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Financial Planning For Coaches

The career path of a coach requires a different view of financial planning.  More times than not where you live is temporary, your benefits vary among institutions, your salary does not follow a continuous path, and employment opportunities are scarce.  Having a specific long term plan allows you to remain in control of your future in an uncertain industry and to focus your energy towards achieving your lifelong dreams.

Most workers have the opportunity to make their own retirement plans; on their own terms and at their own time.  Coaches do not.  The world of coaching will retire you.  Long gone are the days when a coach has the long-standing support needed to retire on their own terms.  If Bobby Bowden and Philip Fulmer can be forced out less than ten years removed from a National Championship then you can to.  Understanding the reality of the business you are in is essential to creating your financial plan.

Another important difference in the world of coaching is that your prime earning years often fall in the middle of your career.  Whether it is true or not, in many cases once a coach reaches fifty years of age there is a perception that the game has passed them by and they are often forced to take jobs that fall beneath their experience level.  You cannot rely on catching up to retirement later in your career simply because the salary level cannot be counted on.

Because of these dynamics, it is important that coaching families remain ahead of the curve when it comes to retirement.  This involves saving more than you might other save and living a lifestyle that is well below that of your stated salary.  Rich people don’t get rich spending money, and a high income has no bearing on your retirement lifestyle.  Your savings plan will be the largest single factor in determining what type of lifestyle you have during retirement.

University coaches have among the best retirement options available to any type of employee in the country.  Technically as state employees, you have access to the same retirement plans as the state legislature who certainly allow for generous retirement options.

For instance, the IRS limits the amount of voluntary retirement contributions for private sector employee to $17,000 in 2012.  For state employees, that amount is doubled to $34,000 when combined with a 457 deferred compensation plan.

In addition, most private companies will match an employee’s contribution to a maximum of 3% but only when combined with employee voluntary contributions, while most universities have a mandatory contribution of 12% or more, combined employee and employer contributions.  This is important because any retirement plan contribution that is mandatory does not count against your voluntary limit ($17,000.)  Thus, in many cases university coaches (and politicians) can save in excess of $60,000 compared with $17,000 in the private sector.  It is important to take advantage of these unique opportunities.

Another area where coaching families must have a different view on financial planning is determining whether to buy or rent a home at their present location.  There are many variables to making this determination but it is important to realize that the one thing you need in order to reduce the risk of losing money in a house is ‘time’ which is the one unknown in the life of a coach.

It is true that buying a house provides tax benefits and the potential to make money in appreciation, but it is also a major responsibility with potentially immense costs associated with it.  Realize that the first 6% of appreciation in your home ($18,000 on a $300,000 home) goes to your real estate agent when you sell the home.  Also remember that when news comes down that you need to relocate, this usually occurs quickly with little time to go through the sales process properly.  This ultimately can lead to accepting a low offer just to get rid of the home.  It is important to take all these factors into account when assessing your future housing options.

If you alter your view on financial planning as a coaching family, you can more easily address the financial issues that you face.  Understand that your current location is temporary, your income and job is ‘rented,’ and you may not ever make as much money as you currently make.  By accepting the harsh reality of being a college coach, it will better prepare you to take advantage of the opportunities available to you.




September 25, 2012 No Comments

Liability Management: Managing Your Debts

Managing your debts is a key component to managing your overall financial health.  Without careful consideration given to when debt is taken on and for what purpose, your financial picture can quickly deteriorate into a sea of chaos.  Bankruptcy is rarely caused by a lack of income, but instead by becoming too indebted for your particular circumstance.  While some choose to avoid debt altogether for this reason, proper use of debt can enhance your financial health if used properly and in moderation.

Debt can be divided into two categories: good debt and bad debt.  Good debt is taken on to purchase an appreciating asset such as a home or investment such as stocks and/or bonds.  Bad debt is debt used to secure a depreciating asset such as a car or anything generally put on a credit card.  While bad debt provides no benefit to your financial picture and can often become an albatross to your financial health, good debt can be used to grow your net worth and enhance your finances.

One primary difference between good debt and bad debt is the interest rate charged on the outstanding balance.  Since good debt is secured by an asset that should appreciate over time it generally carries a lower interest rate and has tax benefits associated such as the interest rate deduction for your mortgage or margin balance.  Some examples of debts with tax benefits are mortgage debt, home equity loans or lines of credit, and margin loans (when used to purchase securities.)  Debts that have no tax benefit would include auto loans, credit card balances, and personal lines of credit.

In order to manage your debts effectively, you want to consolidate any outstanding balances under the lowest interest rate available to you.  For most, this would be found in your home; either as a first mortgage or as a home equity line of credit (HELOC.)  To some, this would be simply to transfer credit card balances under the lowest rate.  Each credit line available to you has an effective interest rate (interest rate after tax considerations) and credit limit.  To properly consolidate, list each credit line with the interest rate charged as well as the available credit and shift all debts towards the lowest rate.  The following table lists possible credit sources in order of lowest rate to highest rate:

First Mortgage

Home Equity Loan / Line of Credit

Margin Loan

Personal Loan / Line of Credit

Credit Cards

Lenders will generally loan up to 80% of a home’s value on the first mortgage and up to 90% in a HELOC.  The goal is not to avoid debt but to eliminate bad debt for your financial picture.  Credit cards should only be used in the rarest of circumstances and should be for emergencies only.

One common question involving debt is whether or not it is a good idea to pay off your home, if you have the means to do so.  If it will make you sleep better at night knowing that you are debt free then by all means, please do so; however, having the ability to pay off your mortgage is more important than actually doing so.  This entails having an asset base readily accessible to you in taxable accounts that can be used to eliminate the debt at any time.  If those assets generate a higher rate of return than your cost of borrowing, then you are using leverage or debt to enhance your overall financial health.

Another benefit to not paying off your home is that you have liquid assets available to you in the event that you need those funds to pay for things such as health care expenses.  If you had chosen to pay off your home, then you could access those funds through a HELOC, but you would effectively be paying the bank for accessing money that was yours.

Utilizing leverage to enhance your financial picture should only be done with the assistance of a professional financial adviser who can educate you on the risks you face and has the ability to monitor the situation.  It is important to remember that assets can go down while debts remain the same.  If you carry too much debt for both your income and asset base then you may be faced with a financial catastrophe solved only through bankruptcy.

Understanding Your University Retirement Benefits

If you’ve ever enrolled in a university retirement system, you may have been overwhelmed by the choices and restrictions associated with these plans.  In many cases, employees must make their elections within a month of their hiring and while these decisions can dramatically affect your long term financial plan, most do not take the time to fully understand the benefits made available to them. 

First and foremost, all plans differ between institutions.  Plan options, contribution rates and limits, vesting schedules, and investment choices are among the factors that vary widely between schools.  It is important to fully understand the options made available to you prior to making any decisions regarding your elections.  Remember that the Human Resources department is always available to answer any questions you may have. 

Plan Options:  There are two primary categories of retirement plans: pensions and optional retirement plans.  For an in-depth review of these options, please visit our Pension vs. ORP article.  Voluntary options may also include a 403(b) plan (also known as a Supplemental Retirement Annuity or SRA) and public institutions may also have a 457 plan, also known as a deferred compensation plan.  Each of these plans is administered by an investment firm such as TIAA CREF or VALIC, to name two, and you will want to understand the differences between the providers prior to making your elections. 

Contributions:  The contributions to your retirement accounts can be divided between mandatory and voluntary contributions.  The IRS limits the amount of voluntary contributions, but any contributions made by the employee as a condition of employment are excluded from these limits.  Mandatory contributions can be made into either 401(a) or 403(b) accounts, depending on how the plan is set up.  Voluntary contributions are typically made into 403(b) plans with a limit in 2011 of $16,500/year or $22,000 if over age fifty.  Since 457 plans are not technically retirement contributions but instead deferred compensation, it has an additional limit of $16,500 or $22,000 if over age fifty.   

Vesting Schedules:  Vesting schedules pertain to how long you must be employed in order to receive employer contributions to your retirement plan.  Pension plans typically have more restrictive vesting schedules than optional retirement plans with many having schedules of ten years.  Vesting schedules can be “graded” or “cliff” schedules.  In a graded scale, an employee may receive 20% per year for five years while cliff schedules go from 0% to 100% on a specific date.  It is important to coordinate your expected tenure with the vesting schedules made available to you to ensure you do not leave any money on the table. 

Investment Choices:  Investment choices vary widely among plan providers.  Since you do not have control over how your money is invested within a pension plan, this is only a concern for optional and supplemental plans.  You will want to check the choices made available to you prior to making your decision and you can check the performance of the fund on independent websites such as Morningstar.  The investment choices are often what differentiate good providers from bad ones.  High fees and habitual underperformance can derail your financial plan.

Developing a Mortgage Strategy

Purchasing a home can be a thrilling and costly adventure.  Developing a mortgage strategy that fits your financial plan can save you hundreds each month and perhaps hundreds of thousands over the course of thirty years.  By tailoring your mortgage debt to fit your specific goals and financial picture you can achieve more in life by limiting wasteful spending.

One common mistake among homeowners is that some become “home rich” meaning too much of their monthly expense or net worth is tied up in an illiquid asset.  Due to the slow (and costly) process of restructuring mortgage debt, it is important not to overspend on a home in order to keep your payments manageable.  While lenders will typically loan you 35% of your gross income for mortgage debt, it is smart to cap that number closer to 20-25%.  By determining what you can afford in your monthly budget prior to looking for a home, you will keep from overbuying.  Interest rates, down payments, and the type of mortgage will factor into how much principle a particular monthly payment will support, but what ultimately matters most is the monthly payment.

The second question you should ask yourself is ‘How long do I intend on staying in the home?”  By determining how long you plan on owning the property, you can structure the down payment and mortgage properly which can save you hundreds each month.  If you in a temporary location for the next five years, then maybe a mortgage with a fixed rate for seven or ten years would be more appropriate than a conventional thirty year mortgage.  Each type of mortgage carries its own risks so be sure to understand which risks you are exposing yourself to and when they may appear.

Understanding where we are in the interest rate cycle is also important in developing a mortgage strategy.  While shorter term adjustable rate mortgages often carry a lower rate, they can expose you to dramatic interest rate changes if rates rise during your initial lock up period.  With interest rates being as low as they currently are, you would be well served to lock in the rate for a period that is longer than your expected ownership.  The current level of interest rates is not sustainable and as the economy slowly recovers, interest rates will begin to rise and can come up dramatically over the course of ten years, for example.

Determining the size of your down payment is also important to creating a viable mortgage strategy.  You must recognize that this is not an expense, but instead a balance sheet adjustment where liquid funds you may hold in your bank account convert to illiquid funds held in your home.  In the event that you would ever need to access these funds as a home equity line of credit, you must pay interest to the bank on funds which are officially yours.  Whether you are a first time homeowner or late stage retiree, your personal situation will determine what down payment is appropriate.

Developing a viable mortgage strategy is a key element to creating a comprehensive financial plan.  With one plan, you are able to properly manage your largest monthly expense and your largest liability; both of which can have a significant impact on your overall financial health.  Mortgage products each carry their own risks from overspending to interest rate adjustments so familiarize yourself with the risks associated with each so you can make a educated decision.  Proper financial management is not about avoiding risks, but instead knowing what the risks are and managing them.  By having a cornerstone mortgage strategy, you will be able to achieve more in life.


Saving For Your Child’s Education

Paying for college can be one of the largest expenses in your financial life.  It can also be one the best investments you will ever make for your family.  Estimates for the cost of college can vary widely depending on the age of your child, whether they would attend a public or private college, and what level of degree they plan on attaining.

The first step in determining how to save for college is to determine how much of the expense burden do you want to cover for your child.  Some parents believe that their child should share in the expenses for their college education as a way to motivate them.  Other parents believe that graduating from college debt free is the best gift they could give to their child.  Some parents cover the cost of an undergraduate degree and expect the student to cover any additional degrees.  One approach is not better than the others but instead is a parental choice that you must make prior to saving for college.

By 2030, the average four year cost of college is estimated to be $135,000 for a public institution and $285,000 for a private school.  In order to fully fund college at these levels, you would need to save about $300 / mo for public and approximately $600 / mo for private for the next 19 years generating a return of around 7% each year.  Depending on your cash flow, you may not be able to afford this monthly outlay but the key is to begin to save whatever amount is currently feasible.

Once you have established the parameters of savings for your child’s education, you have several account options available to you that provide tax benefits.  The most common account used to save for college is the 529 College Savings Plan.  Contributions into 529 plans offer a current year state tax deduction (subject to limits,) earnings grow tax deferred, and withdrawals for college expenses are made tax free.  In order to receive the state tax deduction, you must open a 529 account with your state of residence.  In the event you were to move out of state, you can open a 529 account with your new state and roll your existing funds into the new account, in most cases.

Since 529 plans differ from state to state, their investment options do as well.  Some states have limited investment options only offering aged-based portfolios where the investments are designed to become less risky as the child nears college, while other states have an expanded list of quality mutual funds to choose from.  Consult with your advisor to determine which investment approach is best for you.

Tax free withdrawals can be made from 529 plans to cover an expanded list of eligible expenses.  In addition to tuition and books, eligible expenses include computers, internet access, and even off campus housing.  To the last point, most schools are migrating towards using a fixed dollar amount that may be withdrawn tax free based on the cost of living in their location.

Aside from strictly saving for college, 529 plans can play an important role in managing your long term wealth.  They offer extensive estate planning flexibility and benefits that you should discuss with your advisor.  Strategies to reduce or even eliminate your state tax liability can be achieved with the help of your accountant.  It is important to understand the limits on contributions and deductibility before enrolling in a 529 plan.  While you have the ability to bring any excess 529 funds back into your estate, there are tax penalties associated with doing so.

For additional information on saving for your child’s education, please contact Scenic Wealth Management.

Pension vs. Optional Retirement Plan

If you have ever changed jobs as a university employee then you should be familiar with the choice of enrolling in the pension or the optional retirement plan.  This is an important decision with lifelong ramifications and should be discussed with your advisor prior to making the irrevocable decision.  In order to determine which is right for you, it is important to understand the differences between the two options.

The primary difference between the two is who carries the risk.  In the pension plan the risk is assumed by the university while in the optional retirement plan you assume the risk.  Pension plans have a defined benefit in the form of lifelong income during retirement based on your salary and years of service.  Optional retirement plans have a defined contribution and your retirement income is based on the performance of your retirement assets.

The retirement income benefit of the pension plan is often determined by you three highest year’s salaries, your number of years of service and a multiplier.  This multiplier differs from school to school and differentiates high quality plans from low quality ones.  Be aware of what your school’s multiplier is before making an informed decision and be aware that the multiplier can always change.  The formula is illustrated as:

3 Highest Year’s Salary X Number of Years of Service X Multiplier, or

$ 200,000 X 10 X 2.25% = $ 45,000 Annual Retirement Income

In theory, if you manage your investments wisely then you should be able to generate a higher retirement income using the ORP.  This is because the assumed rate of return on the pension plan is below the long term average of a well diversified portfolio.  With that said, if your investments do not perform well there is the possibility of a lower retirement income so be sure to discuss the risks with your advisor.

Another difference to consider is the vesting schedule or the minimum number of years you must be employed in order to receive the employer contributions to the retirement plan.  Pension plans often have a longer vesting schedule then the ORP so if you are uncertain as to how long you may be employed you may be best served to enroll in the ORP.  Vesting schedules can be as short as two years and as long as ten and can be graded (i.e. 20% per year ) or cliff (0% to 100% at set date.)

Choosing between the pension and the ORP usually pertains to mandatory retirement contributions.  Contributions may be made by employer, employee, or both.  The contribution rate is often stated as a percentage of your income and is subject to certain limits.  It has become common place for the ORP to have a smaller net contribution with a small percentage retained by the pension plan to help cover expenses.

Choosing between these two retirement options can make a significant difference in your long term financial picture.  Be sure to discuss your particular circumstance with your advisor to understand your options before making your election.

For more information on understanding your retirement option, please contact Scenic Wealth Management.

November 17, 2010 No Comments

Health Savings Accounts (HSA)

With the skyrocketing cost of health care, many investors are using Health Savings Accounts (HSAs) to supplement their lifetime health care expenses.  HSAs offer certain tax benefits and may play an important role in managing your long term financial health, as well.  However, not everyone is eligible to enroll in a HSA so it is important to understand who qualifies and how the account can be used in coordination with a long term financial plan.

Simply put, a Health Savings Account is a tax advantaged savings vehicle specifically designed to help cover lifetime medical expenses.  Tax deductible contributions made into the account grow tax deferred and may be withdrawn tax free to cover eligible medical expenses.  Balances remain in the account from year to year and at your death your spouse may continue to use the HSA for their benefit.  Where permitted by the custodian, funds may be invested in a wide variety of mutual funds potentially producing market returns.

In order to be eligible to open a HSA you must be enrolled in a High Deductible Health Plan (HDHP,) you cannot be enrolled in Medicare, you cannot be claimed as a dependent, and you cannot have any other primary health coverage.  However, vision, dental, disability, and long term care policies are allowed with a HSA.  In most circumstances, HSA owners may also have insurance against a specific illness or disease such as cancer.  Prescription drug plans are allowed but only if no benefits are paid until the annual deductible is met.  HSA accounts are opened as individual accounts; joint accounts are not allowed.

A HDHP is a health plan that has a higher than normal deductible and a maximum out-of-pocket expense within guidelines set annually by the IRS.  In 2011 the minimum annual deductible to be eligible is $1,200 with maximum out-of-pocket expenses set at $5,950.  In some cases, HSAs are made available to group plan participants but in many cases HSAs are used primarily by the self-employed and small business owners.  If you are a participant in a group plan, check with your Human Resources department to see if you are eligible.

Contributions made to an HSA are tax deductible if made by an individual and are considered excludable income if made by your employer.  The IRS sets annual contribution limits ($3,050 self, $6,150 family in 2011 with an additional $1,000 if over age 55) with any excess contribution subject to a 6% excise tax.  Contributions to a HSA must be made in cash and the IRS even allows a non-deductible funding distribution from a Traditional or Roth IRA.  You have until the tax filing deadline (April) to make prior year contributions.

Most medical treatments are eligible expenses and may be covered by your HSA balance.  Eligible expenses generally include any expenses that would qualify for the medical and dental expenses deduction on your tax return.  However in most cases, insurance premiums are not considered an eligible expense and must be paid for out-of-pocket.  Recordkeeping is important when using a HSA to ensure compliance with the IRS.

These benefits make Health Savings Accounts a valuable element to any prudent financial plan, if you are eligible.  Health care expenses may account for hundreds of thousands of dollars in your lifetime so establishing a long term funding vehicle with tax benefits may prove beneficial.

If you would like more information on HSAs or how to become eligible for a HSA please contact Scenic Wealth Management and be sure to discuss any tax questions with your accountant.