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SEPTEMBER 2010

WEALTH M A N A G E M E N T

Building Wealth

What Your Children Should Know

Pay for College, Save for Retirement You Can Do Both


WEALTH M A N A G E M E N T

Back to School, Depending on the route you drive to work in the morning or the subdivision in which you live, maybe even out shopping, it’s hard not to notice that kids of all ages recently returned to school. My oldest son Ryan (1st grade) catches the bus each morning along with nine others just at our stop, armed with a backpack carrying a healthy lunch and a slim homework folder. I guess these are some of the essentials for a solid foundation for a lifetime of learning ahead of him. Education is very important. Math, history, English, music, and of course gym are all good subjects as we grow up and move from grade school to high school and into college. One area that typically gets left behind and really falls more on the parents shoulders are financial lessons or discussions about money. Now before I go any further I should remind everyone that my wife, Megan, is a second grade teacher. So you know our family believes in education, but for whatever reason you always hear that schools never really teach our youth about money issues. As someone who paid for their own education working their way through college, I can tell you there is probably no better way to learn these issues than by being forced to take control of your own destiny and being allowed to make some mistakes along the way. Ideally though I would agree if given the knowledge, along with some funding ahead of time it can really help give someone a financial edge after college and early in their adult careers. This month’s first article “What Do Your Children Know about Building Wealth” includes some fundamentals that should be shared with children during these early years. Now for some of you, the thoughts of “back to school” may have triggered a reminder that you need to save for your own kids future college expenses. Not to mention juggling the savings of your own retirement. Yikes!! Well, our second article “Paying for College while Saving for Retirement” may offer some assistance in reducing any increased blood pressure. Should you need a shoulder to cry on or use of a buddy system give Terry Maziarka, my office manager a call. Her daughter is a high school senior this fall. As the school year settles in, these may be two articles to keep close to you all year. Please enjoy this month’s articles and should you need any further guidance with financial issues please let me know. Phil Guerrero, CFP® President

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


WEALTH M A N A G E M E N T

WHAT DO YOUR CHILDREN KNOW ABOUT BUILDING WEALTH? What would you like to have known at 18, 25, or 35?

When you were 20 or 25, what was your level of financial literacy? What did you think of when the nightly news mentioned Wall Street or the Federal Reserve? Did you even care about those things at that time? Few young adults fully understand how wealth can be built. That’s a shame. Decades from now, many will wish they had started planning to amass wealth earlier in life. How can you encourage your children to start that process? Help them start before they turn 18. If your child is a minor, there are still several ways she or he can get a head start on growing wealth. Besides the basic move of opening a savings account, it is possible for your child to open a Roth IRA. The I.R.S. sets no minimum age limit for IRA contributions; if your son or daughter has earned income from a job and filed taxes, he or she can open a Roth or traditional IRA with your assistance and contribute to it. Your child may

also buy a government bond with your help, or buy equity shares or make a direct stock purchase via a guardian account or custodial account.1,2,3 Encourage them to set life and financial goals. Why not? It is not far-fetched if your teen wants to become a millionaire; given inflation over time, we may need to be millionaires down the road. Even if your son or daughter simply sets a life goal – for example, to start a business someday or to graduate from a prestigious university - he or she will start to think about what that will take financially. Wean them off plastic. As your children become young adults, the great lesson is a simple one – spend less than what you make. If they have to go into big debt, it better be for education’s sake and not for comparatively frivolous reasons. Remind them that it is possible to pay off debt and plan to build wealth at the same time.

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


WEALTH M A N A G E M E N T

Look back over your life for a moment. What shaped you more – the material things you bought when you were 18 or 21, or the experiences you had when you were 18 or 21? It is wiser for your son or daughter to spend money on an experience that may “pay off” in life skills and character development, rather than on a material item that will inevitably depreciate. Convey that is not what you own, but what you do that counts. Hopefully, your son or daughter will start investing early – and sensibly. Some young investors like the thrill of day trading - of looking for the next hot stock that will be the talk of Wall Street. It is better for your son or daughter to learn principles of diversification from the start (and not retrospectively). Getting rich slowly is not a bad idea. Investing seriously means staying invested through market cycles. Remind them of the power of compounding. If your child opens an IRA or 401(k) before age 30, that does so much in terms of retirement savings potential. Yet few young adults focus on these retirement savings tools. The tax information service CCH took a poll in 2007 and found that just 4% of employees aged 25 and younger were maxing out retirement plans. That same year, Charles Schwab conducted a survey and learned that only 40% of adults aged 26-40 were contributing to an IRA.4 Looking back, what did you wish you had known? Today is as good as any day to let your son or daughter know about some investment

and asset-building principles. At first glance, it may seem boring to them – but making money sure isn’t. The more they know now, the more years they have on their side to grow wealth.

Citations 1 irs.gov/publications/p590/ch02.html#en_US_publink10006507 [TY2008] 2 kiplinger.com/columns/drt/archive/2008/dt080130.html [1/30/08] 3 investopedia.com/ask/answers/06/underagebrokerageaccount.asp [1/30/08] 4 articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/YoungAdultsAllButIgnore401ksIRAs. aspx?page=all [5/3/07] © Peter Montoya

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


WEALTH M A N A G E M E N T

PAYING FOR COLLEGE WHILE SAVING FOR RETIREMENT These two objectives are not mutually exclusive.

It can be done. All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative. First, make sure the priorities are in the right order. Strange as it may sound, your retirement may need to take precedence over your child’s college education. Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they will have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt. The following are some short-term and long-term ideas you may want to consider if you have college costs on your mind:

Save for college the DCA way. While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or … Consider a tax-advantaged college savings plan. Contribute to a 529 plan, which features taxadvantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.1,2

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


WEALTH M A N A G E M E N T

Exploit your credit card. No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise. Keep your income as low as possible in the base income year. That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will. However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.1 Let the college know if your financial situation has changed. Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing

to review these developments and may be able to adjust aid for your student accordingly. Make it a family affair. In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing. In short, hunting for every scholarship or alumni connection you can and finding a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.

Citations 1 – articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/financial-aid101-how-to-get-more-cash.aspx [7/16/10] 2 - money.usnews.com/money/blogs/On-Retirement/2010/07/23/how-to-pay-forcollege-without-sacrificing-your-retirement [7/23/10] © Peter Montoya Inc.

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


WEALTH M A N A G E M E N T

Upcoming Quarterly Market Outlook Luncheons 4th Quarter

When: Wednesday, October 6th Where: Vehe Barn, Deer Park, IL Guest Speaker: Jeff Fox, John Hancock Time: noon to 1:15 p.m.

Thank you to those who attended our Third Quarter Luncheon in July. This was one of the best ones yet. Thanks for all the great questions and audience participation.

Other Tidbits…

Next time you find yourself driving by please stop in. We’d love to see you. We successfully completed our move into the new office in Hawthorn Woods, just a few miles north of our previous location. The build out turned out great and we’ve had a number of clients pop their heads in to see the new digs. It’s a very relaxed setting outside our windows with many birds residing just behind us. The space itself is more functional including an extra office. I hope to soon add another associate to assist with service and the continued growth of PMG Wealth Management.

60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047

[P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com


SEPTEMBER 2010 60 LANDOVER PKWY, SUITE D HAWTHORN WOODS, IL 60047 [P] 847-550-6100 [E] phil.guerrero@lpl.com www.mypmgwealth.com

Securities offered through LPL Financial. Member FINRA/SIPC.

PMG's "Wealth Management" September 2010 Newsletter  

PMG Wealth Management's monthly newsletter. This month includes articles discussing how to juggle saving for retirement and college at the...

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