What kind of investment return do you expect on your college savings? From 1926 through 2010, the historic average total return of the S&P 500® index was 9.
9%.
Sounds impressive, unless you happened to be saving for college over the past decade.
From 2000 through 2009, the S&P 500® index returned -24.
10%.
Try explaining average total returns to junior after the 38.
5% decline in the S&P 500® index in 2008.
As the adage goes, "timing is everything" - except when you don't have time.
The challenge for parents saving for college is that your initial withdrawal target date (typically beginning at age 18) is relatively inflexible and, depending on when you begin to save, there is only a limited amount of time to achieve your desired savings goal and recover from any losses sustained along the way.
While stockbrokers frequently point to historic average stock market returns as a source of comfort, your reality is somewhere between right now and your child's high school graduation.
You can't cash a "historic return" at the bank.
Age-based Section 529 plans have emerged as a possible solution to the problem.
The funds are structured to convert from a more aggressive to a more conservative asset allocation strategy as the child approaches college age.
Age-based 529 plans focus on capital preservation in the years immediately preceding college, but do not necessarily lock in a profit.
In fact, if the account suffered losses during the more aggressive investment years, the shift to a more conservative strategy could limit the potential to recoup those early losses.
The formula is strictly age-based, and transfers occur at set age intervals.
Some financial planners and college savings advisors are now considering index-linked juvenile life insurance for college savings.
It is permanent universal life insurance that grows tax-free and has cash value increases linked to the performance of an equity index (e.
g.
, S&P 500®) up to a certain percentage (a "cap") with downside protection (a "floor").
With indexed juvenile life insurance, the policy is structured to increase in value when the stock market goes up and provides downside protection so that a policy owner will not incur losses if the market goes down.
Some insurance companies offer a minimum growth guarantee, regardless of market performance.
For example, one well-known carrier offers a cap of up to 15% and a floor of up to 2%.
Indexed juvenile life insurance policy can meet the challenge of a short investment time horizon and an inflexible draw down period by providing equity exposure without risk of loss for the entire holding period.
Unlike a 529 plan, the cash value of indexed juvenile life insurance can be used at any time, for any purpose, without penalty and is not limited to qualified educational expenses.
If the child receives a scholarship or decides to postpone college, the funds continue to grow tax-free.
Whether or not the funds are ultimately used for college, the child has fully-paid insurance for life.
As part of an overall college savings plan, which may also include funds from other savings and investments (including 529 plans), indexed juvenile life insurance represents a promising new way to overcome the challenge of an inflexible withdrawal period and a limited amount of time to invest.
9%.
Sounds impressive, unless you happened to be saving for college over the past decade.
From 2000 through 2009, the S&P 500® index returned -24.
10%.
Try explaining average total returns to junior after the 38.
5% decline in the S&P 500® index in 2008.
As the adage goes, "timing is everything" - except when you don't have time.
The challenge for parents saving for college is that your initial withdrawal target date (typically beginning at age 18) is relatively inflexible and, depending on when you begin to save, there is only a limited amount of time to achieve your desired savings goal and recover from any losses sustained along the way.
While stockbrokers frequently point to historic average stock market returns as a source of comfort, your reality is somewhere between right now and your child's high school graduation.
You can't cash a "historic return" at the bank.
Age-based Section 529 plans have emerged as a possible solution to the problem.
The funds are structured to convert from a more aggressive to a more conservative asset allocation strategy as the child approaches college age.
Age-based 529 plans focus on capital preservation in the years immediately preceding college, but do not necessarily lock in a profit.
In fact, if the account suffered losses during the more aggressive investment years, the shift to a more conservative strategy could limit the potential to recoup those early losses.
The formula is strictly age-based, and transfers occur at set age intervals.
Some financial planners and college savings advisors are now considering index-linked juvenile life insurance for college savings.
It is permanent universal life insurance that grows tax-free and has cash value increases linked to the performance of an equity index (e.
g.
, S&P 500®) up to a certain percentage (a "cap") with downside protection (a "floor").
With indexed juvenile life insurance, the policy is structured to increase in value when the stock market goes up and provides downside protection so that a policy owner will not incur losses if the market goes down.
Some insurance companies offer a minimum growth guarantee, regardless of market performance.
For example, one well-known carrier offers a cap of up to 15% and a floor of up to 2%.
Indexed juvenile life insurance policy can meet the challenge of a short investment time horizon and an inflexible draw down period by providing equity exposure without risk of loss for the entire holding period.
Unlike a 529 plan, the cash value of indexed juvenile life insurance can be used at any time, for any purpose, without penalty and is not limited to qualified educational expenses.
If the child receives a scholarship or decides to postpone college, the funds continue to grow tax-free.
Whether or not the funds are ultimately used for college, the child has fully-paid insurance for life.
As part of an overall college savings plan, which may also include funds from other savings and investments (including 529 plans), indexed juvenile life insurance represents a promising new way to overcome the challenge of an inflexible withdrawal period and a limited amount of time to invest.