What is this advisor’s perspective on college and retirement financial planning?
This article features an interview with Ben Schrock, investment adviser representative, insurance professional and President of B.A. Schrock Financial Group. Based in Wadsworth, Ohio, B.A. Schrock Financial Group is an independent, full-service financial advising firm that focuses on financial services and wealth management. Ben has been in the insurance and annuity industry for over eight years, and founded B.S. Shrock Financial Group in August 2012 after working with a Fortune 500 Insurance Company. Since then, Ben has earned the National Social Security Advisor designation, and more recently received his Behavioral Financial Advisor designation in May 2017. Prior to the financial service industry, he received his Bachelors of Arts in psychology from The College of Wooster in Wooster, Ohio, where he played football in college for four years. To help stay connected to the community, Ben regularly hosts informational seminars on a variety of topics with guest speakers, special activities and take-home materials. You can learn more about Ben and B.A. Schrock Financial Group at the website of http://www.baschrock-fg.com/index.php. Last but not least, thank you Ben for your time, insight and support in working with me on the article. Please read the question and answers to learn about his perspective on college and retirement financial planning, and hope that the article provides you with an opportunity to learn more from your peers.
Question 1 (Paul Curley, Editor of the 529 Dash): How and why did you first get started in helping clients with financial planning?
Answer 1 (Ben Schrock, Investment Adviser Representative and President of B.A. Schrock Financial Group): I actually graduated from college with a Psychology degree and didn’t really have any intentions of getting into the financial planning world, until like any struggling college grad, I took the first job I was offered. It was only a short period of time thereafter that I realized this was my passion. I was obviously very green in this area, but I had one trait that helped me learn quickly and that was the willingness to help people. I wanted to make an impact in people’s lives and this was a great way to do so. You don’t have to be a financial genius to show people that you care, and that’s the biggest thing that I’ve implemented in my practice that has helped me grow. I’ve now been in the business for almost 10 years and am constantly continuing to further my education in the financial industry. I don’t think anybody can become complacent because our industry is constantly changing, but the one thing that has always remained constant was showing people that I genuinely care about them and their situation.
Question 2: Based on the Strategic Insight 529 Industry Analysis 2017, 19% of parents intentionally save for their children’s higher education with 401(k)s, and they contributed an average of $2,826 last year with a total balance of $14,500 at the end of last year into their 401(k)s for college financial planning. Why should parents think twice before planning to use 401(k) funds to cover the cost of higher education?
Answer 2: Great question! Parent’s definitely need to reconsider pulling money from their 401k’s or any pre-tax savings vehicles for a couple of reasons. The first reason is what I always preach to our clients and that is, “make sure you have your own house in order.” I think it’s great for parents to want to help their children fund their education, however if they are doing so through their own retirement accounts, then who are they really helping….my answer is nobody. Yes they might be helping their children pay for their education, but they are doing so at the expense of their future. If they are saving and using their retirement funds for this reason, then what do they expect to have for their own retirement. If they don’t have enough money to survive in retirement then who do they turn to? Their children. Most parents don’t want to be a burden on their children, but if they don’t have enough money to survive then it is a possibility that the education they paid for with their retirement funds is going to be their “room and board” when they are forced to live with their children. Now this might be an extreme case but with the rising cost of education multiplied by the number of kids you have, you could easily pay $500,000 in education.
Another reason to reconsider this is the tax ramification that this could create. If you withdraw money out of a 401k you could get hit with a 10% early withdrawal penalty if under 59.5 unless you take a hardship. Regardless, any distribution will be taxed at ordinary income tax brackets. This distribution will increase the taxes owed and could increase the parents’ current income tax bracket. Another problem is that if the student is filing for financial aid, this distribution is viewed as income, which will likely decrease the aid available for their student. I like to use this example for withdrawing anything out of a pre-tax vehicle like a 401k. If you are going to make a big purchase, in this case tuition, and this tuition is going to cost $30,000 each year. In order for you to “net” (after taxes) the $30k that you need, you will likely have to withdrawal $40,000 (at a flat 25% tax hit). So not only was the original tuition expensive, you just made it more expensive by having to pull out $10,000 extra to net after-taxes the $30,000 tuition payment.
Another common option is for parents to take out a loan against their 401k in order to avoid the income taxes. This can be a viable option if they know a few important things. The loan they take out is accruing interest and the 401k providers should tell you what that interest rate is. This loan also needs to be paid back through 401k contributions, which come directly out of a paycheck. If this loan is not paid back and the client retires and decides to make a distribution or perform a rollover, any unpaid loan balance will then be viewed as a taxable distribution and the client will receive a 1099 in the mail for that. Example, you have a $50k loan on your 401k and decide to retire and roll that into your own personal IRA. Because you never paid that money back, you will receive a 1099 for $50,000 for that taxable year. If the client is not prepared for this, they can be in for a surprise come April the following year.
Question 3: The Center for Retirement Research at Boston College recently reported in “The impact of raising children on retirement security” that saving for their children’s education resulted in a 14.3% reduction in retirement risk. Given the symbiotic relationship between the two goals, should retirement and college financial planning be integrated in a holistic financial plan?
Answer 3: I absolutely think that college planning and retirement planning should be integrated together IF it is a goal and objective for that client to pay for their children’s education. Some of the hardest conversations to have with clients is that they may not be in a position to pay for their child’s education, and retire on time like they hoped. However, we can show ways to accomplish both by helping cover some of their educational costs and still accomplish the retirement goal as well. When we break it down and have them really think about prioritizing their goals, almost 100% of our clients want to help their children, however, they also understand that planning for their own future should come first. It is crucial for us and our clients to be on the same page when it comes to this, and whenever we see opportunities (future inheritance, raises at work, bonuses etc..) we will help them allocate more money to the educational fund.
Question 4: How can product partners and state agencies better support you now in your current role?
Answer 4: I think the state of Ohio (where I reside and my practice is located) does a great job of promoting their 529 plans to the public, and they also have a good selection of investments. One thing I would like for the state and partners to do is create more awareness about the impacts of alternative planning outside of 529’s. I think they should encourage the college savings options but also give unbiased information that discusses the impacts of taking money out of pre-tax savings vehicles. Everyone should know the ramifications of using retirement savings vehicles to plan for college expenses.
Editor’s Final Note: Thank you Ben Schrock for your time and insight in the article, and much appreciated. Also, I would like to provide a special thank you to the readers of the article for learning from your peers, for your support and your engagement. Have the college financial planning discussion with your clients today.