Are 529 plans in trouble? If so, what can you do about it? Did you know that retirement accounts alone lost an estimated $3.4 trillion in the first half of 2022? What happens if the market drops while you’re trying to save for college? Could you be putting your child’s future at risk? In this episode, Chris Miles addresses the risks of the current stock market when children are heading off to college, and what you can do about it.
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Are 529 Plans In Trouble
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All right, first off, I want to show off my shirt my chief marketing officer, Danielle, made up here. “Financial advisors are defined as the person that paid to sell you crap. Not to make you more money.” That is the truth. As I was reflecting back, I always like these mile markers because I want to know what it is that’s in my heart that I want to share with you. What’s so important now and there’s seriously so much that I could share, but I want to keep it concise.It's not about how much you make. It's how much you keep and then make on top of it. That makes all the difference with your money. Click To Tweet
Analyzing 529 Plans
I’m focusing on what we’re moving into right now, which is moving into the fall. I saw a particular article that came out about 529 plans. It was on Yahoo Finance. The article is called Parents Face 529 Plan Losses As Tuitions Come Due. It’s a very interesting article. They’re saying the same thing I’ve been saying to you for years, which is when the market starts to go down, that’s the worst time. The problem is you can’t control where the 529 plan is invested.
Though, if you’re not sure what the 529 plan is, it’s a college savings account. This is what you saved money in for college. It’s tied to the stock market. Usually, most people have this based on age. The older your child gets, the less they have you exposed to the stock market. Even if your child is 17, 18 years old, they still have it blended with some of the stock market returns. Even worse, in 2022, even bond market returns haven’t been great. In fact, some of them have lost money.
What we have is stocks. You’re damned if you do, damned if you don’t. Stocks or bonds, it doesn’t matter. People are watching their 529 plans lose right before you pull it out. Imagine this. Let’s say you have saved up $100,000 for a child. Let’s say that you only lose 20% in the market. I say only because when you go through a recession, it could be much bigger. That’s 80,000 that you’re left with, but your tuition didn’t go down 20%, did it? You still have to access it.
Let’s say you’re planning on paying $25,000 a year for four years. Guess what? That $25,000 comes out when it’s hit $80,000. Now you’re left with only $55,000. You now have half of what you wanted. This is almost like losing a whole year of tuition. What happens if it goes down again? Maybe it does recover, but what if it goes down the next year? Maybe it goes down only 10%. Now you’re left with $50,000. You pull out $25,000 and now you’ve got $25,000. Even if it makes back 10% the next year, you’re $27,000. You have nothing left for the fourth year.
Preserve Your Capital
This is the problem that’s going on. You may not lose that much money in the stock market. I get it because if they did do it age-based, you might lose maybe more like 5% or 10% but regardless, who wants to lose money? How many of us truly want to lose money, especially for something that important? Your best preservation for you is to preserve your capital. Now, I think about being a financial advisor. I was a financial advisor and now it’s going on for many years. I was 24 years old when I first became a financial advisor.
I was bright-eyed and bushy-tailed, young and dumb. I would listen to whatever I was told by the financial industry. Now, of course, they would say, “If you’ve got plenty of time, you’re young. You can take these risks.” The truth is that none of us are too young to take risks. I don’t believe that. That’s ridiculous because if I had a choice between making money and not losing it or making money but possibly losing it. I’m going to pick this every time. I want to make money while protecting my money at the same time.
It’s not about how much you make. It’s how much you keep and then make on top of it that makes all the difference with your money. Unfortunately, we’re always taught high-risk rates, high returns. You got to take those big risks if you want to hit it big. The problem is that many of us have taken high risks, which isn’t good. To give you further context to quote. Director of the Center for Retirement Research at Boston College, Dr. Alicia Munnell, said that from the beginning of 2020 to the end of 2021, we have lost $3.4 trillion in different types of accounts, especially retirement accounts.
I am not even talking about 529 plans, just retirement accounts. $3.4 trillion of that $1.4 trillion is in 401(k)s. I might sound like a broken record if you’ve read the show enough, but obviously, this should be a concern to you. I’m telling you this day because I can’t tell the future. I don’t have a crystal ball. I don’t know what’s going to happen, but I do know this. Since June, when the market hit a low, it’s recovered.The odds are not in your favor if you hang on to what you've got. Click To Tweet
Many people say, “Cleared that. I’m good. I’m not losing money anymore.” The truth is that when you’re in a bear market, in a down market, which I do believe we’re in, it always does this. When it goes up, it goes up, then pulls back a little bit and bounces up. It’s like a little bouncy ball bouncing up the stairs and vice versa. When it’s a down market, it’s like a bouncy ball bouncing down the stairs. Those little bounces are called bear market rallies. A bear market means that the market’s going down. A bull market is when it goes up.
A bear market rally means that the market’s coming back up after it’s lost some of its loss. It’s getting some of its gains back or some of the losses reversed. This is a perfect time if you’ve been debating about whether to be in the market or not. I’m not giving any investment recommendations, but those bear market rallies, as they come back, for those people who are still holding on, this could be a great opportunity to take your cash now while the losses are minimized a little bit more. What happens is as it bounces down, it comes back up. It doesn’t keep going up straight. It eventually comes down to a lower low.
Many people will hold on, gripping tight. This is human psychology. Human behavior never wants to lose money. What do they do? They hang on forever until it either becomes so emotionally enough and everybody’s saying the sky is falling. That’s when somebody emotionally finally pulls the money out of the market when it hits a low. This is why financial advisors and other people in the media will say, “Don’t pull out your money at all,” because they’d say you can’t time it. Here’s the best time to pull your money out of the market. It’s when people are saying that there’s hope.
When you start to go into a down market and people think there’s still hope, this is the point right where before it starts to get a lot lower. I believe the market will get lower than what it is now. I’m saying this, seeing that we’ve had a bear market rally. I believe that we’re going to start to see it reverse a little bit. I don’t know. It might go flat. It might even go up a little bit more and that’s great. If it does wonderful, but the odds are against you.
As they say in the Hunger Hames, “May the odds ever be in your favor.” The odds are not in your favor if you hang on to what you’ve got. I can’t give you recommendations to cash out your equities, cash out of the stock market because I don’t even know your situation. I don’t know what you’re in. All I’m saying is that I’ve had clients where they’ve wondered what they should do. I told them in our live group call for our consulting clients. I said, “This might be the day. This might be the time period now where you’ve got some of your losses back. As it’s gained a little bit more, this might be the time to access your funds.”
I’m not a Nostradamus. Even Nostradamus didn’t predict everything. I can’t say that I know what’s going to go on and how it’s going to look. I know that I don’t trust the market’s going to keep going up. That’s the problem. I used to be a stock trader. I used to teach people how to trade stocks and options. By the way, from a technical analysis perspective, it’s getting right up to where the trend line is where there’s resistance.
This usually means the market starts to go back down. This is where people start betting more, including financial institutions. This is usually the point where many financial institutions, if they’ve had money in certain places or start to sell off quietly while all the rest of people are putting their dumb money back in, hoping it’s going to come back up. Right at that point, there’s a sell-off, then your stocks tank. This is how it’s worked for many years. It happens all the time and in reverse directions, too, even in up markets.
Many companies will take advantage and start buying when people are selling off. They’ll try to do it quietly so that the money stays out until they get their money in and it skyrockets. Everybody else throws their money in, chasing it. The market is unpredictable, although human behavior is. The one thing you should know is that there are always cycles and having a two-month recovery in a down market is a great time for those big institutional money.Do things in the space of alternative investments, like buying real estate that has actual returns now. Stop trying to make money on appreciation. Start making real cashflow today. Click To Tweet
All that money that’s in those mutual funds and even hedge funds, those people are banking on what’s going on now. They love to take out someone’s profits. Who’s to say they weren’t the ones buying up when they hit the low? They’re the reason why it came back up again. I’m saying that’s typically how it works.
The question is, do you want to be in this place? Do you want to be in this place of so much unpredictability? When there’s unpredictability, you have no freedom. Where there’s no control, you cannot have freedom. If you have no ability to know if your future is safe if your 529 plan is safe, if your IRAs, your 401(k)s are safe, why would you put your money there?
It makes zero sense just because everybody else does it. Come on, look at the average person that does do this. Are they successful? No. People are going to go broke as we move into this next recession. It’s not looking good, yet people still throw their money in hoping that something might be different this time. The only thing I can promise you is that it does look different every time. The one thing that doesn’t change is that the average person that keeps putting their money in will lose. Savers are losers. Savers in mutual funds are losers. Savers in stocks and bonds will become losers. That’s the way it always is.
Play It Safe
Protecting your money and keeping it safe then growing it, especially if you can generate passive income with it, that is the true key to financial freedom. Not all this other stuff. Not all this stuff that is ridiculous. Maybe I’m a little bit passionate because I know my birthday is coming up, but I’m getting tired of it. After decades of watching this happen, it becomes pretty easy to see the signs. You see patterns.
In fact, that’s one of my gifts. I’ve often seen patterns, even as a young kid. I remember seeing little mathematical patterns and stuff that I’m like, “Here’s a shortcut for the scale of a mathematical equation.” I would do that. Believe it or not, sometimes, despite what my wife thinks, I am smart. I do have some intelligence. It doesn’t mean that I’m always right because I’m intelligent to know that I can be wrong a lot and I have been.
My point is this, once I got myself away and many of our clients have gotten their money away from the stock market and they started doing things in the space of these alternative investments like buying real estate that has actual returns now, not trying to make money on appreciation but making real cashflow now, those are the people that feel safer. I’ll give you an example.
I had a client from years ago. He came to mind because I was reminiscing with a particular dentist and this guy was a dentist as well. This dentist, I’ll tell you, he was the most stubborn guy and he knew this. I’m saying this because he will admit this. He had a lot of ego and pride. He considered himself a very intelligent man. He had been successful on his own right. He was even speaking worldwide and doing stuff. This was with a company I was with before, many years ago.
The thing is when it came to his money, he said, “I want to make sure you give me a guarantee that I will make my money back. I need to make my money back with what I pay you.” Now, with my company, with Money Ripples, that’s what we do. We don’t take you on as a client unless we know we can at least double whatever you pay us within that year. If we don’t think we can do that, then we don’t take you on as a client. We don’t even offer it to you. For him, we knew that this was going to be a tough case. Anyways, we started doing stuff, tax-wise. We started to find some money to save on taxes. He had other partners that complicated things. His results were going slow.Don’t gamble with your money. Do not be another victim of another recession. Click To Tweet
Long story short, two months later, he said, “Chris, I’m not happy. I’m not getting the results I was promised.” I said, “You’re right. The results have taken longer than the first 30 to 60 days. We need more time. Here’s one thing I can promise you.” He was giving me a little bit of ego because understand that at the time, I was about 33 or 34 years old. He was 65 at the time, so he’s double my age.
He’s throwing a little bit of ego at me and I said, “You’re right, results are taking longer but do you know what’s not good? It’s you as an investor. You suck as an investor. You’re a smart man. You’re great in business, but with your money, you’re not very smart.” It was quiet for a minute. He said, “Chris, you’re right. I’ll admit that.” I said, “Great. Give me more time. Let’s work with you.” All we did with this plan, I didn’t do anything. Nothing with passive investing.
All we were focused on was preserving the money he had. This is right after the market was recovering and everything else we’re preserving the money he had in his accounts. We were putting money in things that were guaranteed and putting money in different places. It could be like annuities. It could be put in places like with certain cash guarantees. Yes, even life insurance with that part of that conversation. We’re doing all those things.
Long story short, a year goes by and he calls up, says, “Chris, called me back.” I thought, “Now he wants to talk. What is it now?” I call him up. I get the opposite reaction. He says, “Chris, I don’t know how you guys did it, but my net worth went up $100,000 this year and I only made $120,000. What the heck? What’s going on here?” I said, “This is easy. The reason that you had a hard time growing your net worth is because you kept losing it. You kept gambling it.” He said, “I can see that.” He put his money in different places.
We were keeping keep money in savings. We did buy some like gold and silver that helped a little bit with some inflation hedges, but it wasn’t like he was buying a ton of real estate with his money. He didn’t do anything that special. We just didn’t lose money. He was able to keep more of his money. Flash forward one more year, he comes to Salt Lake City.
We go out to dinner and he says, “Chris, it’s amazing. The money that you guys protected for me it’s still going up. The one place I lost money is, if you recall, I wanted to keep $250,000 with my financial advisor. He was the guy that had been a family friend since the 1980s. He was even at my father’s funeral. This guy I want to at least keep some money with. I kept $250,000 with him. Guess what, Chris? We found out that guy fled the country and took off with my money and many of his other clients. Somebody I’ve known for decades ripped me off.”
He’s like, “That’s the only money I lost. All the other money that we had that we took your advice, that’s the money that made money. The money that I was hoping would make more money than what you did was with that financial advisor and we lost it all.” That’s the point. It’s not about how much you make. It’s how much you keep and then you can make on top of it. The cool thing is, like I said, that was not even including doing anything with investments or with passive income at all. It was about how to keep it.
I wanted to bring this back to the 529 plan. What does this mean? This means that now, if you’re trying to save up money for college, this is a dangerous place to be because you have no control over those assets. Not only do you have no control over the market, but in many cases, the 529 plan, you have zero control over where they invest it. They’re choosing the money and the funds for you and ultimately for your kid, gambling on your children’s future. Do you truly want to be gambling on their future just because that’s what everybody else does?
I’m here to tell you, stop that madness. Are there other options? There are. You could do things. Depending on their ages, we could be building passive income now. That passive income could pay for college later. On top of that, you can even be doing live insurance, doing the infinite banking strategy we talk about where many of our parents are doing this on themselves, where they do the policy on themselves and grow it there then use that money.
Whether they go to college or not, you can use it for whatever you want. They even put it in their kids’ names and make that as a native for their college education. They can dump plenty of money in that too. There are plenty of ways to do this. The point is this is. You want to make sure that you are not gambling with your money. Do not be another victim of another recession. Do not become one of the statistics. Do not become like the statistic that this doctor talked about, Alicia Munnell.
Do not become one of her statistics where you’ve lost money. Instead, be like the statistics of not just my client from many years ago and not myself because I’ve gained in 2022. Not because of making money but because I haven’t lost money. That’s true with our clients. You need that same assurance as well. If you have questions, you always reach out to us at MoneyRipples.com.
My challenge to you is to ask yourself, “Do I want to be in the same place that every other average American is where they’re putting their money and losing it?” Do you want to be one of those casualties? I don’t want that for me. I want my birthday present to be you prospering. Make it a wonderful, prosperous week. I’ll see you later.