All fluff and no stuff

On twitter, I saw a promoted link from a well known financial service company. It was a link to video about how a family forged a path in investments to not only send their four children to college, but to also have their own golden retirement. As I watched this short video, I kept waiting for specifics, but turned out to be nothing but marketing fluff.

There was a sweet description of how this family was formed. The family realized it was better to live in a smaller house rather than a mini-mansion. This prioritization would make it possible for them to send all four of their kids to college with good, solid investments. The parents were also happy that they could split their attention equally with their own retirement. In the end, they wanted to be the “party grandparents” meaning they hoped in retirement, their kids and grandkids would be visiting them often.

See any issues here?

For an ad showing the power and value of investing in your child’s future, the video had little concrete info.

  • Is this financial institution succeeding in sending high school graduates to college?
  • Are people coming in short of needed funds? 
  • What about the people that saved up money in these plans, and their kids turned out to not want to go to college?
Guess what: the video doesn’t answer any of this. No demonstration of how they have the edge over any other investment house you can find.

Studies show that parents aren’t saving enough money to send kids to college. But what is the core reason behind that? Parents are lazy or not doing things right? Or is it because the cost of college in relation to average income has risen? It’s a complex issue, because while tuition has been rising, the number of dollars in various forms of student aid has risen as well. Essentially, it may next to impossible to predict what college will cost when your kids get there. But this video talked about none of that. Instead, the two concrete things it mentioned were: buy a smaller house, and split your investment dollars 50/50 between your kid’s college and your own retirement.

Too many assumptions
Something I notice frequently in any discussion of 529 plans or other college savings plans are a list of implicit assumptions.
  • Investing for college means investing in mutual funds
  • We are only talking about college. Other vocations and plans are simply off the table
  • You can and MUST save for your kids’ college.
Almost nothing is said except the occasional comment about picking a good fund manager, and not getting hung up on the returns of the fund. Huh??? A good fund manager should lead to good fund returns, right? I have noticed that they are coming up with strategic funds that are based on coming to fruition in a certain year. Essentially, people starting with a 5-year-old child have different saving needs than someone who is 15. While this makes sense on the surface, is there any evidence out there that this beats the existing funds?
What leads me to say no, is because these plans have the same structure as any other 401K or VUL. You can put in a certain amount of money, and then pick what funds to use the money on. If you have trouble with a certain fund, you can rebalance your money into other fund. 

In investor speak, that means sell when the fund is low, and buy some other hot fund when it’s high.

In case you aren’t aware, that will kill your chances at growth, just like any other mutual fund based approach. Considering that the variation of mutual fund performance has been really wide over the years makes it a real bet on whether or not mutual funds can beat their historical performances, let alone the potential inflation of costs of college.

There is a huge assumption that college is the best route to go, and it is best for everybody. That simply isn’t true. Some of the richest people out there never went to college. That doesn’t mean college is bad for you. It just means it isn’t the end-all/be-all of your career. I personally know people that went into home construction and made a fortune. Some of them weren’t good at storing the wealth they had built, and suffered tough times during 2001 and 2008 when home construction slacked off. There are many career paths that aren’t necessary found through college. It means that we need to keep this type of flexibility in mind. If you sink lots of money into a 529 plan and your child picks an alternate career path, what then?

So what is something that might work?
Well, it just isn’t fair if I don’t put my own cards in the table. I have several strategies in play that should help me offer my children the support they need when they get to college.
  • Invest in real estate
  • Buy an EIUL
Real estate, when you focus early on growth, is a plan to get as much property as possible with a reasonable down payment. It doesn’t mean putting 50% down, nor 0%. Instead, something like 20-25% is a good fit. With that, I can probably buy twice as much as the 50% and four time as much as the person that wants to make a cash purchase. The plan is that in 18 years, I should be able to strategically build up a decent portfolio of many rental properties. When the time is right, I have many different options. I could sell one of my properties and probably put my kids through with that. You must realize that my crystal ball is as cracked as yours, so I cannot confirm that the value of real estate will rise at the same pace as the price of tuition, but I think it has much better odds than the value of mutual funds. I might also be able to use the cash flows from my rental portfolio and not sell anything. Or some combination thereof.
Real estate provides great tax advantages in that most if not all of the rent will be shielded by depreciation. This is better than the fancy tax laws used to make 529 Plans look nice. Did you know there are limits on what you can contribute to a 529 Plan? Things like gift taxes come into play. But if you simply pay a child’s tuition direct to the institution  it doesn’t trigger any tax laws, apart from shrinking your own estate.

Unfortunately, if you own rental property and seek student aid, you will have to report it as part of the evaluation. But that’s okay. If rental property provides the means to make it happen, that’s okay.

I also have an EIUL that in 15 years, may be feasible to borrow from if needed. Then I can pay it back when the time is right using my rental property to support my own retirement plans. Did you know that built up cash value in any permanent life insurance is not considered when determining student aid? The money stocked away there is off the books and not even looked at.

Both of these options provide much more flexibility to supporting your children’s future plans. They also don’t pull you off the path of building your own retirement, one of the best gifts you can give your children. Since the history of real estate and permanent life insurance is much stronger and not as risky, then it would appear to have a lot more substance than that video I saw about this family’s plans.