munn & Morris Financial Advisors June Newsletter

7/28/2019 Munn & Morris Financial Advisors June Newsletter

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JUNE 2013

Is a College Degree Still Worth the Cost?

Y

ou’ve probably heard thehorror stories: recent gradu-ates from well-known col-

leges and universities leave with amountain of debt, can’t find a job,default on their loans, and moveinto their parents’ basements.

Against the background of headlines of soaring college costs,tales like this have prompted manyto ask whether a college educationis really worth the expense.

A 2011 study by the George-town Center on Education and theWorkforce found that over his/her

lifetime, the average college gradu-ate will earn nearly $1 million morethan someone who only has a highschool diploma — and that theearnings gap is widening. In fact,the study found that the incomeadvantage continues to climb withmore advanced degrees:

Advantage

over highEducational level school diploma

Less than highschool diploma -$331,000

High school diploma —Some college, no degree 270,000Associate’s degree 423,000Bachelor’s degree 964,000Master’s degree 1,367,000Doctoral degree 1,948,000Professional degree 2,344,000

The Georgetown study alsofound that some people with lesseducation made the same or more

The Fundamental Investing Principle

T he whole point of an investment program is to accumulate sufficientfunds to meet your financial goals. So what is the most fundamental

investment principle? To help ensure you meet your financial goals, youmust save significant sums on a consistent basis. The sooner you start thishabit, the less you need to save. Consider the following example.

Fresh out of college and 25 years old, you decide you’ll need $1,000,000when you retire at age 65. You can save on a tax-deferred basis through youremployer’s 401(k) plan and expect to earn 8% compounded annually. If youstart at age 25, you’ll need to invest $3,860 a year for 40 years to reach yourgoal. However, you decide to wait 10 years. At age 35, you now need toinvest $8,827 per year for 30 years. Still seems like too much? Consider that

at age 45, you’ll need to invest $21,852 annually. The really bad news is thatsomeone waiting until age 55 will need to invest $69,029 annually to reachthat goal. By postponing investing, you lose time and, with it, the ability forcompounding returns on your contributions to perform much of the work of attaining your goals.* mmm

* This example is for illustrative purposes only and is not intended to project the performance of aspecific investment. It does not consider the payment of income taxes. Keep in mind that a plan of regular investing does not assure a profit or protect against loss in declining markets.

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U C C E S S

than the median income for thosewith higher educational achieve-ment. For example, 14% of Ameri-

cans who only held a high schooldiploma earned the same or moreincome than the average personwith a bachelor’s degree. Similarly,23% of those with some collegecourses under their belt but nodegree equaled or outdid the life-time income of those with a bache-lor’s degree.

But for most people, as thetable demonstrates, average lifetime

Continued on page 2

$

Copyright © 2013. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. Thisnewsletter intends to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete analysis of these subjects. Professional advisers should be consulted before implementing any options presented. No party assumes liability for any lossor damage resulting from errors or omissions or reliance on or use of this material.

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Dallas, Texas 75254

972-692-0909

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www.munnmorris.com

Securities offered through

Edward W. MorrisRegistered Principal, RJFSIrving Munn, CPA, CFP®

Munn & Morris Financial Advisors, Inc. is independent ofRaymond James Financial Services, Inc.



earnings are significantly higher forthose with more education. Andthose benefits even stand when tak-ing into account the rising cost of a

college education. The BrookingsInstitute put it this way in a study itissued recently, “[W]hile collegemay be 50% more expensive than itwas 30 years ago, the increase tolifetime earnings that a collegedegree brings is 75% higher. Inshort, the cost of college is growing, but the benefits of college…aregrowing even faster.”

Unemployment Protection

In addition to better earnings

prospects, a college education bringsa second benefit: greater protectionagainst unemployment. As of Octo- ber 2012, the U.S. unemploymentrate stood at 7.9%. But, according tothe Bureau of Labor Statistics,among those at least 25 years old,the rate of those with a bachelor’sdegree was just 3.8%, while thosewith only some college suffered anunemployment rate of 6.9% — morethan 80% worse.

Those with less education wereeven worse off. Among those with just a high school diploma, 8.4%were unemployed, while 12.2% of those who dropped out before earn-ing a diploma were jobless. As theBrookings Institute put it, “Today, acollege graduate is almost 20% morelikely to be employed than someonewith only a high school diploma.”

What’s more, the job growththat occurred over the prior 12months was entirely among the

college-educated. On a seasonallyadjusted basis, jobs for those withonly a high school education actual-ly declined 0.3%, while jobs forthose with some college grew 3.6%and those with a bachelor’s degreegrew 4.2%.

Caveats

Despite these advantages to acollege education, there are other

Is a College Degree?Continued from page 1

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Encourage Your Child to Fund an IRA

Once your child starts work-ing, help him/her developgood savings habits by

encouraging him/her to fund an

individual retirement account(IRA). Even if your child onlycontributes for a few years, an IRAcan provide significant funds forretirement.

Your child must have earnedincome to contribute to an IRA andmay only contribute the lesser of earned income or the maximumIRA contribution. The maximumlimit is $5,500 in 2013.

Although most children will be

eligible to contribute to both a tra-ditional deductible IRA and a RothIRA, you should probably encour-age your child to fund a Roth IRA,which has several advantages:

4Roth IRAs are more flexible.Your child can withdraw all

or part of his/her contributions atany time, without paying federalincome taxes or penalties. Thus, if your child later decides to usecontributions for college, a car, adown payment on a home, or for

some other purpose, contributionscan be withdrawn with no taxconsequences.

4

Earnings accumulate tax free,

plus qualified distributionscan be withdrawn tax free. Aqualified distribution is one madeat least five years after the first con-tribution and after age 59½. Thereare also certain circumstanceswhere earnings can be withdrawnwithout paying income taxesand/or the 10% federal income taxpenalty. If your child allows thefunds to grow until at least age59½, all contributions and earningscan be withdrawn without payingany federal income taxes.

4A traditional deductible IRAoffers little tax benefit to a

child. When your child first startsworking, he/she will typically paya low marginal tax rate on his/herincome. So even though theRoth IRA contribution is not taxdeductible, your child typicallyreceives little or no tax benefit fromdeducting the traditional IRAcontribution anyway. mmm

considerations that temper this rosyoutlook:

4Majors matter. Not all collegedegrees are created equal.

Recent graduates in the fine artsand liberal arts aren’t faring as wellin employment or earnings as stu-dents who major in other subjects,like engineering, accounting, healthsciences, and mathematics.

4

Ability and drive trump namecolleges. Studies show that

more expensive “name” colleges cangive a career boost to some stu-dents, like those from low-incomefamilies and those in the first gener-ation of their family to graduatefrom college. Otherwise, educatorssay ability, drive, character, grades,and SAT scores correlate more close-ly with career success than the pres-tige of the college from which a

student graduates.

4Minimize student debt. Inorder to stretch to meet the

high cost of some colleges, studentsare tempted to take on ever-higheramounts of education loans. While acollege degree improves the odds of landing a job right after college,debts that entail monthly paymentsrivaling those for a luxury car or anapartment can wind up limiting the

graduate’s job flexibility or puttingan unpleasant crimp in theirlifestyle, even if they land a job. Inthe long run, it may be better toexcel at a lower-ranked college thanincur substantial debt to attend ahigher-ranked one.

Please call if you’d like to dis-cuss this in more detail. mmm



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you should certainly go through theprocess of determining how muchto withdraw based on your uniquecircumstances, be prepared formodest withdrawal percentages.With a $1,000,000 portfolio, a 4%withdrawal equals $40,000.

4Stocks need to remain a sig-nificant component of your

portfolio after retirement. Whilethe recent stock fluctuations have been difficult to deal with, especial-ly for recent retirees, stocks shouldstill remain a significant componentof your retirement portfolio, espe-cially with inflation rates nowstarting to rise.

4Review your calculationsevery year. This is especially

important during your early retire-ment years. If you’re depletingyour assets too rapidly, you canmake changes to your portfolio,reduce your expenses, or considergoing back to work. As you age,your options tend to become morelimited.

4Work as long as you can.Supporting yourself for a

retirement that could span 25 or 30years requires huge sums of money.Consider working at least a coupleof years longer than originallyplanned. During those years, youcan continue to build your retire-ment assets and you won’t be mak-ing withdrawals from those assets.Once you retire, consider workingat least part-time to reduce yourwithdrawals from your retirementassets. Even modest earnings can

help tremendously. For instance, if you earn $20,000 annually, that isthe equivalent of a 4% withdrawalfrom a $500,000 portfolio.

Deciding how much to with-draw from your retirement assets isan important decision that willimpact your standard of living forthe rest of your life. Please call if you’d like help with this decision.mmm

How Much Can You Withdraw in Retirement?

It’s probably one of the mostimportant decisions you’ll makewhen you retire — how much

to withdraw annually from your

retirement assets. Take out toomuch every year and you may haveto seriously reduce your living stan-dard late in life or even depleteyour assets. Take out too little andyou may unnecessarily reduce yourstandard of living so you don’tenjoy your retirement.

Several factors need to be con-sidered when calculating your with-drawal rate, including your lifeexpectancy, expected long-term rateof return, expected inflation rate,and how much principal you wantremaining at the end of your life.Unfortunately, life expectancies,rates of return, and inflation are dif-ficult to predict over a retirementperiod that can span decades. Keepthese points in mind:

4Your life expectancy. Whileit’s easy enough to find out

your actuarial life expectancy, lifeexpectancies are only averages.Approximately half the population

will live longer than those tablessuggest. How long close relativeslived and how healthy you are canhelp you gauge your life expectan-cy. Just to be safe, you might wantto add five or 10 years to that age.After all, you don’t want to run outof money at age 75 or 80, when youmight not be able to return to work.

4Rate of return. Expected ratesof return are often derived

from historical rates of return andyour current investment allocation.Historical rates of return are aver-ages of returns over a period of time. You might want to be moreconservative than that, assuming arate of return lower than long-termaverages. Even if you get the aver-age return correct, the pattern of actual returns can significantlyaffect your portfolio’s balance. Forinstance, if you experience higherreturns in the early years of retire-ment when your portfolio balance ishigher, and lower returns in thelater years when your portfolio’s balance is lower, you’ll have a high-

er ending balance than if the oppo-site occurred. One of the mostdevastating scenarios for a retireeis to experience a severe marketdecline right after retirement.

4Expected inflation. Whileinflation has been relatively

tame recently, even inflation of 3%can have a dramatic impact on yourmoney’s purchasing power over along retirement. For instance, at 3%inflation, $1 is worth 74¢ after 10

years, 55¢ after 20 years, and 41¢after 30 years. Since your retire-ment is likely to last decades, usean inflation estimate encompassinga long time period.

So what is a reasonable percent-age to withdraw on an annual basis? To be conservative, it is typi-cally recommended that you onlywithdraw modest amounts fromyour retirement savings, especiallyin the early years of your retire-

ment. A common rule of thumb isto withdraw no more than 4% inyour first year of retirement, adjust-ing that amount for inflation insubsequent years.

Consider these tips when decid-ing how much to withdraw fromyour retirement funds:

4Use a modest withdrawalpercentage to ensure you

don’t deplete your assets. While



A Letter

from the IRS

Financial Thoughts

Keep Student Loans under Control

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W hen a letter from the InternalRevenue Service (IRS) is

found in the mailbox, many taxpay-

ers simply pay without questiondue to a fear of the IRS, the confus-ing nature of the notice, or a con-cern that fighting will result in a fullaudit of their return. Review thenotice carefully to make sure youdo, in fact, owe the additional taxes.If you believe the IRS is wrong, fol-low these guidelines:

4Don’t ignore the notice. Youwill continue to receive notices

until you respond.

4Respond quickly. If you feelyou owe the additional money,

pay as soon as possible. If youintend to contest the matter,respond in writing.

4Keep your response simple.Stick to the facts, stating your

case simply and concisely.

4Follow up. Often, yourresponse will cross in the mail

with another IRS notice. If thathappens, just send copies of your

first response with the secondnotice.

4Get professional help if need-ed. If the notice involves a

technical matter, you may need thehelp of a tax professional. mmm

Paying for a college educationis no small task. You maynot want to count on finan-

cial aid, especially since approxi-

mately 38% of all undergraduateand 67% of all graduate financialaid awards are loans (Source:Trends in Student Aid , 2012). Even if you have been diligent about sav-ing and qualify for some financialaid, you may need student loans toget through college. In fact, thetypical college student who bor-rows to finance a bachelor’s degreefrom a public college graduateswith $23,800 of student loans

(Source: Trends in Student Aid ,2012).

While student loans may be anecessity to get through college,make sure to keep them undercontrol so they don’t become finan-cially overwhelming. Consider thefollowing tips to help your childwith student loans:

4Make sure your child keepstrack of all student loans.

Often, students borrow from anumber of lenders, taking smallamounts out over time.

4Translate those outstanding balances into a monthly pay-

ment. Student loans must typically

be repaid within 10 years after grad-uation. While you won’t know theinterest rate until graduation,assume an interest rate of 8%. For

every $1,000 of student loans, themonthly payment will be $12 if paidover 10 years at 8% interest. A stu-dent with the average loan balanceof $23,800 can expect to pay $286per month to repay student loans.

4Encourage your child to payoff all debts as soon as possi-

ble. While student loans are likelyto be your child’s largest debts, theymay also be the cheapest. If yourchild has other debts with higher

interest rates, such as credit carddebt or an auto loan, suggest payingoff those loans first.

4Remind your child that up to$2,500 of education loan inter-

est can be deducted on his/herincome tax return as an above-the-line deduction, with income phase-outs of $60,000–$75,000 for singletaxpayers and $125,000–$155,000 formarried taxpayers filing jointly.

4Suggest your child put off upgrading his/her lifestyle or

buying a home until all debts arepaid off. This is a lesson what will benefit your child for a lifetime.mmm

A pproximately 54% of familiesage 55 to 65 carry mortgage

debt, up from 37% in 1989. Themedian mortgage debt is $97,000among families age 55 to 64, upfrom $34,000 in 1989 (Source: TheWall Street Journal , December 10,2012).

Approximately 22.6% of homeowners have mortgage bal-ances that exceed the marketvalue of their home (Source:

Kiplinger’s Personal Finance , Janu-ary 2013).

Almost 25% of seniors rely onSocial Security payments for 90%or more of their family income(Source: aarp.org/bulletin , Novem- ber 2012).

The median retirement sav-ings for households age 55 to 64 is$120,000. Approximately 42% of workers guess at what they needto accumulate for retirement

rather than performing an actualcalculation. The average annual

amount spent by retirees is$31,400, compared to $39,900spent by working families(Source: Money , December 2012).

Almost 45% of those earningmore than $75,000 per year haveat least six months of livingexpenses in an emergency savingsfund (Source: Money , November2012). mmm

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Munn & Morris Financial Advisors June Newsletter