Paying for college has been the theme of this important series using a three-prong approach. First is saving for college using accounts like the 529. If you have seen any recent news on the topic, you likely have a fundamental understanding of how this account works. This step also uses other savings vehicles. The second prong is to shop for colleges that fit your needs financially, socially, and academically.

Today’s article addresses perhaps the biggest question that influences families that are college shopping: Do I fund my child’s education or my retirement? The extent to which a parent favors one answer over another drives the family’s ability to pay for college. The last step we will explore involves saving on the cost of college.

We will review the issue of funding college versus funding retirement, why it is important and the standard industry advice. Ironically, the standard falls short in helping families answer this question. Inherit problems will be highlighted with the standard advice. We will wrap up the article with examples that demonstrate why saving for retirement first may be a bad idea. As always, you should check with your team of professional advisors to see how any of the concepts, terms, or ideas apply to your situation.

Why is funding college versus retirement such an important question?

Middle-class families live on limited incomes. A middle-class family must decide what to do with these incoming dollars. Do they save or spend the funds? If they spend, what do they buy? On the flip side, for which goal does the family save? Even knowing which goal should take the top priority, the family must make decisions about which vehicle (stocks, bonds, CDs, etc.) and account (Roth, IRA, taxable, 401k, 529, etc.) to use.

Several studies on American savings and habits clearly explain the stress we experience in our financial lives. With goals that cost millions (like retirement) or $100,000 or more (like college), is it any surprise that we stress about finances? It isn’t that families plan to fail in meeting their goals; instead, they fail to plan. To meet our goals, we must face the pain of discipline now; otherwise, we will face the consequences later. With limited income and expensive goals, where does a family save extra dollars?

Standard industry advice

The financial services industry tells families to save for retirement first. After this goal is met, the family can save for college. The language most families hear is something along the lines of “You can’t borrow for retirement, but kids can borrow for college.” Let’s look at a few examples from popular financial resources.

The article from titled “The Kids’ College Funds Can Wait. Save for Retirement First” makes several points about why parents should save for retirement first.

– As previously mentioned, there are no loans for retirement.

– Working later because you funded your child’s education isn’t a plan. Forces outside our control – like a job loss or disability – can spoil our plans.

– You may be doing a disservice to your children if they end up supporting an elderly parent. While you may have paid $100,000 for their education, you did not save the $300,000 or more required to take care of yourself. Your child may end up footing the bill.

– Roth IRAs are a reasonable vehicle for college and retirement savings.

Consider the points from a Vanguard blog post, “Save for Retirement and College.” Here, the author suggests that you prioritize retirement before any other goal. “First and foremost, pay your future self. Unlike college, you can’t take a loan for retirement.” Second place on the priority list should be paying down debt, followed by a rainy-day fund. Saving for college should take fourth place, according to this author.

Carrie Schwab-Pomerantz also chimes in on the subject in a post called “Saving for College: Understanding Your Options.” Here, Carrie answers a question from a mother who is wondering about saving for college for her three-year-old child. College costs and savings vehicle information is shared. Carrie states:

“As parents, it’s natural to want to put our children’s needs first. But you can use loans to pay for your child’s education if you have to. You can’t get a loan for retirement. So, as important as college is, our retirement should always come first. Think of it as another way of taking care of our children, by ensuring we’re financially independent once we’re no longer working.”

The last financial guru, Dave Ramsey, leads his followers in “Retirement of College Funding: Which Comes First?” by asking “What is more important—my own security at retirement or my child’s education and future? There’s a lot of emotion wrapped up in that question, which makes it easy to come to the wrong conclusion.” Simply put, in his “Baby Steps,” Dave prioritizes retirement over college for a reason. “You’ll depend on your retirement savings to live, eat, and pay for shelter—the basics. If you’re not working, that money is your only source of income.”

Are you convinced?

With the industry gurus taking the same side of the coin, it seems pretty convincing that saving for retirement should be a priority over saving for college. I was part of this crowd for years until my oldest daughter entered her sophomore year of high school. I started looking at data and noticed these articles, which pointed towards studies in which parents took money out of their retirement accounts to pay for college. The data and studies were verified.

However, two items started making me question this advice. First, I hadn’t read an article with any numbers that stated why saving for retirement over college was better. Second, I started understanding why parents pull money out of retirement accounts to help pay for college. I’m not advocating this as a smart move, but rather acknowledging an understanding of behavior. I’m in the same situation as the middle-class parents. Advice from high-income earners (likely many of the financial gurus noted above) seems to make the subject a little less relatable from an emotional standpoint. We parent, live, and make choices emotionally.

Contrarian standard

In 2015, Mark Kantrowitz, a financial aid expert, wrote an article for called “Saving for College vs. Saving for Retirement: Why the Conventional Wisdom is Wrong.” Mark did the calculations and reviewed a couple of scenarios while dispelling financial planning myths.

– You can’t take out loans for retirement. Simply put, a couple over the age of 62 who has adequate home equity may take out a reverse mortgage or reverse equity line of credit.

– In fact, borrowing money to pay for college was a bad idea. Check out the article for the data. (Exploring it in detail here would make this article too long.)

Does it ever make sense to borrow money to pay for college?

Mark’s article highlights a specific situation. “The only time borrowing for college costs is financially beneficial is when the interest rates on parent loans are lower than the equivalent long-term earnings rate on your investments. But that just doesn’t happen very often.”

Currently, Direct PLUS loans carry an interest rate of 7%. Most financial plans assume rates of return of between 5%-6.5% depending on the portfolio, planner, and timeline.

Why does the financial services industry tell parents to save for retirement first?

To start, there’s a conflict. As I noted in my Current State of Affairs post, most advisors earn a commission for selling a product or they receive compensation from the assets they manage. Few charge by the hour or charge a flat fee. These same people and institutions will help families look for ways to fund goals that don’t take money away from the generation of revenue. Looking at the conflict another way, college will be coming before retirement and is less expensive. From the advisor’s perspective, the parent or student should take out a loan. The goal is funded and the advisor isn’t paid less. The loan will be dealt with later.

Next, outside of a few individuals, the industry doesn’t know how college funding works. Savings, loans, scholarships, work-study programs, class hours taken – these all influence the cost of college. Few if any discussions or works are available about how to shop for college. Families must match the student with the best college from the beginning; this can reduce time in school and transfers, the latter of which increases costs.

The reality is that parents will likely be on the hook for at least some of the student loan debt if they haven’t saved. The federal government will allow only $27,000 in student loan debt over four years with Stafford loans ($31,000 between subsidized and unsubsidized). The rest will come from either PLUS loans, private loans, or home equity. PLUS loans require a parent to participate, and private loans usually require a cosigner. This, again, places the matter back in the parent’s lap. The solution is to make college funding part of a family’s plan to shop for and save on higher education.

How many advisors and financial service professionals work in the trenches?

Based on my experience, very few (specifically, doing things like helping families fill out the FAFSA). Personally, I enjoy volunteering twice a year at College Goal Sunday. Families bring in their information and we walk through the FAFSA. No selling, just helping kids get into school and giving information to Mom and Dad.

Beyond the conflict and lack of understanding of college funding, the industry forgets that financial planning has value to the end client only when the plan is based on the client’s own values, not what we impose on the client. If a family ranks college funding over retirement, the advisor has the responsibility to build the plan that way AND to educate the family about the tradeoff between funding college and/or retirement. With more information, the parent better understands his or her choice and the cost of his or her decision.

What do you do?

– Take a deep breath. As a parent, I want the best that I can give my children. If that means working longer or having a little less at retirement, fine. I understand the choice and cost of this decision. Most parents have the same mindset of giving the best they can to their kids. To save for retirement over college seems contrary to how we parent and makes some parents feel as though they are being selfish.

Put your advisor through the paces and see how clear the college funding portion of your plan is. If it only states saving $x’s/month, you may be in trouble. Have a young child? Your advisor must, at a minimum, use a process or method to help beyond the savings component.

– If your student is in high school, use these articles to help you understand college funding. Download this worksheet to develop a college funding snapshot. This will help you understand how much the family can afford today.

Have more questions? Call to schedule a time for us to talk at 317-805-0840.

Navigate The Stock Market Volatility


Stock Market Volatility

1. with the recent price swings you be getting a little scared of the markets and wonder if another 2008 is upon us.
2. we do not know for sure but let’s review a few a things.
– The large point drop in the DOW of nearly 1600 points was large at 6.26% but not the largest in percentage terms
on 8/24/15 the dow saw a 1089 point drop or 6.6%
– 5/6/2010 saw the flash crash with the DOW Dropping over 9%.
POINT: it is not the down days that define the success of an investor. It is staying in for the good days. I.e. remove the top 10-20 days and things really do start looking bad, but you need to stay invested.
– On average we see in an intra-year drop from peak to trough of 13.8%.

2. It is your stock/Bond/Cash ratio that best explains your return and volatility over time at over 90%.
– If you were extremely nervous perhaps we need to have a conversation about your capacity for risk and risk perception.
– It may be time to change your longer-term allocation.

3. We use a disciplined approach to match your portfolio to your goals. Accomplishing your goals is really what this is all about any.
– Matching your investment portfolio to your goals.
– How to use a bucketing methodology.

We use an academic approach to factor-based investing
The premiums:
1. Stocks outperform bonds over time.
2. Small-cap stocks outperform large-cap stocks over time.
3. Value stocks outperform growth stocks over time.
4. Profitable stocks outperform stocks with low profits over time.


The traditional investing world is shrinking as younger workers face the hurdle of saving for retirement, servicing student loans, buying homes, and starting families. The shrinking isn’t in the

Understand how crowdfunding works

number of available choices (like mutual funds or exchange traded funds) but in the number of publicly traded stocks. The number of publicly traded companies decreased roughly 46 percent from the middle of 1996 to the middle of 2016 (1).  Crowdfunding may change how we invest.

Let’s look at one of the broadest domestic indices, the Wilshire 5000. In August 2016, the index had 3,607 stocks, while in 1998 it had 7,562 (2). Ironically, the number of public companies outside the United States has risen by roughly 8,700 since 1996 (2). The lower number of public stocks today can be attributed to the fact that large companies are merging or failing to meet listing requirements, and fewer companies want to go public (2).


As the Wilshire example shows, this is happening now. Consequently, on the larger company side, equities like Apple play a more important role in the markets. Remember when Apple was not a major player for the top position in the S&P 500? Today, the stock occupies roughly 3.5 percent of the S&P 500 and over 11 percent of the NASDAQ 100. An article from CNBC discusses how this may negatively affect the popular trend of passively investing in index-based instruments (3):

“Some have gone a step further, arguing that passive investing leads already-overvalued stocks to become even more overvalued, as new money is allocated on the basis of existing (relative) sizes.”

For active mutual fund managers, a shrinking pool may mean holding onto well-known names longer than they would have otherwise. This point demonstrates the influence on mutual managers and investors as the number of stocks decreases. Less flexibility exists for mutual fund managers because money is leaving the arena and there are fewer stocks in which to invest.

This movement plays out like a game of musical chairs, in which the companies are the chair and the investors (including the fund managers) are trying to grab a seat. In our case, the number of investors does not decrease as the number of chairs becomes smaller. We end with people sitting on each other’s laps.

What is an investor to do?

You should continue with a normal course of saving and investing regularly, but you will need to make a few adjustments.

  1. Pay attention to your holdings. Know what you own and how to use it in your portfolio.
  2. Notice where you save money. How much goes into your 401k versus IRAs or Roth IRAs? Do not forget about your emergency savings. IRAs at large firms like Schwab, Vanguard, or TD Ameritrade typically have more investment choices than does a 401k. The point is to make sure you have the flexibility to access the best investments.
  3. Be ready to change as the financial markets change. Two movements are taking place that may change our investing landscape. The first is socially responsible investing, which has captured much press recently. The second change stems from crowdfund investing or the private equity movement.

What is private equity?

Private equity covers many types of investments, though its main characteristic involves not listing on a public exchange like the New York Stock Exchange or the NASDAQ. Private equity typically involves an investment in a non-listed business. Profit, management, and other traditional metrics matter, as they do with a listed business, but you do not have the reporting requirements of listed companies.

Some analysts propose that investing in private equity forces people to become “real investors” because of the lack of liquidity and the longtime horizon needed for the investment to provide returns. Private equity may also include bonds or other forms of debt.

Most closely associated with private equity is the venture capital firm, or VC. VC firms invest mostly in small companies or startups they believe have growth potential.  The institutions receiving the money typically do not have access to enough traditional funding through banks, public markets, and other places. Most of the investments are high risk. Consequently the terms of VC funding do not follow a traditional path.

A new and growing way to access private equity involves raising money through crowdfunding.

What is crowdfund investing?

Think Kiva, Kickstarter, and Go Fund Me; these are popular examples of crowdfunding. It is like a public version of Shark Tank. People put their ideas out there and potential investors can pass,

Understand how crowdfunding works

invest, or sometimes become actively involved in the presented opportunity. One of the key features of crowdfunding is that it allows securities to bypass federal securities laws (4).

Crowdfunding sprang into action with the JOBS Act of 2012, signed by President Barack Obama. The idea behind the act had the “SEC to write rules and issue studies on capital formation, disclosure, and registration requirements” (5). It opened the door for more participants to fund companies or investments that were previously available only to accredited investors.

Who are accredited and non-accredited investors?

In simple terms, accredited investors are high-net-worth or high-income individuals who have access to private investments that do not have to be registered with the Securities & Exchange Commission (SEC). To become an accredited investor, one must meet one of the following criteria:

– Have a net worth greater than $1 million. This value cannot include the value of one’s personal house.

– Have an income of greater than $300,000 for couples (or $200,000 for individuals) for the two previous years. Also, the couple (or individual) should expect to meet the criteria in the current year.

A non-accredited investor does not meet the needs listed above. As we can imagine, accredited investors make up a small percentage of the population. This is where the JOBS Act enters the picture with crowdfunding.

What are the rules for crowdfund investing?

In a press release dated October 30, 2015, the SEC outlined four areas for rules and regulations for crowdfunding, which include (6):

  1. Capital limits on funds raised by the company.
  2. Disclosure requirements on issues of specific information for the security offered.
  3. Investment limits on the amount investors buy.
  4. Framework for broker-deals and funding portals that engage in crowdfunding.

A brief summary of each area

Capital Raising Limits– Companies may not raise more than $1 million through crowdfunding in a 12-month period. Some companies, such as non-US companies and Exchange Act reporting companies, will not be eligible for crowdfunding campaigns.

Disclosure Requirements (as taken from the October 30, 2015 press release)-

  • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements unless financial statements of the company are available that an independent auditor has audited;
  • A description of the business and the use of proceeds from the offering;
  • Information about officers and directors as well as owners of 20 percent or more of the company; and
  • Certain related-party transactions.

In addition, companies relying on the crowdfunding exemption must file an annual report with the Commission and provide it to investors.

Investor Limits– Investors are divided into two groups: income or net worth below $100,000, and those above $100,000.

  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
  • If either their annual income or net worth is less than $100,000, the greater of:
  • $2,000 or
  • Five percent of the lesser of their annual income or net worth.
  • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Broker-Deal and Portal Framework– Some funding platforms should register with the Commission a new Form Funding Portal and be registered with FINRA. Additional requirements taken from the same press release are as listed below:

  • Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered, the information a company must provide to investors, resale restrictions, and investment limits;
  • Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
  • Make publicly available on its platform the information a company is required to disclose throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
  • Provide communication channels to permit discussions about offerings on the platform;
  • Provide disclosure to investors about the compensation the intermediary receives;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a reasonable basis for believing an investor complies with the investment limitations;
  • Give investors notices once they have made investment commitments and confirmations upon or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with the completion, cancellation, and reconfirmation of offerings requirements.

The rules would also prohibit intermediaries from engaging in certain activities, such as:

  • Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with the personally identifiable information of any investor or potential investor.

Could crowdfunding change the way we invest?

One of the most noteworthy trends in crowdfunding right now focuses on impact investing and socially responsible investing. As we look forward, though, crowdfunding may solve the problem posed earlier about the declining number of publicly traded securities.

Perhaps we will see a trajectory in packaged products similar to the ETF or mutual fund for the smaller investor. This would create economies of scale while providing diversification and reducing business risk.

Where do I look for crowdfund investing opportunities?

Here is a link for portals regulated by FINRA:

Next steps:

  1. Educate yourself on crowdfund investing. As with other risky investments, the potential to lose money exists. Make sure you have the capacity to lose the money. If not, crowdfund investing is likely not suitable for you.
  2. What are you looking for as an investment? Is it to have an impact locally or “own a dream business” like a brewery without the stress of running it?
  3. Talk to a knowledge advisor on the topic. Be careful when engaging in this conversation, as many “advisors” are really salespeople. Ask how the advisor receives compensation. If the advisor receives commissions, he/she is a salesperson.

Check out this related article on investment performance.




Overconfidence with Finances and Sailing

Helping GenX parents plan for college and retirement.



Overconfidence With Finances and Sailing
1. How we get ourselves into trouble
2. Common financial moves
3. Get help

This post compares a day out on the water sailing to common experiences people encounter with their financial lives.  The root for many of these difficulties reflect behavioral.

Isaac Newton Investing Lesson Part 1

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information:, 317-805-0840
1. Isaac Newton
2. Stock bubbles
3. Cognitive Dissonance

Do you want to reduce your tax burden?

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information:, 317-805-0840

1. Taxable Interest
2. Stock Dividends
3. Capital Gains
4. Health Savings Account
5. IRA contributions

March and Market Madness

I help Purdue faculty make the most of their benefits and 403(b) retirement plan.
Contact Information:, 317-805-0840
How many seconds is one year of your investing career in terms of a college basketball game?