For this month’s ‘For your consideration’ I submit the second of three parts in a series of ‘what-If’ scenarios. Factors of financial planning that planners assume they have a firm understanding, but must be prepared in case everything changes? Last month we considered if the investment world will continue to operate as it has for centuries, or instead will completely change due to the growing abundance of information.
This month we consider a planning goal related to generational wealth planning or estate planning. As much as planning clients want to secure their own financial future it is just as common to want to help their children and grandchildren. The most common goal is to help children get a head start on life and a jump on their career. But what if that means something completely different in a generation?
What is the future of college?
Paying for education is the second most common goal for planning. The goal of going to and/or paying for college has been baked into ‘The American Dream’ since the beginning of the last century. In fact, I have found for some clients, not being able to pay for their children’s education can be a bigger emotional disappointment than not being able to retire on time. So, while I may not agree that education funding should be the primary monetary driver, I understand the pressure and spend a lot of time on the task.
The chore is to set up a proper funding amount into the proper tax efficient accounts. In the age of information, most people are aware of the primary education savings accounts; state sponsored 529 accounts, Coverdell accounts, and education trust accounts. Accounts that must be earmarked for accredited school funding but can also have amazing tax benefits.
But, what if someday, going to a university does not carry as much weight or have as much clout as it has in the past? First, college is becoming incredibly expensive. Second, the concept of easy ‘basket weaving majors’ are becoming less alluring as the job market changes and becomes more competitive. And of course, there’s the ongoing stigma of the school debt crisis that may turn future students away from attending college.
It is very possible that the next few generations will turn away from a college education to focus on trades, entrepreneurship and apprenticeships. In the future, attending college may not be the most promising gateway to a lucrative career.
It’s also possible that there will be a ‘university bubble’. One in four members of Generation X attended college, while one in two members of Generation Z are attending college. The saturation of college graduates in the job market may devalue the benefits, limiting the return on investment of tuition costs. This may cause a decrease in attendance and based on supply and demand create a tuition price crash. We may be over saving for college, based on today’s costs, into accounts that carry penalties on withdrawals for non-education purposes. The dangers of under-funding the goal may be replaced by the dangers of over funding in restrictive accounts. But, of course, time may prove this theory to be completely bunk. You just never know.
The easy solution for this problem (or possibly a lack thereof) is diversification. A concept that not only relates to asset types, but also account types. Since you can change the beneficiary of a 529 account, they will always have a perpetual value. However, when considering helping future generations it is also important to consider minority trusts and simply paying costs out of pocket. The solution will depend on the individual, their resources and what will come of FASFA rules (which is a whole different can of worms).
Bonus ‘what-if’. What is the future of car ownership among ‘kids these days’?
This is a subject that I have a personal curiosity, and no knowledgeable answer. During the 1940s and 1950s the increase in automotive ownership changed the landscape and social construct of America and other developed nations. Automobiles changed the way and how efficiently we traveled across the country. Highways changed the landscape. Travel plans expanded across multiple state lines. Freight transport expanded to trucks and vans. Mail delivery became quicker.
Owning a car became as necessary as owning a garage to park it in, which in turn changed how homes were built. Getting your license as a teenager was a rite of passage and unofficial entry into ‘sort of’ adulthood.
But, what if the interest in car ownership changes? Lyft, Uber et. al. are changing the social construct of taxi travel and transport availability. The allure of car ownership in the past has included a sense of freedom. With the hint of driverless cars in our future that sense of freedom is much more accessible and doesn’t require testing and a license. ‘Ubering’ is mathematically much more cost efficient than owning a car for a larger portion of urban Americans and the desire to own a car is dwindling among younger Americans.
If car ownership becomes a thing of the past, ‘auto expenses’ would become a cash flow item versus a short-term savings goal. A paradox shift in transportation would usher in hundreds of new jobs and usher out hundreds of old jobs. Would traffic go away? Would garages? Would neighborhoods and the concept of the suburbs as we know them alter dramatically??
Financial planning for the benefit of future generations is an important aspect of personal financial planning. We should not consider the physical and monetary items we want to pass on to them without considering what values we want to instill with our gifts. At the same time, we must accept that despite our efforts to give the very best, we may have no idea what they will need. Financial planning is all about long term strategy with a high amount of acceptable flexibility.
Next Month: Advanced medicine; extending lives, challenging financial plans.