Investors often experience election year jitters, especially when it is a Presidential election year. Strong political feelings can cloud otherwise rational judgment on long-term investment strategies. We often say that the market does not like uncertainty, and there is plenty of uncertainty in closely contested presidential elections.

Every four years, optimistic sloganeering vies with fearful predictions as each side seeks to get a leg up with voters. Looking over the last 100 years, from Herbert Hoover’s underwhelming “Who but Hoover?” and Franklin Roosevelt’s more optimistic and tuneful “Happy Days are Here Again”, campaigns have tried to convince the public of their candidate’s successful plans for the country and the economy.

The good news for investors is it doesn’t really matter which party’s candidate is elected president. Stocks have risen dramatically over the long term under both Republican and Democratic administrations. True, there have been sharp, painful selloffs, most notably during the Great Depression under Hoover and the Great Recession under George W. Bush, but over the course of time, markets have produced tremendous returns as the following chart shows (all charts are from BlackRock):

The U.S. economy is huge and hard to predict. Unless it is in response to a major financial crisis when everyone agrees to act together, it is difficult to pass and enact legislation that would have a material economic impact. Companies attempt to grow and maximize shareholder value no matter who is in office, so it pays to separate your political beliefs from your investment planning.

Let’s look at how much of that cumulative return you would have given up if you only invested when your preferred party was in power. The 1,456,754% return shown in the above chart is a little hard to wrap one’s head around so we’ll concentrate on dollar amounts over different time periods. The following chart shows what would have happened if you only invested when your party was in office compared to whether you remained apolitical and stayed invested. Starting with $100,000 in 2013, those who only invested when a Republican was president would have seen their portfolio rise to $181,000, while those investing only when a Democrat was president would have $172,000. Those who stayed invested no matter which party was in power would have seen their portfolios soar to $311,000. The numbers are even more impressive when looking at the last 70 years. Over that period, Democrats who invested $1,000 would have earned marginally more than Republicans, but investors who stayed in the market the entire time would have earned $1.5 million more than either of them.

During election years when uncertainty is at its highest, it also pays to stay invested rather than sit on the sidelines until the results of the election are known. The chart below shows that, going back to 1926, Presidential election years have seen better than average returns in the stock market. Stocks have performed best during years when there is no Presidential or midterm election (up 14.8% on average), but Presidential election years have also produced attractive returns (11.6%).

Looking even further at results by quarter, the greatest returns in Presidential election years have happened in the third quarter with stocks rising 6.2% on average during the July to September time period. This is, of course, before the election in November, so if you waited until after the election to get back into the market, you would have missed most of the gains for the year.

Separating political views from investments is the smart thing to do to achieve your financial goals. Regardless of your political affiliation, history shows that it’s best to be an Independent when it comes to long-term investing success.

In today’s world where healthcare costs are always on the rise and financial planning is more crucial than ever, Health Savings Accounts (HSAs) have emerged as a valuable tool for individuals and families alike. Offering a unique blend of health and wealth benefits, HSAs provide a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. HSAs are unique in that they offer a triple tax advantage – contributions are pre-tax, thus lowering your taxable income, the dollars in the HSA grow tax-free, and future distributions come out tax-free if used for a qualifying medical expense.

Understanding Health Savings Accounts (HSAs)

At their core, HSAs are tax-advantaged savings accounts available to individuals enrolled in high-deductible health plans (HDHPs). These accounts allow you to set aside pre-tax dollars to pay for qualified medical expenses, including deductibles, copayments, and other out-of-pocket costs. Unlike Flexible Spending Accounts (FSAs), funds in an HSA roll over from year to year and are yours to keep, even if you change health plans or employers.

The Benefits of Health Savings Accounts

1. Tax Advantages: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. Additionally, any interest or investment earnings within the account grow tax-free, and withdrawals used for qualified medical expenses are also tax-free. This triple tax advantage makes HSAs one of the most powerful savings vehicles available.
2. Ownership and Portability: Unlike employer-sponsored health accounts like Flexible Spending Accounts (FSAs), HSAs are owned by the individual. This means you can take your HSA with you if you change jobs or health insurance plans, providing flexibility and continuity of savings.
3. Long-Term Savings Potential: While many people use HSAs to cover immediate medical expenses, these accounts also offer a valuable opportunity for long-term savings. Once you reach a certain balance, typically around $1,000, you can invest your HSA funds in a range of investment options, such as mutual funds or stocks, allowing your savings to potentially grow over time.
4. Retirement Planning: One of the lesser-known benefits of HSAs is their potential to serve as a supplemental retirement account. After age 65, you can withdraw funds from your HSA for any purpose penalty-free (though non-medical withdrawals are subject to income tax). This makes HSAs a valuable tool for covering healthcare costs in retirement, which can be substantial for many individuals.

Maximizing Your HSA

1. Contribute Regularly: Take advantage of the tax benefits of HSAs by contributing the IRS maximum each year. For 2024, the annual contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for those aged 55 and older.
2. Use it Wisely: Be strategic about when you use your HSA funds. Consider paying for minor medical expenses out-of-pocket and allowing your HSA balance to grow over time. This way, you can harness the power of compounding interest and investment growth for long-term savings.
3. Invest for Growth: Once your HSA balance reaches a comfortable level (perhaps the annual deductible amount or max out of pocket amount), consider investing a portion of your funds in diversified investment options. Like any investing there is risk involved, but investing your HSA funds can potentially yield higher returns over time, helping you build wealth for the future.
4. Save for Retirement: You can treat your HSA as a supplemental retirement account by prioritizing long-term savings. If you’re able to cover current medical expenses out-of-pocket, consider leaving your HSA funds untouched and allowing them to grow tax-free until retirement.
5. Keep Track of Expenses: To ensure compliance with IRS regulations, keep detailed records of your medical expenses and HSA withdrawals. This will make it easier to substantiate any withdrawals in the event of an audit and ensure that you’re using your HSA funds appropriately.

Health Savings Accounts (HSAs) offer a unique combination of health and wealth benefits, providing individuals and families a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. By understanding how HSAs work and implementing strategic savings and investment strategies, you can maximize the value of your HSA and secure your financial future. Whether you’re using your HSA to cover current medical expenses or saving for retirement, HSAs are a valuable tool for achieving both health and wealth goals. As always, every situation is different, and we are happy to discuss the utilization of HSAs as part of your overall financial plan.

Tax season is once again upon us! We wanted to share a quick update for any tax documents that you may receive from Pershing.

Your Form 1099 & 1099-R will be sent through Pershing’s electronic delivery unless you are set to receive hard copies which will be mailed through the US Postal Service.  For those receiving electronic delivery, the tax documents can be found on the CJM Client Portal as well as Pershing’s NetX Investor sites.

We also want to remind you that realized gains/losses are part of the Form 1099.

When will I receive my tax documents?
January 31: Form 1099 will be sent for those clients who hold only stocks and bonds. Form 1099-R will also be sent for those clients with retirement account distributions (IRAs).

February 15: Form 1099 will be sent for those clients who have mutual funds, REITs, etc. If a 1099 is not yet ready, a “Pending 1099” notice will be sent to you.

February 28: Most of the remaining final 1099s will be sent at this point.

March 15: This final 1099 mailing would be for the fund companies that were very late in sending income reclassification data to Pershing, causing them to miss the February 28th deadline.

How do I download my tax information into TurboTax?

If you use Quicken, Turbo Tax, or H&R Block for your tax preparation, you can import your account information directly from NetXinvestor for both investment accounts and bank accounts.

1. Once logged in, you will be prompted to import 1099 information.
2. For your Pershing accounts, please select – BNY Mellon|Pershing
3. This will prompt you to enter your Investor portal User Name & Password.

How do I find the amount of municipal bond income that is excluded from state tax?

If you owned a municipal bond fund and are being asked for the amount in which your income dividend is also to be excluded from state tax, use these sites:

American Funds: https://www.capitalgroup.com/individual/service-and-support/tax-center/interactive-worksheets/munibondtax.htm

T Rowe Price:https://www.troweprice.com/personal-investing/resources/planning/tax/fund-specific/t-rowe-price-tax-free-funds.html

If you owned municipal bond funds from other companies, you can use Pershing’s helpful tool: https://ofx.netxinvestor.com/tools/mftoolsecure

Where do I find my tax documents?

For accounts held at BNY Mellon/Pershing you can find the information on the CJM Portal or Pershing’s NetX Investor site.

CJM’s Client Portal Website

1. Sign on to:https://login.orionadvisor.com/
2. Click on the Folder icon in the left menu bar
3. Click on Pershing Documents
4. Click on Tax Statements
5. In the top right, change the year to 2023 to access the tax year 2023

Pershing’s NetX Investor Website

1. Sign on to NetX Investor Site: https://investor.pershing.com/nxi/welcome
2. Go to Communications on the left-hand side and choose All Documents
3. Click on Tax Documents for Income, Dividends, and Realized Gain/Loss information.

Be aware that in non-qualified accounts (Trusts, Joint, Individual, etc.), you could have a combination of covered and non-covered cost basis. You should report both the covered and the non-covered cost basis, not just the covered amount.

Tracey A. Baker, CFP®, Brian T. Jones, CFP®, Kevin E. Donovan, CFA and, Parker G. Trasborg, CFP® discuss markets in 2023 and what we are looking towards in 2024.

Parker G. Trasborg:

Hi, my name is Parker Trasborg. I’m Senior Financial Advisor here with CJM Wealth Advisers, and today as always, I’ve got Kevin Donovan, our Portfolio Research Director and two special guests. We’ve got our President and another Adviser here, Tracey Baker and our Chairman and another Adviser, Brian Jones. Happy New Year everyone. Thank you for joining us and tuning into our first quarter update of 2024. So 2023 was a great year for stocks. The bonds ended up doing pretty decently as well. Brian in 60 seconds or less, what was your top story of last year in 2023?

Brian T. Jones:

Thanks, Parker. I think the big story for me was the absolutely monster rally we saw in Q4. Clients have to remember that when we sent out the 9/30 reports, the Bond Agg was negative at that particular point in time. And if you look at the Dow, it was only up just barely over zero at that point. And what ended up happening was October was a down month. Both stocks and bonds declined in the month of October, and then we got to November and both equity and bond markets just absolutely took off, and it was just a wonderful end of the year. You saw a lot of broadening in the markets with regards to a lot of the things that had lagged front half of the year. So we ended 2023 it was just a great year.

Parker G. Trasborg:

Thank you. So fourth quarter was pretty good. Kevin, what did the rest of the year look like for you?

Kevin E. Donovan:

Yeah, let me expand it a little bit on what the full year was like. Let’s throw a chart up and see what the market bill performance looks like. You can see those, the top line there is the S&P 500, and it was up 24% for the year. Now we’ve talked in previous videos and our marketing commentaries about how the S&P was really influenced by the magnificent seven tech stocks like Nvidia, Apple, Amazon, things that really benefited from the AI boom earlier in the year. And that kind of carried through to the outperformance of the S&P for the full year. We go a little further down the chart. You can see international stocks had a very good year up 15% for the year. They beat the Dow. And bonds ended up with a gain of about five and a half percent, not too bad for bonds.

Showing the next chart is the fourth quarter chart that Brian was talking about. And here you can really see some of the things that he was mentioning where the Dow led all indexes higher, that was up 12.5%. So that’s some of the broadening out of the market where other sectors besides technology did well, like Brian said. And you see the big increase in bonds during the quarter that were negative, but they went up almost 7% in the quarter.

And one of the main reasons for that is our next chart, which shows the 10-year yield for treasury bonds, and it was a very volatile year for the 10-year yield as the Fed increased interest rates in the first part of the year, then held them steady, and then right at the peak there, as you see towards the end of the year in late October is when the Fed had said that basically they were done raising rates for now and that they may actually cut rates. They see themselves cutting rates in 2024, and that’s when we saw the 10-year yield go down steeply and you saw bond prices rise dramatically and the stock market really take off. So that’s kind of the big story for the year is the yields. Fed raising interest rates didn’t declare victory against the war against inflation, but inflation came down dramatically to about 4% and it’s well on its way towards going down even further.

Parker G. Trasborg:

Yeah, hopefully we’ll hit our 2% target (on inflation) here and not too long. So 2023 again was a good year, volatile as we kind of made our way through the year. Tracey, what are your top stories? What are you thinking about for 2024?

Tracey A. Baker:

Yeah, 2024, we’re really hoping that it is going to continue that trend that we started kind of late October, November, December that the Fed waged war on inflation and they are going to continue the trend of no longer raising interest rates. Anybody that has been in my meetings, I’ve talked about rising inflation and the Fed trying to fight it with raising interest rates. They declare victory and they’re going to maybe even perhaps drop interest rates, which would be fabulous. I warned clients we didn’t really want to see them pull back on interest rates because for them to do that would mean that they saw weakness in the economy.

It may be that they just saw that the economy has survived this and that they had that soft landing that they were hoping for, and that would be good news for everybody. So we’re really hopeful for that. We’ve got an election year, which I know we’re all dreading our phone ringing off the hook, but we really think that’s going to be kind of a non-issue. So we’re really hopeful that 2024 is going to be a good year for all of us other than our phones ringing off the hook, and we’re going to have a good year in the markets, both in the stock and bond markets. So we’re really very hopeful for 2024.

Parker G. Trasborg:

Yeah, it does look like the Fed may have engineered us to the soft landing.

Tracey A. Baker:

Hope so.

Parker G. Trasborg:

Keep our fingers crossed. Kevin, do you have anything to add for the rest of this year?

Kevin E. Donovan:

Yeah, I want to just echo what Tracey said about bonds. Right now, bonds are paying good yield, good income on bonds right now. You remember from ’08 until 2022, bonds were at zero basically. Now we’re finally getting good income, and if the Fed does lower interest rates, we’re going to see price appreciation on those bonds. So we’re really optimistic about the bond market. Stocks always going to be volatile, much more volatile than bonds are. I would caution against the market consensus at the beginning of the year. You remember the last year our market consensus was we were going to be in a recession in 2023. What everyone is saying is going to happen now may not necessarily pan out. We don’t know. There could be a market surprise, but we are optimistic on the bond side and we’re optimistic long term.

Parker G. Trasborg:

Great. Great. Thank you. Thank you all for joining us. Try something new today. Thank you, Brian for having us here and Tracey for joining as well. Kevin, as always, it’s been a pleasure getting together with you. Again, Happy New Year to everyone. I hope you all have a healthy and happy 2024. And if you have any questions at all, feel free to reach out to your planner directly and we will see you next time. Thank you.

End of Year Reflection – Be Authentic by David Greene

As a firm, we always try to pause as the year comes to a close to reflect on the past 12 months and consider what the next year may have in store for us.  2023 often seemed consumed with headlines about AI (artificial intelligence), deep fakes, and ChatGPT.  Now, almost as a counterbalance, my thoughts lead me to the concept of “authenticity”.  It seems that I am not the only one thinking of this – did you know that Merriam-Webster’s word of the year for 2023 was, in fact, “authentic”?!?

Exploring what it means to be authentic fits quite well with this time of year when many of us focus on the very REAL triumphs and challenges that we faced in 2023.  It’s highly likely that our success in those ventures relied on the genuine authenticity of everyone involved to get to the root of the problem and find a long-term solution.  In a world of ten-word tweets and five second sound bites, we often miss the genuine parts of a story or the very real consequences of an event.  More and more, we seem to depend on computers and computer-generated content to do our thinking for us.  Yet, I maintain hope and confidence that REAL people will maintain their AUTHENTIC dreams and see those dreams to fruition.

We see this authenticity of living REAL lives on a daily basis through the lives of our clients.  Adult children generously supporting one aging parent serving as caregiver to another parent struggling with a life altering condition like Parkinson’s or Alzheimer’s.  Professionals inspired to reinvent themselves with a second or third career focused on various non-profits with the mission of helping those in need. Young adults leveraging their parents’ investment in their education to lead fulfilling lives with inspiring careers.  Artists and musicians in our client family who show incredible creativity and talent through music, painting, etc.  Families suffering through the loss of a cherished grandparent while honoring their legacy through hard work and sacrifice.

At CJM, we also strive to model such authenticity in our support of and interaction with our clients. It can be as simple as sympathy card written by a real person with genuine emotion. Even the act of actively listening to a client without interruption to truly understand their current situation.  Our team strives to consistently and genuinely help our clients with REAL solutions and an authentic interest in their lives and their futures.

So, as we all hopefully find time to celebrate the holidays with friends and family, let us commit to each other to maintain our authenticity as human beings.  To have empathy and grace.  To challenge each other while maintaining mutual respect.  To harness passion, innovation, and inspiration.  Look out 2024…it is about to get REAL!!!

Day of Service 

This fall CJMers volunteered at the Audrey Moore Rec Center in Annandale. We were graced with beautiful weather to do some pruning, weeding, and planting of colorful bushes. We all really enjoyed the positive feedback from the local residents and spending time together out in the community.

GMU Externship Day at CJM

Brian Jones hosted a group of students from George Mason University’s Financial Planning & Wealth Management department. Brian has served on their Advisory Board since its inception and works with the financial planning community to promote the degree program, recruit, and outreach to the student body, as well as accreditation.  As part of the Financial

Planning & Wealth Management Externship Experience, the students got to spend time at CJM and learn more about the inner workings of a wealth management firm.

PINK DAYS!

This year CJM had several Pink Days in support of Breast Cancer Awareness Month. CJM has 4 breast cancer survivors, several of whom also fundraise to support the cause and bring awareness and outreach to their communities. We are stronger together!

For those still actively working full time, funding your employer retirement plan every year is the foundation of any long-term plan to retire from the workforce. Setting aside dollars today into a tax deferred account (401(k), 403(b), TSP, etc.) helps to grow one’s nest egg for tomorrow when you are no longer working full time. Clients frequently ask how they could save more into these plans, since there are limits, and one great solution is the ‘Mega’ Back Door Roth.

Let’s take a step back and review how this works. All retirement plans have a maximum annual contribution amount. In 2023, the maximum annual employee contribution to 401(k)s, 403(b)s, and the TSP is $22,500.  If you are over 50, there is an additional “Catch-up” contribution of $7,500.  The IRS has announced the 2024 contribution limit will increase to $23,000, but the catch-up contribution will remain at $7,500.

There is another number to be aware of in 2023 — the maximum that can be contributed to a 401(k) plan by both the employee and employer is $66,000 (or $73,500 if you are at least 50 years old).

       Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401(k)-and-profit-sharing-plan-contribution-limits

So, if you are a high income earner and have maxed out your annual employee contribution ($22,500/ $30,000 in 2023), what should you do next?

Enter the “Mega” Back Door Roth.

The “Mega” Back Door Roth allows you to contribute above and beyond the $22,500/$30,000 to your employer retirement plan.

In order for this strategy to work, you must meet certain criteria:

1. Have earned income to contribute and enough disposable income to make after-tax contributions
2. Your employer plan allows you to make those after-tax contributions
3. The plan must allow periodic in-service distributions or Roth conversions of your after-tax money and any earnings

Roth accounts are a better “deal” for taxpayers in retirement compared to a traditional account for a few reasons. Traditional accounts require an annual distribution beginning at age 73 (age 75 beginning in 2033). This distribution is taxed at ordinary income tax rates, whereas Roth distributions are federal tax free.

Let’s look at how this strategy has worked for our clients using the case studies below.

Case study

Client (age 42) works for a large IT company. The company 401(k) plan allows after-tax contributions and periodic in-plan Roth conversions. In 2023, she contributes $22,500 as her base employee contribution to her company’s 401(k) plan. Her company matches 5% of her $400,000 annual salary to the plan totaling $20,000.

Employee pre-tax contribution   $22,500

Employer contribution                    $20,000

Total 2023 contribution                  $42,500

On top of the contributions above, she contributes an additional $23,500 in after-tax contributions to the 401(k) plan to reach the maximum of $66,000. She immediately does an in-plan Roth conversion of these dollars (if done immediately, there should be no additional income tax liability on the $23,500 as there won’t be any earnings).  These dollars are now in a Roth 401(k) meaning that they will grow tax deferred and distributions in retirement will be federal tax free.

As you can see from the example above, this employee is making maximum use of their employer retirement plan by a) maxing out their annual employee contributions b) maxing out the employer annual matching contribution and c) deferring additional after-tax contributions inside her 401(k) plan and immediately converting these additional contributions to Roth for retirement.

Age 50+ case study

In the example above if the client were age 50 (instead of 42) her contributions would look like this in 2023:

Employee pre-tax contribution                                  $22,500

Employee age 50+ “Catch-up contribution”            $7,500

Employer contribution                                                $20,000

Total 2023 contribution                                                $50,000

In this example, the employee would also make an after-tax contribution of $23,500 (after which the employee does an in-plan conversion of the after-tax dollars to a Roth 401(k) as the IRS allows up to $73,500 including the age 50+ catch-up.

Whew. The tax code, qualified retirement savings rules plus upcoming changes as part of the SECURE 2.0 Act make this quite a complicated tax strategy. But leveraging after-tax contributions inside your employer retirement plan has significant benefits over the long term if done properly.

Note that everyone’s situation and plan is different. You should work with your planner and tax preparer to implement the strategies above.  If you have questions about maximizing your retirement savings or any additional options available to you to make more of your hard earned dollars tax-free in retirement, please contact us today.

CJM hosts Cozy Wittman, College Planning Expert, from College Inside Track. This past year has resulted in some of the most significant changes to the college planning process in decades.  We discuss the changes with Cozy during this webinar recorded on October 26, 2023.

Parker G. Trasborg:

Hi, I’m Parker Trasborg, senior financial advisor with CJM. Thanks for joining us today to learn a little bit more about the college process beyond just where and how much to save. I have three kids myself, many years off from college still, but I’m excited for today’s event. We’ll be, as I said, recording today’s program and posting it to YouTube, so if you have to leave early at all, you’ll still be able to catch the rest at a later time. If you have any questions at all, please utilize the Q&A feature at the bottom of Zoom and we’ll make sure to get those answered for you. Without further ado, it is my pleasure to introduce Cozy Wittman from College Inside Track. Cozy is the education and partnership leader at College Inside Track, and speaks nationally. She was, I think, in Texas recently and maybe California before that, about college search, educating families and training financial advisors and other professionals who work with families with high schoolers.

College search has become increasingly complex over the years with the nuances, very difficult to understand at times. Cozy is passionate about dispelling myths that cost families money. She was featured in the Journal of Financial Planning on the subject of college planning. Cozy is very excited to connect with organizations and families interested in learning more about the complex college search project. She’s a mom of five kids, pretty amazing, with very different goals for college, so she’s no stranger to the challenges around the college search. Cozy, thanks again for joining us and I’ll let you take it from here.

Cozy Wittman:

Thanks so much. Boy, five years into Zoom you would think I could remember how to unmute myself. Thanks so much for inviting me, it’s my pleasure to be here. I’m excited to work through some of the new and interesting nuances that are related to college, college search, and applications and acceptance. And so without further ado, we’ll dive right in. If you’re not familiar with College Inside Track, we’ve actually been helping families navigate the college search process for 17 years. Our goal is always the same, to make sure that families find right fit schools for their students. Right academic fit, right social fit, and right financial fit for your family. And then I’m assuming you joined today because you have a high schooler. I’m sure you already know that college search can be very stressful, and so part of our job through the process is just to try and reduce the stress associated with the college search process as well.

So we’re going to start today with a quiz, this is a play along at home kind of thing. As a percentage, how much do you think tuition has increased nationally at our public institutions? So these would be your state colleges and universities in the last 30 years, so since 1993. Do you think those prices have gone up 73%, 106%, 180% or 213%? So I’ll give you an opportunity to think about that for a second. Last 30 years average increase nationally for our public institutions. These schools have actually increased their tuition by 213%. By comparison, their private counterparts have gone up 415%. But before you get out your wet noodles and start lashing those private schools for that outrageous increase, I want you to take a quick peek at our flagship universities, so these are our major university in our states. I live in Minnesota, the University of Minnesota has gone up 570%. Our neighbors next door at University of Wisconsin have increased their tuition by 1047%. The highest I’ve found so far nationally is UConn at 1300%. Always like to give people a little state of the state of college land today. When I sit down and I chat college with families, which I do often, I ask the students, tell me some schools you’re kind of sort of interested in. And I will tell you candidly that your kids bubble up these top four, or something that sits in that same realm, as schools of interest. So I want to make sure that you can see the numbers here. But what I want to point out are these bottom three. The bottom three schools on this list are all flagship schools for their states. And you can see that the schools today ranging in that $30,000-$35,000, so when we think about public institutions it is rare that you get to dive in under $30,000 a year today. Your flagship universities, nationally we see them in the $30,000 to $35,000, as I mentioned. Of course, there are outliers, we have UC Berkeley sitting way out there at $39,000. But the others are catching up, and so I think it’s important to make sure that you’re saving and you are aligning your game plan for paying for school, for what prices actually look like today, and not like they looked like about a decade ago. We meet a lot of families that are hoping to pay $20,000 a year for a college education, and candidly, it just doesn’t look like that anymore.

All right, so here’s another quiz for you. I hope you did well on the first one. What percentage of students transfer at least one time? So number of kids who get off to their school and discover, “Oh my gosh, this is not the right place for me.” And need to change colleges. Is that 6%, 14%, 25%, 38%, or 42%? So today, the national transfer rate sits at 38%. 38%. Of the 38%, so almost 40% of kids who end up changing schools, the number of these kids who choose poorly the second time and have to change yet again is actually almost 42%. So huge number of kids not really thinking deeply about what they want in their college experience. And so here’s why I bring this up. When your student goes from one school to the next school, you have increased the cost of that degree by about $14,000. And for the 42% of kids who make a poor choice the second time and have to go to yet a third school, they are increasing the cost of their degree by about $24,000. So today, finding the right fit school the first time is super, super important, if one of the things that matters to you is keeping the cost of college down.

All right, so let’s talk a little bit about financial aid. The one thing that I always want to clear up here is helping families really understand what colleges mean when they talk about financial aid. So when you go out to a college website and you look for pricing, you’ll usually also find information that says something like, “Oh, here’s our sticker price, but the average student on our campus pays X. Or we give away X amount of financial aid.” And so I want to help you understand what that actually looks like because I find that when families talk about financial aid, what they really mean is need-based aid. So people will kick conversations off of me that say like, “Oh, we’re not going to get any financial aid.” And what they’re really referring to is need-based aid. So that’s one component of what financial aid is when the colleges talk about it, but it is not the only component. Colleges are also including merit-based scholarship dollars in those numbers, and they are including loans. And I don’t know about you guys, but I don’t think about loan as aid. Loans you have to pay back, it’s not a gift. And so when you look at the numbers on college websites and they tell you, “The average student on our campus pays X.” You have to know that their average student is going to include a student who’s getting need-based aid, who is getting some merit scholarship money and likely has taken out loans. And so if you don’t fall into any of these categories, or you only fall into one or two of them, the number they’re showing you is really irrelevant for your student. The other thing is, you’re not guaranteed the exact amount that the average student is getting of either need-based aid or merit-based aid. And so honestly, for the numbers that they show you on the college websites, we don’t really know if that’s what your student is going to pay. So we’re going to tackle these.

We’re going to cover today, need-based aid and merit-based aid. I have a whole entire presentation on loans. We are not going to cover those today. But I want to talk about the factors that actually do influence the overall cost to your family, and we’re going to kick this off by talking about need-based aid. So there are two forms that your family may fill out to determine if you have need. Most people are familiar with the first one of course, it is called the FAFSA. But lots of schools now also ask for something called the CSS Profile. It’s certainly not as prolific as the FAFSA, so you may never run into the CSS Profile, it just depends on the schools that your student ends up applying to. When you fill out your FAFSA form or you fill out the CSS profile, it creates through their formulas, a number that is now called the Student Aid Index. The Student Aid Index today is about 47% of your adjusted gross income. And I don’t know about you, but I didn’t plan to send almost half of my income off with my students to college. Parker mentioned we had five, so every time someone went to college, with the exception of the last one, there were always people left behind who love to do things like eating. So I’m not planning to send half of my income off. Here’s the deal, this is not a fair number. I just want us to all agree that the Student Aid Index is not going to be fair, it just is the formula.

So it’s important to understand how the formula works because what I find is that people start to do mental gymnastics around trying to be need-based. And the reality is you will either be need-based or you will not, and you can almost never jigger your way into that space. So on the FAFSA formula, student assets, because on the FAFSA students and parents are assessed, and you can’t really get out from underneath that, parent, there really is no way for you to extricate yourself from this. There are a few scenarios where a student can be independent. Most of you don’t want your kids to be in those scenarios. So here’s the deal, student assets on the FAFSA are assessed at a 20% rate, where your assets as the parent, only assessed at 5.64%. So when you look at where people save money for college, most people have their money hanging out in a 529 plan. That’s going to get this little teeny tiny assessment, 5.64%.

So if you have it in your head that somehow you’re being penalized for saving for school, just get rid of that thought because you’re not. Think about a 529 plan. What percentage of a 529 plan is intended to be used for college? A hundred. A hundred percent of that 529 plan, that’s what it’s for. Yet it is only getting this teeny tiny 5.64%. I do want to point out if you have your savings for college sitting in an UGMA or an UTMA form, or account, excuse me, it is assessed at that much higher rate of 20%. And so if that’s where your savings is hanging out, that’s okay. Just use it up first and that will impact the remainder of the years that you’re going to fill out that FAFSA. There are two big mistakes that we see that people make when they fill out their FAFSAs. The first is that they assume that assets are the influencing factor here. It is not. Your assets are only assessed at 5.64%, 5%. Your income, on the other hand, assessed at 47%. So your income, not your assets, are likely going to knock you out of the space of being need-based. The other thing that I find is that people put retirement accounts on their FAFSA. Your retirement accounts do not go on the FAFSA at all. If your advisor has suggested that you should have money sitting in a retirement account for your student and that’s going to be their college savings, that also does not go on the FAFSA at all. The other major asset that people have, of course, is their home, and that also does not belong on the FAFSA. Now, if you’re going to fill out a CSS Profile, if the college is asking you for one, you should know that both of those things go on the CSS Profile. So what people find is they are much less needy if they have to fill out that CSS Profile, but not your retirement, not your primary residence. Again, income is the single largest factor on the FAFSA. So stop doing the mental gymnastics, don’t run over to Parker and ask him to move assets around for you. You really can’t do anything on the asset side of the house to impact the FAFSA for the vast majority of people. Your income, unless you’re willing to quit your job and become a popper for the purposes of college, you also can’t do anything about that. And so from our perspective, you’re either need-based or you’re not. And if the answer is not, then we just set it aside. We stop thinking about it. And we focus on other ways to reduce the cost of college for you.

I do want to cover some of the big FAFSA changes. One of the things that does happen when people have two kids going off to college at one time, for us, in the house of five kids, I had six years where I had two people in college. And so there are some big impacts coming for families who have multiple kids in college, and I want to take you through some of the major FAFSA changes. I already mentioned the one, the outcome of the FAFSA is now called the Student Aid Index. If you have older students and you filled it out before you might be more familiar with the terminology Expected Family Contribution. That has been retired, so stop calling it that. I’m trying really hard to stop calling it that. Now, the outcome of the FAFSA is called the Student Aid Index. So again, big change for families that have multiple kids in college at the same time. The discount that was applied, or the leniency in the FAFSA formula that was applied for families who had two kids in college was closed down in the new FAFSA changes. So these are rolling out on the 2024 FAFSA. If you’re joining us today and you have a senior, the 2024 FAFSA should be available starting in December. They have not released the actual date though that the portal will open, so more to come there. On previous FAFSAs, the formula did take into account the fact that you might have multiple kids in college, and it adjusted accordingly. So the way the old formula worked is when you filled out your first student’s FAFSA and you told it, “I have two kids in college.” The formula adjusted and it said, “Okay, I’m only going to assess your income as a parent at 23.5% then. And here for student two, I will also assess your income at 23.5%.” So still 47% of your family income assumed available for college, but it got divided between your students. On the new FAFSA, that division disappears. There is no division. The formula will no longer take into account that you have multiple kids in college. So student A, you fill it out, your income assessed at 47%. Student B when you fill it out, your income assessed at 47%. So now the formula assumes that you can send 94% of your income off with your students to college. And God help you if you have three kids in college at the same time. More than a hundred percent of your income assumed available for college. It’s a ridiculous number. Clearly, when these changes got made, there was glaring misperception around how the FAFSA gets used, but also how expensive college is for families. There is also changes in the divorce formula. The way you will determine which parent fills out the FAFSA in a divorce scenario, because only one is going to, is by who is financially supporting the student more. So on previous FAFSAs you determined it by where the student lived. Try and erase that from your brain. It’s not about where the student lives. It’s also not about who claims a student as a dependent. That is irrelevant for the purposes of FAFSA. So whichever parent financially supports that student more, that is the parent that is going to fill out the FAFSA. This is self-reported. Do your best. Try and figure this piece out and then have that family fill out the FAFSA. The definition or the exemption, rather, for small businesses and farmers is also disappearing. So on previous FAFSAs, if you were a small business owner and you had fewer than a hundred employees, you did not need to include your assets on the FAFSA. Under the new FAFSA formula, you will need to include all of your assets regardless of the size of your business. This is true as well for farmers. And so know that it includes any unsold merchandise, any inventory, capital equipment, if you own the building, the value of the building. Same is true for farmers, land, capital equipment, all of those things need to be included now in the FAFSA.

And then one of the few shiny spots in the new FAFSA rules is that any third-party, I have grandparents here, but it could be anybody, it could be an aunt, it could be an uncle, it could be a godparent, it could be the neighbor next door who loves your kid so much and just wants to help them pay for college. Any of those people can now assist a student in paying for college, and the student will no longer need to report that as untaxed income. In previous years, that’s what happened. It ended up reducing need-based aid, and so they did close down that weirdness. And so now anybody who wants to help a student pay for college can do so. Feel free to start picking up the phone and calling grandma and grandpa.

Okay, let’s see if we have any questions. Parker, I know you’re fielding those. Anything so far pop into the-

Parker G. Trasborg:

Yeah, there was one around the cost of college. So you showed how the numbers have grown over the last several years. What do you expect the future for college cost to look like? And at what point do you think we reach a point where it’s maybe not sustainable anymore?

Cozy Wittman:

Yeah. So I’ll try my best to get out my crystal ball here. Here’s what I’ll say. Here’s what we see now. In COVID, there was a lot of discussion. There’s a cliff coming, not as many kids going to college, what are the colleges going to do? Parents were up in arms because they were paying $50,000 a year and my kid’s in my living room doing college. And so we were all quite sure that the college landscape was going to have to adjust. Many schools froze tuitions during that time, but guess what they’re doing now? This past year, 8% to 16% increases in college tuition. 8% to 16%. So in the very near future, I don’t see this changing. What will it look like 10 years from now? I don’t know, it’ll be interesting. There’s some interesting things starting to pop up on the landscape in the public college space. The state of Minnesota, where I live, just announced a program called the North Star Program. So if you, on your adjusted gross income for your FAFSA, if you are under $80,000 a year, tuition is free at our public institutions. You still have to pay for housing, but not tuition. We see things like that popping up in the state of New York. In the state of California, they’re creating basically a feeder and farm system, if you will, through their community colleges. Allowing kids to start there and auto transferring into any of the UC system schools. And so there’s a lot of creative thinking happening, and so I would say more to come here. But the schools that are losing out are the mid-tier schools. Those super selective schools, always going to be super selective because they’re always people who want to drive the Porsche. There will always be a market for that. Our public institutions are trying to be creative and fill their seats with people of all different styles. I think the schools that may suffer in the future are those mid-tier schools. We’ll see.

Parker G. Trasborg:

Thank you. Another one came in. Can you briefly address the impact of 529 plans owned by grandparents versus parents, and which one should be used first?

Cozy Wittman:

Yeah, so this is such a good question. Again, 529 plans only assessed at that teeny tiny 5.64%. So keep in mind that as a parent, your 529 plan, do the math. If you have $30,000 sitting in your 529 plan, multiply that by 5.64% and see the impact to your FAFSA. It’s nominal at best. So I’m not a big fan, if you have high schoolers, of suddenly jumping around and like, “Oh, let’s get grandma and grandpa to own the 529 plan now.” But rather, if both are there and hanging out, I would take advantage of both, because again, your 529 plan really not impacting. Even if you have $100,000 sitting in that, the impact to your need-based data is so minimal.

Your income, on the other hand, huge impact. But if you’re a family and you have a younger student, I met a family last night who has a 17-year-old and a five-year-old, it might make sense for grandma and grandpa to own the 529 plan for the five-year-old, and you contribute to theirs. But if you already have a high schooler, I’m not a big fan of trying to jiggle through some kind of something that makes sense, because remember, your income is so much larger impact here.

Parker G. Trasborg:

Thanks. Another one, is there an approximate income level where you could just not bother wasting your time filling out that FAFSA form?

Cozy Wittman:

This is such a good question too, and I get it every time. The short answer to that question is no, and here’s why. The FAFSA is more about determining need-based aid. There are other things that it gets used for, and one of the things we’ve seen in the last year are behavior changes from the colleges for families who did not fill out the FAFSA. So in previous years, we’ve always been kind of lukewarm like, “Yeah, if you’re not going to qualify for need-based aid or don’t fill out your FAFSA if that’s what you really want.” But in the last couple of years, we’ve actually seen acceptance behavior changes and financial package behavior changes on the parts of the colleges. So our recommendation to everybody today is fill out the FAFSA. Good news for you though, the new FAFSA, starting on the 2024 FAFSA, the questions go from 108 questions down to 40 or 46, depending on your financial structure. So it’s not such a huge suck of your time today. Fill it out. It is also, by the way, the application for the federal student loan. So if you want to take advantage of that loan program, you must fill out your FAFSA.

Parker G. Trasborg:

Another one. If this will be covered later, we can wait, but do you have recommendations for parents with GI Bill benefits and multiple kids on the doorstep of college? Is it better to allocate 100% of the GI Bill to the first one, or to spread it out across the kids to potentially maximize in-state tuition benefits?

Cozy Wittman:

Yeah, this is a good question. I would say it’s philosophical to your family. Figure out what works best for you. This is a really good question for your advisor at CJM. Go off, talk about how much you have. One of the things that we talk through when we work with families is, what’s the budget for college? And so thinking about what you have available to take advantage of, and then what is the strategic outlay of that? And so there’s so many other factors like, do you have other savings for college that filter in? The one thing I will say is that your GI benefits do not impact your FAFSA, so it wouldn’t be a, use it so then you get need-based aid later. That’s just not a thing, so I wouldn’t worry too much about it. And start to think philosophically, how many kids do we have? Do I want to layer this across my kids? Think about it that way instead.

Parker G. Trasborg:

Thank you. That’s all of them for now.

Cozy Wittman:

Awesome. All right, I have one last quiz for you. What school path do you think is the least expensive? Is it choosing a four-year public college? Is it starting at any two-year school and then transferring to a four-year school? Is it starting at a public college and then transferring to a private college? Or is it starting at and finishing at a four-year private university? I’ll give you a second here to choose your answer. And it turns out it’s a trick question, they all might be true. The real best, least expensive path for you, is based on who your student is and what circumstances do you have. There is no singular right least expensive path for every single student in every single state. So today, this is one of the things that just makes college hard to think about, is you really do have to evaluate all the pathways. And really think about, what is best for me?

And one of the things I’m going to offer here in a little bit is to do a free consultation for your family, where we can explore those pathways, if you want. But you have to explore them today because your circumstances, the way that your state thinks, and who your student is all impact the potential success of your student in college, not just financially, but actually from a success perspective as well. The one thing I am going to say, and we talked about this earlier, starting at any college and transferring to any other college is probably going to be more expensive. So it’s an important thing to keep in mind, when you change schools, usually dollars go up. When kids change schools they’re usually in school longer, on average about eight months, and so you’re still paying for school but not earning. And so just keep that in mind.

Today, it’s time to really ditch old world thinking. It does not suit the college environment any longer. So if you’re thinking, started the two-year community college, changed to the local public institution, automatically cheaper. Nope, it might not be. Started our public four-year and finished at the public four-year, cheaper. Nope, it might not be. Today, you really need to think about schools as flexibly priced and inflexibly priced because there are schools in the country, thousands of them, who will make it less expensive for you because they want to fill their chairs.

So when we look at my five kids, I’m going to take the top two off, they were very non-traditional. One of my kids didn’t go to college, by the way, so I’m not a college bigot. Of the bottom three, one went to our public flagship university, one went to a private university, and one went to an out-of-state state school. It wasn’t the flagship school of the state, but it was a state school in another state. Of those three, the out-of-state state school, the private, and our local flagship, the most expensive of those three, our local flagship university, the University of Minnesota. The least expensive of those three, the private school. My daughter went for the same price as one of our smaller state schools. So today you really do have to investigate, understand gifting programs, understand how colleges think. And I’m going to tip you in here to how colleges think. Why think about them as flexibly priced and inflexibly priced? Because there are public and private schools in both of those categories. In both.

So let’s talk about scholarships because this is what people want to talk about. Where do we find scholarships? And I think you’re going to be surprised at the answer. We’re going to talk about where money comes from, from the highest rate of return for your investment of time, down to lowest rate of return for your investment of time. And the number one place you find scholarship dollars are the colleges themselves. Schools give away millions of dollars every single year. For our class of 2022, those kids garnered more than $23 million in scholarships from the colleges they applied to. 23 million. This is where the money hangs out. So we are not big fans of molding your kids into something that colleges are interested in, but rather the other way around. Figuring out, here’s who my student is, and here are schools that would be interested in them for acceptance purposes, but also for potential scholarships. When colleges give away money, it does typically last all four years. Colleges are also number two on the list, so after your student gets accepted they get a package, but they also get an email that says, “Congrats, you’re a bear, a beaver, a gopher, a duck.” Or some other woodland creature. And in that email, there’s a link to additional scholarship dollars. Why do kids miss this? Because it wasn’t text to them. They’re not email readers yet, they aren’t business thinkers yet, and so they aren’t looking in their email for scholarship opportunities. They just aren’t. If the colleges would send these via TikTok or text, they’d get it in a heartbeat. But they don’t, and so consequently, by the time the kids get around to reading these emails, the deadlines for a lot of these scholarships have passed and they’ve missed that money. So making sure your kids are on top of it after they send their applications out the door is important. Local scholarships are number three. So you’ll notice our pyramids getting smaller. Local scholarships would be things like your employer, a local bank, maybe a community club like Lions. Any of those organizations give away money. Does it move the needle of college? Not very much. Congrats, here’s $200, here’s $500, here’s $700. Your student might manage to scrape up a thousand bucks here. If they’re going off to your local flagship at $33,000 a year, it just doesn’t make that big a difference. It just isn’t really impacting. Congrats, you bought books. So are these okay? Sure. Should they apply? Sure. Just don’t count on them to actually reduce the cost of college by very much. And the other thing here is the local scholarships do tend to be one-shot deals. So you get it once and then they don’t get it again. And then bottom of the barrel, where I would suggest you spend exactly zero amounts of time, is out on the internet looking for private scholarship dollars. These will be a waste of your time. The average student has to apply to between 55 of these and 80 to win anything. And the average award amount here is about 500 bucks. $500. They would be better off just getting a job the summer before they go off to college. They’ll earn more.

All right, so if schools are your source, what are the schools looking for and what should you be thinking about? Well, the first thing you have to know is, does the school actually even offer merit aid? Not all schools do. Why? Because not all schools have to. If I’m a college or a university that has a 4% acceptance rate, 7% acceptance rate, 13% acceptance rate, 18% acceptance rate, I don’t have to give away money. Kids are bashing down the doors to get into my university. There is no money available at those very selective colleges in this country. And I know everybody knows somebody who got a full ride. That kid is urban legend. That kid is not real. Now, you might know somebody who got significant money, but guess what? It wasn’t scholarship dollars, it was need-based money. So a lot of those schools cover a big chunk of need, they do not give scholarship dollars because everybody’s smart who gets in there. Who would they give it to? So here’s the other thing, colleges are businesses. And at the end of the day, they are incentivized the same way businesses are incentivized. And if I don’t have to give away money, why would I? So first you need to know, does the school offer merit aid? The second thing you need to understand then is, what are they giving it for if they’re going to give it away? At the end of the day, schools have a bunch of open chairs, and they need to fill those chairs with kids that benefit them. Again, they’re businesses. No one’s looking at the admissions, all the applications and going, “That Jane, we’ve just got to have her on our campus.” That’s how kids think about college, but it’s not how the colleges think. So they’re looking for kids who help them with their average GPA and their average test score. So in looking for schools, you want to look for schools where your students’ numbers are above the incoming average for that college. It does not mean your kid has to be a four point student, you just need to look for schools where they’re riding above the incoming average kid for that college. Extracurricular talents matter, but more is not better here. Quality of activities is better. And doing a really good job of showcasing, kids are classic undersells, so showcasing the things that you’ve done on that application matters. And then be demographically interesting. This is super easy to do, and most of us cut ourselves off from it. I did for sure. I told my kids, “Stay in the state of Minnesota, go to a state school.” Until I learned better. You are more interesting outside of your state than you are inside of your state, and that brings extra scholarship dollars to the table, believe it or not. All schools want to say that they’ve got 50 kids, one from every state in the country, and they’ve got 37 countries represented. So this is where it’s important to think outside the box. It will benefit you.

All right, let’s take a look at a recipe card for how colleges think. This is one school’s recipe, but these categories are extremely common, so I want to help you understand how the colleges are thinking. Demonstrated interest is a category of scholarship dollars that people don’t even know exists.This is the school’s perception that your student’s pretty interested in that. So the interaction with the school matters. Following their social media, touring, this stuff is easy to do, you just got to do it. Look at this, for living out of state the school’s bringing a lot of dollars to the table for the kids they hardly ever see. This is pretty common practice in the private space, you don’t see it as often in the public space. For every A on the transcript. Again, these next few categories, they’re buying the strongest students they can find. So for every A on the transcript, $62, for rigorous classes, $400 per, an excellent letter of recommendation, 1,800 bucks. And for every point above this school’s average score that your student’s ACT score is, they’re giving 425 per point. So I think it’s important to keep in mind, the schools are looking for kids who are going to be successful on their campus.

And so the decisions you are making right now, while your students are in high school, are actually building the scholarship package that they’re going to get. And that’s why the high school years are so important and it’s important to make good decisions. Just for filling out your FAFSA form, so this goes back to the question you asked me earlier, does it matter if we fill out our FAFSA form if we’re not going to get need-based aid? We would argue yes because there are a lot of schools, one, who will just hold onto your financial award package until they see your FAFSA. And two, there are schools that actually add scholarship dollars just because you filled out your FAFSA. And then a really well-written essay can be worth quite a bit of money. The essay is not a check the box moment anymore, it is an opportunity for the student to increase likelihood of acceptance, and increase likelihood of higher scholarship dollars. We spend a ton of time with our kids on their essays because it matters.

All right, my second tip for you, testing still matters. Do not think that the test optional landscape means that schools don’t care about the test. Today, the schools see the two tests, the ACT and the SAT, as equal tests. There is no distinction from the college’s point of view. So long gone are the days where if you were going to East Coast you had to do an SAT, if you’re going to the middle of the country, ACT. You can take any test you want. And the good news is the kids can take the test that benefits them most because they’re different. The other thing is the PSAT is digital starting this fall, the SAT is going to be digital after the first of the year. So if you’re looking at the SAT, just know that it’s going to be digital and you should get appropriate test prep. The test is going to work really differently than the old fill in the bubble test, and so it’s important, if you’re looking at test prep, to make sure you’re getting the right test prep for the test you’re about to take. So if you’re going to take the SAT, make sure you’re looking at test prep companies who do digital training for test prep. And then after you get a couple of rounds of your tests, then you can decide whether or not you’re going to send it off. Both tests, when you register for them, prompt you to put in schools. Don’t do that. Hold off, wait and see if your student has a test score that you actually want to send because you might find yourself in the position where you send it to these three schools, but you don’t send it to these two. So just keep that in mind. Hold off until you know.

All right, I’m going to take another round of questions if there are any, Parker, before we dive into trends in the last two tips.

Parker G. Trasborg:

None in here so far. I’ll give it a second or so to see if we have any pop up.

Cozy Wittman:

Sure, sure. Good.

Parker G. Trasborg:

Yeah, nothing. If anything comes up I’ll ping you.

Cozy Wittman:

Yeah, sounds good. So let’s talk about some of the trends that are impacting the actual cost of college. I mentioned the test optional landscape before, test optional started as a kind of courtesy or something that was needed, because candidly, the test sites were closed during COVID. There was nobody taking tests. And that, in some states, stuck around for quite a while. But guess what the schools learned during COVID? They learned that when they go test optional, they get more applicants. And so what started as kind of a courtesy has now transitioned into a marketing plan. So as long as I stay test optional as a school, I can still accept kids who are submitting test scores at higher rates, and we see that behavior on a pretty regular basis. But I know that it’s going to drive more applicants. And guess what? Colleges love applications. Why do they love them? The more applications they get, the lower their acceptance rates are, because they’re not changing the size of their freshman class. So the more applications drives down my acceptance rate, I look more selective. And guess what happens when I look more selective? I don’t have to give away money anymore. I get to keep my endowment. So keep in mind that the colleges are all about the colleges. They are making decisions in their best interest, so I want you to make decisions in your best interest. This huge shift in volume, 30% increase in application numbers since 2020 in the last three years. Year over year, a school might see a one to 2% increase in their applications, one to 2%. And we are seeing, in the top tier schools, anywhere from 26% to 37% increases in application numbers. And then in all other tiers, about an 18% increase.

So there’s a huge drive in this application space. The volume of applications is driving decisions the colleges are making and the behaviors that they are using to make decisions. So one of the things we’ve seen as schools shift over into way more application numbers, is they are taking a higher percentage at some schools, a higher percentage of their freshmen classes out of early decision candidates. Why does this impact the cost of college? Because if you put all your eggs in a single basket and you say to a school, “I love you so much, I’m going to apply early decision. And if you let me in, I’m coming. And I’m going to withdraw all my other applications and I’m coming to you.” You’ve lost all your leverage. They’re not worried about losing you anymore. And so consequently, what you see is if you were going to get scholarship dollars, they now disappear because the college doesn’t have to gift them to you anymore. You’ve told them you’re coming.

The other thing we see as application numbers rise, is that students just need to do more to get in. In tier one and tier two schools, so these would be schools who have acceptance rates under 30%, we see students now needing to do extra projects, passion projects, research projects, something like that. Secondary factors continue to influence acceptance rates. They also, obviously, I just showed you, how they increase scholarship dollars. These are things like demonstrated interest, the rigor level of the student’s transcript, the essay, all of those things impacting acceptance. But they also impact in a really positive way for your family, the cost of college because they bring better scholarship money to the table. And then the last thing I just want to point out is that at some schools pricing is better, but I just mentioned eight to 16% increases in tuition.

So while we thought pricing might level out, it doesn’t appear to be doing so anytime soon. That does not mean there aren’t great deals to be had in college, there are. But again, I just want to point out, most people paying over $30,000 a year for a college education. All right, tip three, make college more of a business decision. I already mentioned the colleges are thinking about it that way. They are acting in their own best interest, and you should be too as parents and as the student. So diving deeper, don’t let your kid make a decision based off cool campus, great dorms, and I love the sports teams on this campus. Instead, take them deeper, assure the school teaches like your student likes to learn. Make sure there are multiple majors available on this campus so they can change their mind without having to change their school.

And then those big brand schools, I’ve mentioned this a couple times, I can’t say it enough because I meet with families every single day, they’ve got this super sharp kid, 36 on the ACT, 4.9 GPA, nothing more though. And they think that’s enough to get into the Johns Hopkins of the planet, the MITs of the planet. It just isn’t. It isn’t today. You’ve got to have a passion project, a research project. It might be an internship. You’ve got to have something more than just being smart.

And then my last tip for you today is, create a family philosophy around paying for college. What do I mean by that? You need to create your four-year game plan for paying for school. What does that look like? And in that game plan, actually play out, where is money coming from for all four years? Define expectations for everybody. So if grandma has a 529 plan, but you have no idea how much money is sitting in it, it’s time to have that conversation. “Grandma, I’m trying to figure out my budget for college, tell me how much is hanging out there so I have an understanding of what we can afford.” Same with your own 529 plan, if you want your student to have some skin in the game, you should have that conversation now. Start to lay out expectations. This is what we would anticipate you will be paying. And then talk about it early in the process. Why is this the case? Because one of the biggest mistakes we see that people make is they go and they tour the Porsche when what they want to pay for is the Chevy Malibu. So it’s important to understand, does the school gift? If not, can I afford the $78,000 price tag that comes with it? And if the answer to that question is no, don’t go tour that school. Because of course your student’s going to fall in love with that school. Of course they are. So start to define expectations, and if you have no understanding of how to do this, great conversation to have with your advisor.

It is also a conversation we would have in our consultation.

So a little bit about us and then I’ll take your final questions. College is an industry just like anything. Just like real estate, investing. There are things you need to know to do it well, you’re going to do this a couple of times. We sent 200 kids off last year to college. You can do it on your own, but lots and lots of families do leave money on the table. So part of our responsibility is to help you get through this. Help you understand what you should know and when you should know it, so that you can make good decisions. That national transfer rate of 38% drops to less than 4% when we work with families. We do ensure you get the best prices for the schools on your list. We also make sure that the schools that make it to the list meet your budget. And then we get to be a neutral third-party. This is my favorite thing that we do. I have five kids, four are girls. They have all mastered the eyeball role, and I never get to be the smartest person in the room. Never. I’m sure you’ve had that experience or maybe you haven’t, maybe your kids are kinder than mine. But just know that we get to be that neutral third-party.

So here’s the coolest thing I want to offer to do for anybody who’s on today. I do free consultations. I do them every single day. I love it. It is bar none my favorite thing to do. I love sitting down and chatting college with people. We’re going to sit down, you’re going to include your student, and we’re going to get questions answered. You bring all of your college related questions to the table and we’re going to talk about those. We will discuss goals in those three key categories, academic fit, social fit, financial fit. And I’ll give you strategies. These were great tips. They don’t fit for every single family though, so let’s chat about your specifics. I can give you a rough of the outcome of your FAFSA, so that you’ll know, am I going to be need-based or not? And if the answer is no, then we’ll talk about how you really maximize opportunities for scholarships at the colleges. So a little bit of housekeeping, I have a Google form that I’m going to drop into the chat here shortly, I will also send it off to Parker.

If you have a sophomore or junior, take advantage of the consultation. It’s free. I’m happy to sit down with you. It is bar none. I got into this to make a difference in people’s lives. That’s what I want to do. So feel free to take advantage of that. If you join today and you have a young student, you’re like, “Oh, Cozy, they are not ready to talk college.” That’s okay. Fill out the form anyway, we’ll reach out during sophomore year. Second half of sophomore year most kids should be starting to think about this. And then feel free to follow us on Facebook, we put a ton of content on our Facebook page. It’s just College Inside Track on Facebook. And then share us with people you know. If you have high schoolers, I know you know people with high schoolers, so many families stressed out, and so many students stressed out. I really want families to understand what the landscape looks like, so that you can make really good decisions for your students. Any questions, Parker?

Parker G. Trasborg:

None, again, at the moment.

Cozy Wittman:

All right.

Parker G. Trasborg:

We’ll see here in a second or two. But Cozy, thank you so much for joining us today and for all the great information and your time. Thank you everyone for joining us today, it was really neat to see people from all over the country, I see a family out in Washington, some people down in Texas. So good information for everyone and glad we’re able to bring you a virtual event so you can join in on the fun. If you have any questions beyond what we’ve talked about today, feel free to reach out to your planner directly, or as Cozy mentioned, we can reach out to her and she will help get those answered. That is all for today. Again, thank you all for joining us and I wish you all the best as we head into the holiday season. Thanks.

Cozy Wittman:

Thanks for having me. Take care.

Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss markets for the third quarter 2023.

Parker G. Trasborg:

Hi, I’m Parker Trasborg, Senior Financial Adviser with CJM Wealth Advisers, and today again we’ve got Kevin Donovan, our Portfolio Research Director, for our October 2023 market update. Kevin, markets started the third quarter okay, and then sold off starting late August into September. What happened?

Kevin E. Donovan:

Yeah, it was a disappointing last two months of the quarter there in August and September. Basically, it was all again, once again driven by expectations about the Fed and the market’s rethinking about what it expected the Fed to do in terms of will it raise interest rates or keep them high? Or when they’re going to eventually stop raising interest rates and lower them. So, let’s look at the first chart here, and this shows the 10-year yield on the treasury bond.

Now, a lot of things feed into the 10-year yield, and I want to focus on a few things, though, for this quarter. One is that inflation was down significantly from last year, but lately it’s come in just slightly above what the market expected. When you combine that with economic growth being a little better than expected, that caused yields to rise, because the thinking of the market is this may give the Fed room to increase rates even more as they continue to fight inflation. So, the inflation remains above the Fed’s target of 2%. And you can see here at the beginning of the quarter, the 10-year yield was at about 3.8% and ended at about 4.6%. It trended higher in August and then it really took off in September. So, that 3.8% to 4.6% increase is actually a 20% increase in the 10-year yield, a fairly significant increase in a short amount of time.

So, the concern is that the battle against inflation isn’t over and that the Fed may have more work to do, and if they do have to do more work and raise more interest rates, that will restrain the economy and may end up to an economic slowdown. So, if you look at the major market indexes and how they performed in the third quarter, which is pretty much opposite of the 10-year yield. We already saw the yield trending higher in August. We can see the indexes trending lower in that month, and when the yields finally took off pretty strongly in September, we can see that the market’s sold off pretty sharply in the last two weeks or so of September. So, what we ended up with were losses across the board.

The Dow was down about 2.6%. The S&P 500 was down about 3.7, and international stocks were down about 4.7, as the dollars strengthened. Bonds were down about 3.2%. Bond prices fall as yields rise, so everything ended up in the negative column. What we did see, though, was growth stocks and value stocks perform about equally in the third quarter.

If we shift to the next slide on the year-to-date performance with indexes, you can see that the S&P 500 year-to-date is still up a significant or a healthy amount, 11.7%. Now, that is helped a lot by the strength in some of the very large tech companies earlier in the year. With the AI boom, those companies took off, but for the rest of the market, we haven’t really seen that kind of an increase. And you can see the Dow is only up 1.1% this year, so it’s fairly positive this year. International stocks are doing okay, made single digits, about 4.5%, and bonds are down about 1.2%. So, not a great quarter by any stretch to the imagination, but year-to-date for the equity markets, we’re still positive, and bonds are slightly low.

Parker G. Trasborg:

Thank you. Tough quarter. Heading into the year, everyone was expecting a recession to happen. Here we are now in October and we haven’t seen that so far. What’s the thinking around that at this point, Kevin?

Kevin E. Donovan:

Yeah, well, market expectations have been wrong about yields, they’ve been wrong about the recession. So, the economy is stronger than expected. We don’t expect a recession in the rest of this year. There’s only one quarter left. There are still big banks out there who are calling for, they see a recession next year. Others were saying “We’re going to see a soft landing, we just don’t know.” Right now, it hinges upon inflation and if we do see an uptick in inflation, how aggressive the Fed may be in responding to that. If they push yields too high, will that cause the economy to contract by too much? It’s up in the air right now.

Parker G. Trasborg:

Thanks. Well, again, that’s all the time for today. We’ll continue to keep an eye on and monitor the situation as things are progressing on a day-to-day basis, depending on what data has been coming out. Thank you for joining us, Kevin, and we will see you next time for our end of year update in January next year. Bye-bye.

Parker G. Trasborg, CFP®, hosts Cozy Wittman to discuss how to plan for college.

Parker G. Trasborg:

Hi, I am Parker Trasborg, Senior Financial Adviser with CJM Wealth Advisers. Today I’ve got Cozy Wittman from College Inside Track. College Inside Track helps families navigate the complicated college process. We are actually hosting Cozy on Thursday, October 26th at 12:00 Eastern for a Zoom webinar, which will go into a bit more details beyond what we’re talking about today. So a little promotional video here for the event later on.

Cozy, thank you for joining us. Let me start off with just a quick question. I had heard that colleges are no longer necessarily requiring tests and it’s test-optional now. Can you tell us a little bit more about that real quick?

Cozy Wittman:

Yeah, for sure. Thanks for having me, Parker, and I’m excited to partner with you later in October. For sure, the test-optional landscape has been around for quite a while. Pre-COVID, there were more than a thousand schools who were test optional. And what test optional really means is that it’s up to the student whether or not they would like to submit their test. It does not necessarily mean that the schools don’t care about the test. And that’s a distinction that I want to make.

After COVID though, when COVID hit test sites shut down, and so about 800 more schools in the country jumped into the test-optional space simply because people could not get tests. But what we’ve seen as COVID has receded and things have started to return to normal is that a lot of the schools are remaining test optional. Now, some have gone back to test required. We see that in some public institutions, for instance, in the state of Florida and the state of Georgia and the state of Indiana. But a lot of schools are remaining test optional because one of the things they’ve noticed is that test optional becomes a marketing engine for them and it helps increase their overall applications.

And in our webinar together, we’ll talk about the implications of that. But the thing that I just want people to know is the landscape is not as clear as these schools require a test and these simply do not because there’s no question that behind the scenes we are still seeing students get accepted at higher rates who have test scores to submit.

Parker G. Trasborg:

That’s interesting. It’s definitely another place that things have changed over the last couple of years with COVID. So where would you kind of recommend that people look to find scholarships for their kids heading off to college?

Cozy Wittman:

Yeah, for sure. So scholarships are the number one question that I get asked when I sit down and chat college with families. The number one source of scholarship dollars are the schools. And if we want to merge our two topics together of test optional and scholarships, one of the things that we’ll see in the test-optional schools is even if they are test optional for acceptance, they are still tying those test scores to scholarship dollars.

So when you think of the overarching landscape about where scholarships come from, the number one source of scholarships are the colleges themselves. There are a lot of reasons schools give away money, and we’ll break down the specific categories for what they give money away for in our webinar together. But in general, what I want people to know is there’s no magic rainbow of scholarships that you are somehow missing out on because you just don’t know where to tap into them.

The place that you tap into those scholarship dollars are the colleges, right? How your student makes decisions in high school is building a scholarship package. How they present themselves in their application process is helping build your scholarship package so that by the time you apply to schools, the schools then will just apply the scholarships based on what they see happened during your high school timeframe, which is why it’s so important for people to start to think about college search as early as sophomore year because those decision processes along the pathway are building that.

Parker G. Trasborg:

Interesting. So definitely a lot there and much, much more to cover, which I look forward to doing here in just a few more weeks on October 26th. Cozy, thank you again so much for joining us today, and again, we look forward to having you join us again in a couple of weeks for a more extensive, about hour-long webinar that we’re planning to do. Again, thank you very much and I’ll talk to you soon.

Cozy Wittman:

Yeah, sounds good. Thanks, Parker.

Parker G. Trasborg:

You’re welcome.

Required Minimum Distribution rules used to be simple enough that clients knew when they were subject to the rule. Confusion around Required Minimum Distribution (RMD) rules started in 2019 with the passing of the Secure Act. Additional changes over the past four years have prompted many questions from clients. In this article, we’ll summarize the current rules, what is different for 2023, and what you should do if you have questions.

Current Required Minimum Distribution Rules

• Traditional IRA RMDs must be met as outlined in the below chart

• Inherited IRA RMD rules have not changed for IRAs inherited prior to 2020.
  • Prior to the SECURE Act, beneficiaries of Inherited IRAs had the option to “stretch” the distributions over their own life expectancy, allowing for potentially smaller annual distributions and longer tax-deferred growth.
• IRAs inherited in 2020 or later, most beneficiaries must fully distribute the account within 10 years. In addition:
  • If the original IRA owner was taking RMDs during their lifetime, an annual RMD may be required. However, this requirement is currently waived through 2023.
  • If the original IRA owner had yet to begin taking RMDs, annual RMDs are not required.

So how did we get here? Prior to the passing of the SECURE Act at the end of 2019, the age to start taking RMDs was 70 ½ years old. The Secure Act changed the RMD rules for anyone other than a spouse who inherited an IRA in 2020 or later. The major change requires non-spouses to take all money out of the Inherited IRA within 10 years. My partner, David Greene, put together a great summary article of the SECURE Act.

The Secure Act 2.0 clarified a few points and materially changed the RMD age to 73 starting in 2023, then back further to age 75 beginning in 2033. My colleagues, Brian Jones and Parker Trasborg, wrote an article highlighting the changes.

The IRS ultimately waived the new inherited RMD requirement for 2021 and 2022. They also issued guidance that annual RMDs may be due going forward and vowed to clarify the rule. In June of this year, the IRS issued additional guidance that further waived inherited RMDs for 2023 and noted that final guidance should be expected in 2024. Beneficiaries who inherited their IRAs in 2020 and after may be required to take their first annual RMD in 2024. In 2024, anyone subject to an annual RMD would need to take that distribution or face a tax penalty of 25%. Of course, we’ll continue to monitor the situation in case the IRS decides to change its mind again.

For some clients, it makes sense to take an Inherited IRA distribution this year even though there is no requirement. The 10-year rule still applies, so it’s important to work with your accountant and financial planner to plan for the long-term tax bill that could be associated with the distributions.

With the frequent changes to the RMD rules, our clients have had a lot of questions about their RMDs. At CJM, we handle RMDs for all our managed clients to alleviate the stress of having to keep up with these ever-changing rules. If you still have questions or are uncertain whether you are subject to an annual RMD, please don’t hesitate to reach out; we’d be happy to have a conversation.