I happened to watch a TV crime drama recently and the criminals were a group of graduate students who were caught selling biotech research data to a shady entity. At the end of the show one of them blurts out a number, which represents the amount of debt he has incurred in student loans while pursuing his education. Then it hit me how bad the conditions are for these young adults who are entering the worst job market since the Great Depression.  Some are calling them the lost generation.

There are indeed bleak data, headlines and personal stories all around us validating this conclusion. I have a personal friend whose grandson, after graduating as a valedictorian with a chemical engineering degree, has yet to find a job after one year out of college.  A colleague’s client’s son armed with an engineering under-grad degree, a JD from a prestigious law school, after passing the bar exam has not been able to find a job. He presumed that those degree combinations would place him safely at the top tier of legal field of his choice to become a patent attorney. My own son is back home after his graduation from one of the most highly regarded art and design schools a year ago, still struggling to land his first job. The Bureau of Labor Statistics reports that 50% of recent graduates are either unemployed or under employed.

While the average amount of debt for a 2011 college graduate was $27,200, or $34,000 including parent loans, it is not uncommon to see some come out of college with student loan debt well into 6 figures. The total student loan debt surpassed the 1 trillion dollar mark and now exceeds consumer debt in the U.S.  Some economists are speculating that this landscape will cast a long gloomy shadow in the lives of this generation as well as the society as a whole. The former students saddled with burdensome student loan debt, which cannot be forgiven even in most bankruptcy cases unlike mortgage debt, are inclined to put off marriage and purchase of a home.  Also many baby boomers carry some of this burden through parent plus loans or cosigning with their children at the expense of their own retirement savings.

So what is a good financial planner’s advice regarding the question ‘Is college worth it?’ The short answer is yes but with some caveats. The unemployment rate for adults at least 25 years old with a college degree is 4.1% compared to 8.7% for the high school graduates according to the Bureau of Labor Statistics.  The BLS also shows that the median income of high school graduates was $33,176 while college graduates’ median income was $54,756 for 2011.

But not all college education cost makes sense. The students and the parents should consider where to study and what to study as some private college expenses can reach $40,000 plus a year and certain majors in tech related field still enjoy high demand from the employers even in this economy. Following your heart can be a luxury not too many can afford these days. Likewise it makes little sense to have an education debt north of $100,000 with no prospect of earning above $35,000 salary in a chosen field. While weighing the options in schools and majors, the students should proceed with their eyes wide open since their decision could impact their financial lives in years to come if they must incur a substantial educational debt.

As for the parents, I would advise them to take a parents’ Hippocratic Oath of ‘do no harm’ to their retirement savings. As much as you would like to help your children to take the right steps to get a good education and stable and fulfilling life, you can not jeopardize your own plan and savings for retirement and should place retirement savings as your highest priority. If you are able, and willing to support your children through current assets, college savings and manageable loans with “no harm done” to your own retirement savings, by all means, have at it. Otherwise some unpleasant conversations about college, major choices and affordability might be in order. And that would be a conversation worth having!

Pink or blue. Right or left. An apple or orange… We make an array of decisions daily: some are simple and inconsequential while others could have more impact in later times. Somewhere in the upper side on that scale lies a decision about a Roth account as a retirement savings choice.

The question of Roth has become quite the contested issue among financial professionals and the general public alike. In recent years, Roth has gained some momentum and more employers are offering Roth 401(k) in addition to traditional 401(k) programs.

The biggest difference between a Roth account and a non Roth retirement account is that you contribute to it with after tax dollars and consequently the withdrawals are income tax free if made after age 59½. It can only be funded with earned income including alimony but not an investment income or gifts.

There are several conditions and benefits to consider in deciding for Roth.

Current marginal income tax rate vs. marginal tax rate in retirement:

For a young worker who has a very low current income tax rate and pays no or little income tax, Roth is a powerful option. Consider a teenager who works at her first job making a few grand a year. She can put a way all of her earned income up to $5000 in a Roth IRA in 2011 that can grow tax-free. If she makes only 5 annual $5000 contributions and the account grows at annual rate of 8%, her nest egg will grow to  $468,394 over 40 years. So when your teenager pesters you wanting to hang out with you instead of going out with his friends, this would be a great topic of conversation!

Diversification and Maximum Contributions:

Consider a recently empty nested couple who file a joint income tax return. The husband maxes out his retirement contributions through his employer and the wife brings in ‘spending money’ through her voice lessons to students. If they are trying to save extra in a tax investment account, she should consider a uni Roth 401(k) in which she can contribute up to $22,000 with catch up amount if she is over 50 years of age. This will offer a measure of diversification in that their retirement savings are divided among tax deferred accounts as well as a Roth account. It also means that since her contribution is made with after tax dollars, she is putting away more for retirement than she would in a regular retirement account.

 Flexibility:

If you withdraw from regular retirement accounts before 59 ½, this withdrawal will be taxed as regular income (there are a few exceptions) plus an additional 10% penalty on the amount of distribution. With a Roth account, which follows first in first out rule, you can always withdraw your contribution amounts without tax or penalty. If you dip into earnings you may be subject to tax and or penalties.  Another key benefit is that you do not have Required Minimum Distributions from a Roth account the year you turn 70 ½. If you fail to withdraw RMDs from a regular retirement account, the penalty is 50% on the short fall. Thus, you can have a greater flexibility in how much and when you withdraw from you Roth accounts or if you desire to leave the funds to your heirs if not needed. In addition, there is no lower or upper age limit to contribution so long as you have earned income. Even if you work past 70, you can continue to contribute to your Roth account.

If you expect to be in a higher or same income tax bracket in retirement or you desire maximum savings, diversification and flexibility,  a Roth account can be a very powerful tool in retirement planning. If you have further questions on Roth, do not hesitate to contact me at bg@beaconfinancialmgmt.com or 760 473 3335.