Late but not lost -- Educational savings for the boomer investor

Planning for their children's college among baby boomers is akin to how they think about exercise: They're motivated around New Year's Day but it quickly takes a back seat to other issues (if it rates a seat at all.)

While "college saving" isn't a four-letter word for your clients, it is likely to cause some degree of procrastination or, worse still, apathy. But even for boomer clients with children that are closing in on college-age, all is not lost.

According to Dave Root, Jr., CEO of Pittsburgh-based D.B. Root & Company, saving for educational expenses is a relatively straightforward idea.

"I would say the key to being successful is to start saving now, save as much as you can, and be intelligent about how you invest the money," Root, Jr. says. "It doesn't have to get much more complicated than that."

If it sounds so simple, why do so many boomer clients have such a difficult time putting the pieces in place?

For Ray Loewe, founder and president of College Money, a Marlton, N.J.-based college financial planning firm, the lack of savings falls into one or more of the following three categories. First, while some people are good savers, most procrastinate.

"[College] seems so far away and it's so expensive to raise kids to begin with," Loewe says, "Parents don't realize the impact that not saving for college is going to have on their lives and their retirement."

Second, a lack of understanding exists as to just how expensive college will be. With state school costs running at approximately $20,000 per year and the cost of an Ivy League school more than double, higher education is a significant expense. And that doesn't account for expenses outside of tuition, room and board; those that cover the cost of social networking. Everything from sororities and fraternities to vacations and extracurricular clubs can quickly add up.

"I had one set of parents who showed up after they were in the process of paying and said, 'You forgot to budget for spring break,'" Loewe says.

Lastly, he cautions that many of the best-laid college savings plans are thrown off-track simply because parents don't realize how emotionally attached they will become to the admissions process. This will cause them to make unnecessarily expensive decisions.

What will happen, Loewe asks, if your child gets into Harvard?

Emotions kick in, he says, and the appeal of "my kid goes to Harvard" -- as opposed to the original savings goal -- drives the decision.

No matter which of these symptoms a client experiences, it's imperative to appeal to their sense of commitment.

"I think it's a mindset," Root says. "It's making a personal commitment to set money aside to help offset what is already an extraordinary expense. The earlier [parents] start to plan for it, the better off they'll be."

The magic number
Loewe begins the savings process by defining a "Family Savings Plan," which matches his firm's available resources to best fit a given situation.

Far and away the most popular tool is the 529 plan. Offered in every state, 529s give families a tax advantaged savings vehicle. According to Root, if a client is earmarking funds primarily for college and is virtually certain they're going to go toward educational expenses, the 529 plan is the most appropriate option.

"It's hard to beat the tax-free element and -- in some states -- a tax deduction on top of that," he says.

He does caution, however, that if you're less certain that it's going to be used for educational expenses, the client should be made aware of potential ownership and the tax issues that may come into play down the road.

One of the biggest appeals with 529s is that they are a basic savings plan, which -- like a 401K -- encourages clients to pay themselves first. But as with any investment choice, proper due diligence should be performed and it's important to look at the quality of the investment options offered by a given state. In Virginia, for instance, they offer twenty-three different fund options through American Funds, long known as a solid money manager.

College vs. retirement
"College savings is really a retirement issue, and clients had better think about it now to avoid heartache later," says Bill Raynor, vice president and national sales manager with New York-based OppenheimerFunds. "If you planning to retire at age 55 and suddenly get hit with a $120,000 bill, that three year retirement plan quickly becomes a 10 year retirement plan."

If the advisor holds himself out as a true planner, Raynor says, then he cannot ignore the college savings issue. And the costs are such that it's increasingly becoming a multi-generational issue that involves not only the parents, but also the grandparents and their estate plan.

Loewe adds that when it comes to college savings, individuals who make less than $100,000 per year will likely qualify for financial aid, and should focus instead on maxing out their 401Ks. Clients who earn over $150,000, however, will not qualify for financial aid and may well end up having to take out loans to cover the costs.

"You can have quite a situation," Loewe says. "We like to call the time between the end of college expenses and the beginning of retirement 'The recovery period.'"

If a client goes deep into debt for educational expenses, they may spend the recovery period simply paying off debt, as opposed to investing funds into their retirement savings. If this is articulated to clients, they stand a better chance of taking the issue seriously.

To help advisors better prepare their clients, OppenheimerFunds will soon roll out its back to school campaign. It offers a college savings calculator, personalized Web pages, pre-filled applications and most importantly, according to Raynor, educational material that explains recent tax law changes that make the tax-free treatment of 529s permanent.

Of course, no matter how seriously they want to take their savings plan, the client should always be encouraged to adopt a strategy that is appropriate to their situation. While it's never too late to start savings, each client's unique time horizon does influence what savings products -- and what amount of risk -- are appropriate.