Discusses the inherent trade-offs between funding college education for your children versus maximum retirement income for yourself

1. IT AIN’T WHAT YOU DON’T
KNOW THAT GETS YOU
INTO TROUBLE. IT’S WHAT
YOU KNOW FOR SURE
THAT JUST AIN’T SO.
- MARK TWAIN
Feeling any pressure?

2. Does this hurt?
 College costs are
rising 6 – 8% annually
 Retirement costs are
rising (healthcare,
LTC)
 Inflation
 Taxes
 Technological change
 Planned
obsolescence

3. The Crux of the Issue
 In a world of limited
$$$, we have to
allocate wisely … in
a word – tradeoffs

4. What are the Tradeoffs?
 Maximum
Retirement Income
for me

5. What are the Tradeoffs?
 College funding for
my kids
Both are a requirement – NON-NEGOTIABLE!

6. Retirement Income Strategy Musts:
 Maximize income from all available
Objectives
assets
 Maximize flexibility to respond to
changing external factors – taxes,
inflation, market volatility, health
changes
 Maintain control and minimize
wealth erosion

7. Education Strategy Musts:
 #1 – have your child attend school
Objectives
 Minimize limitations surrounding
certain “single-use” financial
products
 Maximize flexibility to fund
education using most efficient and
effective way possible
 Maintain control, liquidity, and
minimize wealth erosion

8. Some Standard Methods – a Taxonomy
Other People’s Money My Money
 Scholarships  529 plan
 Grants  Fund from cash flow
 Gifts from family  Coverdell savings
 Working child  Mutual funds
 Equity loans
 Student loan in
child’s name only

9. Standard Answers May Fall Short
529 Plan: Advantages 529 Plan: Disadvantages
 Market risk
 Tax-deferred
 Lack of liquidity
accumulation
 Penalty for non-qualified
 Tax-free withdrawals withdrawals

Question: If you get  Appears on FAFSA form
Ability to change
what you want,
why should you be penalized?
beneficiary  Not self-completing in the
event of disability
 Some state income tax  Not self-completing in the
benefits in certain event of premature death
states, but not TX  Government-imposed limits
on total account
 Opportunity for growth contributions/balances

10. What is the True Cost of College?
4,000,000
3,500,000
Over 30% of
3,000,000
total comes in
last 5 years!
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Compound Growth Curve of $550,000 @ 8%

11. So do you want more income in retirement
OR to fund your kids’ college?
Retirement
Income
Maximum
Minimum
College
The Trade Off Expense

12. So do you want more income in retirement
OR to fund your kids’ college?
College
Expense
Maximum
Minimum
Retirement
Income The Trade Off

13. Wouldn’t This Be Better?
Retirement
Income Maximum College
Expense
No Trade Off!

14. Positioning for Maximum Retirement
Income and College Cost Recovery
 How do we get
there?

15. Positioning – Use a Macro Model …
 Organized
 Coordinated
 Balanced
 Integrated
 Resilient
 Efficient
 Verifiable
 Flexible

16. … together with Strategies
 Velocity of Money
 Taming a Bear
Market
 Spend-downs
 OPM
 Withdrawal
Protocols

17. Implementing the Model
 Understand your
“Wealth Timeline”
 Must “Begin with
End in Mind”
 Failure cannot be
an Option

18. Your Wealth Timeline: 3 Phases
 Accumulation
 Distribution
 Preservation

19. Accumulation: Common Problems
 “Silo” investing
 Chasing Rate of Return
Yup, I’ve got college
 Growth Mentality all wrapped up here
 Disregard for: and over yonder’s
my retirement
 Hidden risks
 Taxation
 “Drafts” in the model

20. Lines of Defense: Build a Moat
 Protect Your Castle Against:
 Market Volatility
 Inflation
 Taxes
 Longevity
 Lawsuit
 Health Events
 Premature Death

21. Distribution Phase: Safe Rate?
 Want Maximum but …
 … most academic
research indicates the
“safe” withdrawal rate to
be between 4 and 4.5%
because you cannot run
out
 … and you also need:
 Flexibility to adapt
 Multiple sources of
income

22. Preservation: Exit Plan
 Your wealth will go
somewhere
 Government (IRS)
 Corporations –
healthcare or financial
 Other wealthy people –
think fire sale
 Charity
 Family
 Will it go where you
want, in the amount
you want, when you
want?

23. What is the True Cost of College?
It’s the income from the
4,000,000
3,500,000 future value of the asset
PLUS the value of the
3,000,000
asset passed along
2,500,000
to your children
2,000,000
1,500,000
1,000,000
500,000
-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Compound Growth Curve of $550,000 @ 8%

24. The Bottom Line …
 If, through planning,
positioning, and
strategies, you are
able to replace the
income you otherwise
would have lost, AND
pass it on, haven’t you
recovered the cost of
college?

25. Case Study: Dr. Smith
 Dr. and Mrs. Smith, ages 45 and 44
 Two children, ages 8 and 10
 Annual household income of $275,000
 Want children to attend Rice University,
projected total cost of $550,000 (currently
$48,500/year for Fall 2011)
 Currently saving $25,000/yr into 529’s that
have $70,000 assumed to earn 8% yearly
 Projected retirement assets of $2,200,000

26. Case Study: Current plan results
Education Plan Results Retirement Plan Results
 If all assumptions hold (contributions,  With $2,200,000 of retirement
inflation, return, etc.), sufficient assets that must last for their
assets are set aside for the two combined life expectancy, results
children’s education in projected annual retirement
 Total payments to Rice approximately income of $95,000 plus social
$550,000 security (pre-tax)
 Projected “True Cost” of almost  Lost income opportunity would
$900,000 at retirement age, and represent an increase in annual
about $3,000,000 at life expectancy
realized income of 42%
 This equates to about $40,000 of
annual retirement income for 20+  Children and/or grandchildren do
years NOT receive the $3,000,000 at
 Also assumes no scholarships, joint life expectancy
grants, etc. which result in no non-
qualified 529 withdrawals

27. Case Study: Alternative plan results
Education Plan Results Retirement Plan Results
 If all assumptions hold  With $2,000,000 of retirement
(contributions, inflation, assets PLUS paid-up asset
return, etc.), sufficient assets insurance, projected annual
are set aside for theEntire Plan Protected Against: income of $125,000
two retirement
plus social security
children’s education - Premature Death
 College cost recapture via
 Total payments to Rice - Disability additional $30,000 of annual
approximately $550,000 Lawsuit
- income in retirement,
 - representing an increase in
Financial aid opportunitiesMarket Fluctuation
maximized annual realized income of 31%
 Children and/or grandchildren
 Any scholarships, grants, etc. receive $1,000,000+ at joint life
would not result in taxes and expectancy
penalties attributed to non-
 Multiple sources of income
qualified 529 withdrawals
available in retirement

28. Todd M. Harris
Email: tharris@houcap.com
Phone: 713-429-4810
10375 Richmond Ave., Suite 260
Houston, TX 77042