The Huge Difference Between Inflation and the Inflation Rate

Plus, how to prevent AI crooks from tricking you, and Rethinking College Planning: What You Need to Know Now 

It's Friday, August 16th.  Coming up on the show today, we have a great conversation from my Wealth Management Convergence conference about one of the most significant issues clients face in the world of personal finance.  But first, let’s talk about inflation. Over the past 12 months, inflation has fallen to just 2.9%. This is the lowest inflation rate since 2021. Three years, or at least that's what you're hearing in the media. But that story, that reference, that spin, is a distortion of the truth. And I want to share with you what's really going on.

You see, when they tell you that inflation has fallen to only 2.9%.  That's a spin on the facts. The fact is that the rate of inflation has fallen to a rate of 2.9%. But that doesn't mean that inflation itself is only 2.9%. What do I mean by all this gobbledygook? Let me explain it to you.  As you have been feeling this every day, you know that compared to four years ago, the cost of pretty much everything is dramatically higher. From haircuts to car repairs, to childcare, to hotel rooms, the prices are dramatically higher than they were. None of those prices have come down. When they say that inflation is down to 2.9%, that's a misnomer. That's misleading. There's nothing down about it at all.

Inflation means that prices today are 2.9% higher than they were a year ago. Higher, not lower. There's nothing down here. It's just that while the prices are rising, they're simply rising more slowly than they did before. The inflation rate was as high as 7%, 8%, 9% over the past few years. We're not having 7% inflation at this point. Inflation is 2.9%. But let's not kid ourselves into thinking that inflation is down. It isn't. You're still paying 20%, 30%, 50% more for your goods and services than you were three years ago. So, every time Janet Yellen, the Secretary of the Treasury, says that inflation is transitory, well, she's right.  High rates of inflation didn't last long. That was transitory.  But at the same time that she's right, inflation is transitory, she's also dead wrong.  She's a liar, because when she tries to suggest, oh, inflation has come down, that doesn't mean the prices have come down. They haven't. You're still stuck with the higher prices that the high inflation created.

It's kind of like a murder charge. Somebody saying, well, he's not murdering anybody lately. Well, that doesn't matter. They've already murdered a whole bunch of people! So where do you get off saying, “Oh, no big deal that the murders are over?”   No, we're still going to prosecute. Aren't we?

Childcare is up 6.5% over just the last two years. Electricity bills are up 10%, car insurance is up 40%.  You feel this every day. On my road trip last month across the country, I paid $6 a gallon for gasoline in California.  And so now the conversation, because the inflation rate. Is running at 2.9% right now, the lowest rate on an annualized basis since 2021, everybody's now looking to the fed saying, well, since the inflation rate has gone down so much, you ought to be able to cut interest rates now.  But are they going to do that? And if so, when, and by how much? Is the fed going to cut a quarter of a point? A half a point? So what? Your butter and eggs and cheese and blue jeans and soap, they aren't going to go down in cost simply because the Fed lowers the interest rate.  You're still stuck with today's high prices.

So, we mustn't be fooled when politicians try to pretend that, yeah, things were bad, we had high inflation, but now we don't have high inflation and so everything's better. No, it's not better. Not yet.  So, what does all this mean for you really? If we're still stuck with the higher prices that we had before, we kind of get what the impact is on our pocketbook. We kind of understand what this means for the overall economy. Nothing good, but what does it mean for our portfolio? That is a much bigger question and takes a really long time to answer. Not something I can do in 10 minutes here on my podcast. And so, now that inflation rates have come down and the Fed being expected to cut their interest rates soon.  I want to talk to you about what's going to happen to your investment portfolio and particularly, the bonds in your portfolio. Odds are, in your portfolio, you have more money in bonds than in stocks. And interest rates do dramatically impact bonds and bond prices.

So, we're going to do a webinar on Wednesday, September 11 at 1:00pm ET. And in this webinar, I'm going to be joined by Jerome Schneider from PIMCO, the world's largest bond manager. And we're going to tell you the adjustments you need to make for the bonds in your portfolio. You're going to learn how to figure out how much cash you should be holding right now. We're going to do a deep dive on the array of new opportunities in the fixed income market. The webinar is free. You can register right now. The link is in the show notes. I know it's almost a month away. September 11^th.  We'll be talking about this in weeks to come, but I wanted to give you a heads-up about it right now.  If you're a financial advisor, you get one CE credit to boot. So, check out our webinar, register for it, sign up for it today. Now that the inflation rate is down, and interest rate cuts are coming, big implications for what just might be the majority of your investment portfolio.

Also, I want to mention this. Last month, I told you about a really scary scam. Scary because it shows how good that cyber criminals are getting at using AI to impersonate people. The story I shared with you was about a guy working in a finance department at a really big company. And he was fooled into thinking his CFO was telling him to wire $25 million to one of their foreign bank accounts. It turned out that the CFO wasn't doing this. The whole thing was an AI fraud and the company ended up losing $25 million. If you missed that podcast where I shared the story, the link to it is in the show notes.

Anyway, that podcast caused Theodore of Miami to write to me.  And here's his question:

"Dear Mr. Edelman, I am a regular listener of your podcasts. I find them interesting. I fell for a scam similar to the one you reported on. How can an ordinary investor avoid a scam when a company with an IT dept can’t do it?"

Theodore, you've really nailed this one. This is exactly the reason I recorded that podcast and shared the story. And I'm glad you got the point. If trained IT professionals can't prevent these kinds of scams...if professionals in the workplace can't recognize that they're being scammed, how is it that you and I are going to be able to protect ourselves. What it comes down to, and I kind of hate to say this and to say it in this way, but, but I'm afraid, it's the reality today in our technologically-focused society, what it comes down to is that you really can't believe anybody, anytime, anywhere about anything.

That's really what it comes down to. We've kind of learned over the past couple of decades when dealing with the internet to ignore what we see online, you know, the take with a grain of salt, the claims that are being made there and the promises being offered, we know not to double click on links that we are sent in an email or in a text. We know to not answer the phone from phone numbers we don't recognize or strangers that we don't know and to just say no to these kinds of things. We've learned all that, but what if you're dealing with someone who you do know? That’s really the issue, isn't it? Because that's what these new cyber scams are all about. They're using AI to impersonate people you do know. They replicate the voices. They even now can replicate the faces of the people that you know: your colleagues, coworkers, your friends, your family members.

So, you can get a phone call from somebody and it sure sounds like your best friend or your brother or your daughter. And it's indistinguishable.  So, what we need to recognize is that if we're getting a phone call, even from our mom, we have to assume it's not really mom.  Well, how do we do that? How can we get to a point where I can genuinely believe or trust that it is mom?  It's real simple.  Code words, you and your mom, you and your friends, you and your other family members, you and your coworkers have to establish code words. You already have passwords that allow you to effectively and safely access your email and your text and your online sites. You use passwords for that.

We need to use something similar, a password or a code word when dealing with your spouse, with your kids, with your parents, with your friends, saying, if you're going to call me asking me for something, you’ve got to be able to give me the code word. And if you can't give me the code word, I'll know it's not really you.  Because it might sound like you, it might look like you, but without the code word, I'll know it's not you.  And you need to change the code words periodically. And you need to transmit the code words only verbally between each other. You can't put the code word in an email or a text and send it because your email or text could get hacked.

And now all of a sudden, the crooks have your code word. So, you've got to be very careful how you transmit and where you store the code words, the same way you're careful with how you safeguard your passwords. I'm afraid this is what it's getting to. This is where we're headed in a world like this.

So Theodore, you're onto it, and I'm glad you recognize the issue for what it is. And I hope everybody takes greater precautions in an AI age.

You can send me your question as well, just send it to AskRic@TheTruthAYF.com. The link is in the show notes. 

Rethinking College Planning: What You Need to Know Now

The following interview is from my Wealth Management Convergence back in March.

Ric Edelman:  Our next session is, away from the investment side, more onto the financial planning side, the new approach to college planning. So please, join me in welcoming onto the stage, Ross Riskin, and Christina Worley. 

Welcome to you both. I love the pedestrian stuff, the stuff that isn't high tech and innovative and, new age kind of stuff because you don't have to overcome the client's, reticence or confusion. There isn't a client in the country who doesn't realize that college planning is one of the most significant issues they face in the world of personal finance. Parents are intimidated by it. They're petrified, frankly by it because of the incredible cost of college.  

We are seeing more than ever annoyance and frustration because of the cost of college, the student loan debt fiasco, the inability for so many colleges to frankly prepare the students for careers the way that we are expecting considering the incredible cost.  

So I'm really glad that we're talking about this topic. Ross, you talk about this all the time, and I got a quote here from you. I've heard you say it on stage.  I've seen you write it in articles. What it costs is not the same as what you'll pay.  And what you paid does not always equal what it costs.  

Ross Riskin: Yeah, that is something I say frequently. What it costs meaning sticker price. And this is something usually at the forefront. This is what parents and students end up seeing when they go online, a website, talking to guidance counselors at high school, hey, this school costs $60,000 or $70,000 or $80,000. 

But the reality is not everybody pays that when you factor in financial aid distribution analysis. Really, you have people on one end of the spectrum, the ultra-wealthy or high-income clients, are gonna pay that. They shouldn't always pay that. We'll talk about that later. And then on the other end of the spectrum, those are actually qualifying for need-based aid, lower income households aren't gonna pay. But there is room in the middle where they're not able to pay that. And so when you look at financial aid distribution policies, No private schools could continue to operate in existence by charging twice the amount of state schools. And you actually look at the numbers come down. 

And then the other side of that is, well, what you pay doesn't necessarily equal what you, what it costs you. I look at when the bill actually comes due. Of, hey, spring semester tuition bills are just paid. And you have several options of how you pay that, right? You could pay that out of cash flow. You have a $25,000 bill that comes out. 

But $25,000 paying out of cash flow maybe cost you $40,000 because you have to pay with after tax dollars or from a 529 plan. So, maybe you're paying $25,000 but you put $15,000 in. So, it really didn't cost you the $25,000, you didn't put that all in. Or maybe we'll get into on the student loan side, maybe you're using loans to actually pay for a part of that for which you don't end up actually paying that full amount back ever. 

Or maybe you're paying $25,000 back over 15, 20, 25 years and there's some forgiveness element. So, I think people get scared of the sticker price of this is so expensive. Most people don't pay that. And then we don't spend as much time on the distribution planning side of like, where should you be taking money from to pay for this bill? 

And in many cases, college isn't the only education bill, especially when you're working with the high-net worth, ultra-high net worth clients. There's likely private school before then, boarding school, other things to take into consideration.  

Ric Edelman: I also wonder if it's further complicated by the fact that in addition to the actual cost of school tuition, room, board.  If that school is 1000 miles away, you're paying for airfare for this kid, for how many times in a year, and, you can add up all the other expenses and such.  

Ross Riskin: Yeah, absolutely. And then it even starts before then, with the test prep of preparing for a standardized tests that we're seeing are coming back. 

Most schools have gone test optional, but now we're seeing I think another Ivy League school just added that back in. So, there's other costs that are being incurred before you're even getting to that and have nothing to do with actually going to the school in question.  

Ric Edelman: But I would think that when you're counseling the client and the child is much younger, elementary school, junior high, even potentially high school, you're assuming that the kid is going to go to college. 

Are you generally assuming that they're going to go to a private four-year or a public two-year? What is it that you're generally recommending that the client assume in their college planning effort?  

Ross Riskin: Yeah, I think you're seeing a lot of different things. I think it's, erring on the side of caution or being conservative, you're probably assuming private school.  So, you at least have a higher funding goal.  

Ric Edelman: And in that effort, are you therefore assuming the average cost of a private four-year degree.  Almost a full ride even though it could be a public two-year? 

Ross Riskin: Yeah. Exactly. And that's part of the challenge. Look, the majority of people that I've encountered in talking to advisors across the country, 99 percent of what advisors do when they say they do college planning is they do exactly this. 

It's what's the average cost of a private school. Take an inflation rate, 4 to 6 percent inflated out back into what amount you need to save. That's just a time value money problem. It doesn't address the other concerns.  

Ric Edelman: Which means you're overfunding.  

Ross Riskin: Potentially. I mean, it's a good starting point to actually do that. But the problem is advisors usually stop there and they don't provide any additional value. They don't usually, when to come time to knowing which schools to apply to. Did you save enough evaluating different options that way?  

Ric Edelman: So Christina, from your perspective, how many students are getting a full ride?  

Christina Worley: Well, I think that the statistics are only 0.3% of, students actually get a full ride.  

Ric Edelman: 0.3?  

Christina Worley: Yes.  

Ric Edelman: Virtually nobody?  

Christina Worley: Yeah, so if you're planning on it, you shouldn't. A Division I, student would get $20,000 a year for the five sports that pay the $20,000 and I think it's Division II gets $9,000 on average a year.  So really you shouldn't be planning on that. 

Ric Edelman: So they're getting 20 or 20 percent maybe of the cost.  

Christina Worley: For a private school. Florida has a lot of benefits.  Down here we have the Bright Futures Scholarship Program and we have the Florida Prepaid and there's a lot of Florida specific benefits down here, but I'm sure Ross will tell you that if you do community college, that knocks 40 percent off the cost of your school of what you're going to be paying. 

Ric Edelman: Is that a welcome recommendation to parents? Have your kid go to a community college for two years, live at home and then transfer in as a junior?  

Christina Worley: Sure, if you can talk ‘em into it. Saves a fortune.  

Ric Edelman: I didn't ask if you can talk him into. I asked what was their reaction? How likely are, how successful are you at talking them into it? 

Ross Riskin: That’s a challenge. 

Christina Worley: I'm kind of successful.  

Ric Edelman: Point zero three?  

Christina Worley: No.  

No, because you can tell them the kid gets a condo when they graduate or if there's extra in the 529 plan you can enroll $35,000 into a Roth. There's a lot of things you could do with the money if you over save. If the kid's a little shaky. putting that two years into a local community college saves the family a fortune. 

And a lot of times the kids don't do too well in the private schools the first couple years. Having them at hand kind of keeps an eye on how things are going astray and watching them.  

Ross Riskin: I mean that's a good point. That is a difficult conversation to have, especially if it's coming from you as the advisor, who you're having very limited contact with a student to begin with, and then, where are all their friends going? 

Christina Worley: Yeah.  

Ross Riskin: Where are their buddies going? So you have to combat that. But, I think a positive note is the next generation is actually a little bit more aware and pragmatic, like financially of that or concerned about, hey, what am I going to major in? What's the starting salary? There's a little more awareness of that, which maybe makes that conversation a little bit easier, but it's still challenging. 

Ric Edelman: College enrollment is down, compared to five years ago, as people are rejecting the cost and time, and the lack of career opportunity that the degree will bring. 

Christina Worley: Yeah, those English majors. I mean, my gosh.  

Ric Edelman: Well, I always say that when a client tells me that their kid is majoring in philosophy, I go they're going to go work for a philosophy company? 

Ross Riskin: Yeah, but you know what?  I'll push on that because I think what's interesting is for the past 10 or 20 years, everything has been STEM STEM STEM right? (Science, Technology, Engineering, and Mathematics) Engineering degree, mathematics degree. But you can read conflicting things now with AI of, do you need to go to school and know how to code and do that? 

So, there is this start of the pendulum shift back to liberal arts education for certain things at certain schools. So, there's no denying that, like the value of those degrees is more valuable at certain schools than others. But 10 years ago, if we talked, we would have said everybody needs to know how to code and write applications. 

Ric Edelman: Yeah, but I don't really think that you're saying that they should spend $120,000 over 6 years to get a degree in philosophy.  

Ross Riskin: No, not at all. Not at all. Not at all. Not saying that. You're right. You're correct.  

Ric Edelman: To clarify. But to that point, you're, as an advisor, you're dealing with so many different kinds of clients and, people have young children, versus kids in high school, grandparents increasingly involved in the situation. 

Christina Worley: I deal with the grandparents a lot more than he does. Because I have wealthy clients and their grandparents and with the rules now, it's $180,000 the grandparents can put into a 529 for a child, a grandchild. It's not going to count against their FAFSA (Free Application for Federal Student Aid) now at all. It used to be the assets and the income would count against it. 

Now they don't. So they can overfund it and then the parents can use $10,000 a year for K through 12 private school. Which is wonderful for the parents, and then if there's extra in there, they get to roll out $35,000 into a Roth when the kid graduates, $100,000 a year for five years.  

Ric Edelman: So, you're arguing that due to the new flexibility, especially the Roth conversion that is relatively new, that the risk of overfunding really isn't much of a risk anymore. 

Christina Worley: No.  

Ric Edelman: Because there's so many other ways to spend the money in a tax-advantaged way. Whereas the risk of underfunding remains daunting because of the threat of student debt.  

Christina Worley: And with the grandparents, with what's happening in 2026, with the sun setting and the estates going down, these assets are outside of the grandparents’ estates. 

So, it helps them in so many ways. If the kid doesn't use all of it and you do the Roth and you do the private school and there's still leftover, then the grandparent can actually take it back.  

Ric Edelman: So in that weird sense, would you argue that you should talk about college planning really as a retirement planning and estate planning conversation, not a college plan. 

In other words, we're going to take advantage of the fact that you've got a kid who's going to be 18 and we can move money around in such a way that we take advantage of the fact that we're going to call it a college funding plan, but nudge, nudge, wink, wink, we are not using it for college. 

We're going to use it for retirement.  

Christina Worley: Well, for the grandparents, I always bring it up as a way to handle taking care of the kid and you can always take it back as a grandparent as long as you haven't told the child how much is in that account for his college, cause you know, the kid's going to hate you if you do. 

Ric Edelman: But under the law, don't you have to? 

Christina Worley: No. It's your account as a grandparent. Don't tell your kids how much you put in there. If there's a quarter of a million in there, and then you decide to take it back and have that lovely trip around the world with your new wife, they're gonna be pissed at you.  

Ross Riskin: But you bring up an interesting point about the distribution planning side, and I think that is a newer conversation happening now. Just because you have a client that has two, three, $400,000 in a 529 plan, the real question is, should that all be spent and should it be spent now?  So that depends on the client situation, right? If you have grandchildren, other grandchildren, you want to maximize the use of that,  

Christina Worley: And you can always switch it between grandchildren if you have a lot of them and you own it as a grandparent, whoever in there is in the mix that's your fave. You can switch it. 

Ric Edelman: So, one of the mistakes I find new grandparents making is that the first grandchild shows up, they're so super excited and they proclaim to the parents, we're paying for their college.  

Christina Worley: And then there's eight more coming down the road.  

Ric Edelman: A good friend of mine made that mistake. He and his wife declared that they would pay for school. They didn't say college, they said school. So they're putting the grandkids through private school, K through 12 and college. They're wealthy fortunately but they said this at the first grandchild and then seven grandchildren later, five of them from one of their sons. When they had the fifth child, and they were at this point getting kind of fed up with the whole thing, and now they're funding all of this. 

They said to their son, “if you have a sixth child, we are not paying for their education.” Two weeks later, he got a vasectomy. (laughter) You should have that conversation a long time ago.  But it does raise the issue because the kids are different ages and very often the grandparents might not have had the resources when the first grandchild was born, but as everybody's aging and even the grandparents now reaching retirement, they now have the resources and they're now ready to do a bunch of funding for them. 

The issue of fairness comes up. How do you fund all of these different college accounts? Do you give everybody an equal amount of money or do I age adjust the amount of money that I put into each child's account? Do the younger kids get less than the older kids because the younger kids get more compounding. 

Christina Worley: I think that is a question with all the families on whether you're going to be equitable or whether you're going to address need. There's always families that have special needs children these days. One out of 54 children has autism. Those are on the spectrum. So, there's a lot of families that want to concentrate…the 529s can be used for special needs children.  

Ric Edelman: What do you do if one kid decides to go to an in-state school to be a teacher and another one decides to go to a private school to become a physician and the costs of their degrees are so radically different…are you going to provide equal amounts of support?  

Christina Worley: Well, you can switch it between the 529s. And if you lump- sum it for every child and tell them you got $100,000 in your account, if you don't use it for school, you can get your condo. You can use it for starting your business or your practice.  

Ric Edelman: So do you encourage that of clients? That they have such conversations with their kids saying, look, here's a bucket of money. You can use it for school. You can use it for private versus public. You can use it for undergrad versus grad. You can use it for college versus a home. Do you encourage clients to have those conversations?  

Christina Worley: So, it depends if it's the parent or the grandparent, because the grandparents can switch it as long as they really haven't made any promises to the parents. 

So, if they want to be, diplomatic about it, they can say, I have started a 529 and not say exactly how much until you see how the children are, progressing in life and making those decisions and you have some clue on how many grandchildren you're going to have between all of your children.  You may think there's one and then, you know, there's eight. So it could be that you run into a problem that you don't want to promise it to everyone.  

Ric Edelman: What's your observation?  

Ross Riskin: I think it also comes down to K. Y. C. Know your client. Every conversation is going to be different. What are they valuing most? Yes, I think that is one viable approach of they don't need to be trued up right away because the younger individuals have more time. The benefits of being able to change beneficiaries can't be overstated enough because it’s transfer tax and income tax-free. The transfer that also helps if you have re-marriages or you have big age discrepancies, right? Has anybody encountered that where you have one grandchild, their child that's 20 and another one is three or four? 

So, you could actually change the beneficiary from one to the other, and that's totally transfer tax, income tax-free. So there's more flexibility with that, but it gets back to the point of what is the goal of the client to do that. 

I think another way that comes up is even on conversations of going to a particular school. I mean, I've encountered clients we've worked with where the kid gets into an Ivy League school and you think right off the bat, well, you gotta go, like you're gonna pay for it, but then if you take a step back, she also has a full ride to another school over here. And there's three other kids that the family has to plan for and they don't have enough. 

But the peer pressure will you, well, you got to go to that school. Like you got into Yale or Harvard, like you need to go there. So it's a little more nuanced than that of how each family chooses to approach it.  

Ric Edelman: So is this whole conversation, is it a business building opportunity for advisors or is it obligatory that, you're an advisor. You've got to talk to your clients about this subject and it's just, check the box thing or is it actually a way you can use it to build a business, attract clients, retain clients, increase AUM, et cetera?  

Christina Worley: I think it's a bare minimum. You better know everything about it to take care of your clients.  Most of the clients are going to spend the money and the kids down for their education. So, the assets are going to go away. Very few of them are going to be half a million dollars so that they can pay the whole private school tuition and still have a couple hundred left. Even if so, then they'll probably take it out for their first apartments and stuff. 

Ross Riskin: Yeah, it's a hundred percent a great business building opportunity, on several different fronts. So, if I survey a show of hands here, how many of you work with high net worth, high income clients, or paying for college or saving really isn't an issue?  

Christina Worley: It was a couple.  

Ross Riskin: Okay, good amount. How many of you want to actually work with the children of your clients, you want your firms to? You want to work next gen, legacy wealth, right? Okay, so how many of you are telling the kids and grandkids of your children to only marry, date, get into serious relationships with other people from wealthy families who, they pay the full ride? (laughter) I said that once and like I caught three people raising their hand for that. 

You're not. I mean, just looking demographically. Well, perfect example. Year to date already, I've had a handful of conversations, and they all sound like this. An advisor calls me up and says, “Hey, I'm working with a client. We manage, 10 to 20 million dollars for them. And I got this question that came in from the son of the client. He's getting married. He went to a top tier school MBA program, and he's getting married to somebody who is a doctor. And they have a lot of student loan debt. Can we look at this? How do we talk about this?” 

The first thing I do is I go to that advisor's website, and I notice all these buzzwords all over the website of intergenerational wealth and we work with next gen clients and the kids and the clients, yet they have no clue about the complexities of student loan advising, the loan forgiveness programs that are out there, which people are qualifying for hundreds of thousands of dollars of loan forgiveness and who's accumulating that much debt? 

It's usually doctors and attorneys. Grad school is the big part of it. I just encountered so many advisors that these people are qualifying for loan debt and their advisors are completely clueless and have nothing to do with it. So, do you think that person is ever gonna forget that they had six figures of student loan debt forgiven? 

They're never gonna forget that. But they also won't remember that their advisor had anything to do with it or help them. Even being part of the conversation to look into different things, even if you're not an expert in it or you can't do it. It's having the conversation because those options are out there. 

Ric Edelman: So, you have to be aware of the rules and the programs and the packages. Secure Act 2.0… 

Christina Worley:  It changes. 

Ric Edelman: Yeah, so talk about what's there that advisors need to be up to speed on.  

Christina Worley: So there were two big negatives. One is, a lot of people had small businesses or a family farm, used to make themselves very poor when their kids were coming up. 

You could put on a defined benefit plan, have zero income and really get a lot of your scholarship being given to you. So, the family farm and small businesses, they're not just looking at the income starting at 24, 25 a year. They're actually looking at the assets. If you have a $10,000,000 farm that's not generating any money, you're not going to get it.  You're not going to get the help for your children anymore.  

The other thing is, if you had multi children in college, that used to be also a discount. If you had two or three going at once, that would divide by three what your expected family contribution would be, and you could pay a whole lot less, so you could get a whole kid for free when they were all going at the same time. 

They have taken that away, too, this year, so that's not good.  Those are the two big negatives for this year.  

Ric Edelman: Yeah. They said there's going to be a Secure 3.0, but I'm assuming not anytime soon.  

Christina Worley: Well, I have to agree on a lot of stuff. We don't seem to have tons of agreement these days, but you did get this year, you got the grandparents being able to give money. 

So, if your parents are now no longer going to get the aid that they thought they were going to get, because they have more children or their own business, at least the grandparents can give it and have it go through. And they have one more good thing that happened this year. It’s if the parents pre-retirement income for 2024, 2025 and thereafter no longer needs to be on the assets. 

So, if you have money in the 401k, that's no longer going to be taken, as to their expected family contribution.  

Ric Edelman: You're a CPA.  

Christina Worley: CPA, CFA, CFP  

Ric Edelman: Sorry to have you admit that but, are there any other tax rules that advisors need to be thinking about regarding the Secure Act or college planning generally that may not be top of mind? 

Christina Worley: Ross, do you have anything?  

Ross Riskin: I mean, the big one that's come up has been about excess contributions being able to roll into Roth IRA.  We mentioned that before.  

Christina Worley: Only $35,000.  So, this is why you want all your people to go do it this year. The account needs to be in existence for 15 years before the Roth gets rolled to the individual client and the money that you're rolling needs to be in there at least five years before. So, you can't wait until like 14 years, plop it in and roll it out.  

And then the child needs to actually make some money because it's a Roth, they're going to take it out of the 529 and they're going to roll it into a Roth every year.  So, they need $7,000 a year for five years.  They have to have $5,000 of income after they graduate college, which hopefully they would all have.  

Ric Edelman: So are you therefore arguing that the grandparents front load the 529s?  

Christina Worley: Absolutely. I do. All the time.  

Ross Riskin: Well in addition to that, there's still two gray areas with the rollover piece. 

They both really relate to that 15-year rule. The first is, has anybody ever recommended people move money from one 529 plan to another? Maybe the first 529 plan was set up when the child was born. And now it's 18 years later, but you recommended that change out of the best interest of the client, lower fees, whatever, better options for investments. 

You just reset the clock whenever you did that. The other big issue is: do beneficiary changes reset the clock? So that is still to be determined. I've seen it being argued either way. I can't imagine why they would let that reset the clock because the other thing that's being talked about more is. 

Well, whose Roth IRAs are going into, right? We're all talking about the beneficiary, which in most cases is the student. Are you all aware of and familiar with the retirement crisis for people in their twenties? No, because it doesn't exist. I would think what would make more logical sense for many families would be able to change the beneficiary back to the parent. 

And let the parent use the money to go into their own Roth IRA for themselves. I mean, one of the biggest benefits for 529 plans has always been flexibility of beneficiary changes. So, the way it's kind of being talked about: “oh, get a couple grand into a Roth for a 20-year-old.” This just should be another opportunity to get it back into the account owner for their own name. 

And another reason why that makes sense is because what do we think the government wants? Do they want Roth IRAs for people who have 60, 70, 80, 100-year time horizons of that growing tax-deferred? Or do they want it in somebody who's older now with the elimination of the stretch IRA? Like, it's only logical that we'll probably get flexibility with beneficiary changes. 

Christina Worley: That was an excellent point, but I just wanted to throw in, when we do our own financial planning in our firm, we make sure that the parents never fund the college before they fund their own retirement. The kids are never gonna come back and take care of the parent on their retirement out of like, banks for paying for grad school. We make sure that the parents fund first and only after the parents are funded do we let them put anything into college.  

Ric Edelman: Well I assume you get a lot of pushback from that, the parents who feel the obligation. 

Christina Worley: Yes, it's an educational process when you sit there and say, you're going to have to take out the loan. And then when you're doing well in your retirement, when you're fully funded, you can help the kid forget loan forgiveness or the kid's going to make so much money, he's going to pay it off himself. But do you want your child, if he has a special needs child or doesn't make any money, do you want to live with him to support your retirement?  Because you paid for an Ivy league education and then he did nothing. I go for it. They don't get to spend their retirement, they just don't.  

Ric Edelman: And related to that, the point you just made, Ross, about the, need to or the desire to have the laws written in a way that allow the parents or grandparents to use the overfunding of the account to fund their own retirements rather than the children's retirements. 

That kind of flies in the face of the increased debate in Washington that all of these savings programs starting with the 401(k) are benefiting the wealthy. That the bulk of these tax benefits are accruing to the upper middle class who are going to save anyway, as opposed to freeing up those government funds to lower economic strata who aren't saving. So in that regard, do you still feel confident that Congress will write rules that preserve these tax breaks for the affluent as opposed to creating economic opportunity for those who currently lack it? 

Ross Riskin: Yeah, I mean, it's a good question. I think so. I think you even just see that with the newer proposals of catch-up contributions of people making certain amount of money and older having to go into a Roth account. I think you're seeing that.  

Their big thing now is they want people to put money in. Right? There still is that fear of: I don't want to put money in the 529 because what if my kid gets a full ride? Unlikely. What happens? I can't use it for that. I can't use it. I've encountered so many people that were told by quote unquote advisors, “don't put money in a 529. You can only use it for college.  You can't use it for anything else.” And that's just not true.  

I think the real debate comes in is what is the ultimate use of the education funds because you're talking to family. Look, I have two under two. So the conversations of other people, I engage with grandparents and people of all ages as well, but private schools becoming more prominent earlier on as well and talking with families that want to use those funds. 

So then is it for that or if you have money left over, do you need to roll it into a Roth or why not use that for the next generation? That you can keep it growing in perpetuity going on. You don't have Coverdell rules, where you’ve got to distribute before age 30, you don't have any RMD's, you don't have any ten-year rule you need to be worried about. 

To be determined, but I think the thing that we're seeing is that flexibility right? The three interesting things are: we're talking about using 529 plans. College savings plans to not pay for college. The FAFSA Simplification Act came out that made things more complicated. And then when you think about student loans, traditional debt management practices and principles would tell you, you want to pay off debt. Whereas with federal student loans and loan forgiveness programs, you're sometimes, you're now navigating how not to ever pay it back.  

So, it's just really changed the paradigm of how we approach college planning. And there's just so much around that we just need to be more educated and aware.  

Ric Edelman: So given the choice, if you, with a very high degree of confidence in the success of both of these strategies, I want you to tell me which one you would rather use. One, overfunding a college savings account, so that you can easily pay for college and use excess funds for retirement purposes? 

Or, do absolutely no college planning, so that the child gets maximum student loans, which the government then forgives? Which of the two strategies would you recommend?  

Christina Worley: First strategy. 

Ross Riskin: Overfund, no question.  

Ric Edelman: If the government's gonna forgive the debt, you get to keep the money you otherwise would have used to fund college, and you get to have your money  

Ross Riskin: No, but if you overfund with, I think that's the thing, like, that's back to that conversation of overfunding, it still provides you options, right?For other kids, grandkids, legacy, doesn't mean, even if you could pay for it outright  

Ric Edelman: Doesn't mean you have to.  

Ross Riskin: Doesn't mean you have to.  

Ric Edelman: Yep. Clearly, as you said, this is table stakes. You've got to be able to help your clients with this stuff and the more effectively you can do so the better you're going to do a job for your clients and the more goodwill you're going to build and the more clients you're going to generate. So very clearly 

Ross Riskin, Christina Worley. Thank you so much for joining us.  

Ross Riskin: Thank you. 

Christina Worley: Thank you. 

 

Ric Edelman: I’m glad you’re with me here on The Truth About Your Future. If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube – and remember leave a review on Apple podcasts. I read them all! Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app. I'll see you tomorrow.

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