The Value of Education by Robert Fragasso

Promoting meaningful education for young people is a major focus of our firm’s charitable donations of money and time. At Fragasso Financial Advisors, we believe that the beginning of the cure for every ill in our society is impactful and functional education. Conversely, we also believe it is true that the lack of education or ineffective education is the root cause of those ills. You don’t have to dwell long on crime, poverty, illness, bigotry and hate to conclude they have their roots in educational failure.

So we contribute our firm’s monetary resources and the time of our employees to organizations like the Homeless Children’s Education Fund, Entrepreneuring Youth, La Roche College, Duquesne University, Pittsburgh School District’s Career and Technical Education Division, Weil School in Pittsburgh’s Hill District and Downtown Rotary’s Caring Habits program. And we urge others to do the same wherever you can positively impact the educational experience of youth.

Why do we do that? We know that effective education does touch our future by creating thoughtful and productive adults, lessening crime, helping to break the poverty cycle and, finally, it just pays well in lifetime earnings. According to the Postsecondary Educational Opportunity Research Letter, the lifetime income of families headed by individuals with a bachelor’s degree will be $1.6 million more than households headed by a high school graduate. Women college graduates will make 91% more in their lifetime than their high school educated sisters. In a phrase penned by Katherine Hansen, Ph.D., “College education may be expensive, but the only thing more expensive is not getting one.”

And the road to success is not only through college, but also includes post-secondary technical training. Note the source on this quote. The Government of India’s Department of Higher Education’s web site proclaims, “Technical education plays a vital role in human resource development of the country by creating skilled manpower, enhancing industrial productivity and improved quality of life.” Our firm was recently profiled in the Wall Street Journal and the reporter who wrote the story was based in India, who along with the Peoples Republic of China, challenge us for economic efficiency and power in the world. That challenge is not being accomplished on the backs of low cost labor as much as it is education-based. So, education that works is crucial to our country and our way of life.

Beyond our contributions of time and money locally, we also help promote the education of our young people by guiding our clients to the most appropriate means of financing college and technical post-secondary education for their children and grandchildren.

Please read through the article in this edition of our quarterly newsletter to learn more. Then call us for our guidance and assistance. We are all in this together.

Could a Roth IRA Conversion Affect a Student’s Financial Aid?

Run the numbers, because the answer could be “yes.”

An underreported story. In 2010, we have a wave of IRA owners converting traditional IRAs to Roths. There are all kinds of compelling reasons to make that move. Yet for some IRA owners, the conversion may have an unintended consequence: it may reduce their son or daughter’s chances for college financial aid.

A Roth conversion will increase your taxable income. As some scholarships, grants and loans are awarded based on income levels, a big jump in AGI could potentially jeopardize them. This can be a problem if you’re a “millionaire next door” who wants your kids to exploit financial aid as much as possible.

That income must be recorded on the FAFSA. Universities commonly use the Free Application for Federal Student Aid (FAFSA) as a test to determine whether a student is eligible for grants, loans and some scholarships. The FAFSA is all about family income – factors like net worth and invested assets don’t come into play. Mom and Dad’s higher AGI could mean lower levels of financial aid, because the income boost from the Roth conversion will make it look like Mom and Dad can now shoulder a greater percentage of education costs.1,2

A New York Times article offered an example. Take a hypothetical family of four with total 2010 income of $75,000 and one college student. For every $10,000 of taxable income stemming from a Roth conversion, the parents’ expected annual contribution to that student’s education would go up by $3,200 in a FAFSA estimate.1
In April, Mark Kantrowitz (publisher of FastWeb.com, an online scholarship directory) told Financial Advisor Magazine that the Department of Education had requested universities to recognize the effect of 2010 Roth conversions on family incomes. No evidence suggests colleges are doing this en masse.2

Financial aid decisions are often based on multiple years of income. Keep this in mind. IRA owners who go Roth this year are well aware that they may divide taxes on the conversion across the 2011 and 2012 tax years. Well, that decision may affect family incomes for those years, and possibly chances at student loans, grants and scholarships through 2013.1

If your kids are young, time is on your side. If your children are a few years or more away from college, you can make a Roth conversion without having to worry about its impact on FAFSA applications.

Any potential Roth IRA conversion should be analyzed for its impact on other aspects of your family’s financial life. The impact on college financial aid is but one factor to consider. The potential long-term benefits of a Roth IRA conversion are considerable. Confer with a financial consultant to see if the decision is appropriate before you elect to make the move.

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Profiles in Progress:
Client Stories
Thaddeus A. Osial, Jr., M.D.

Dr. Thaddeus Osial, known as “Ted,” is a life-long Pittsburgher. He left Pittsburgh only long enough to complete his undergraduate studies in Zoology at the University of Michigan where he was graduated Magna Cum Laude and was selected for Phi Beta Kappa. He returned to the University of Pittsburgh’s medical school where he graduated Cum Laude and selected for Alpha Omega Alpha, the Honors Medical Society, often referred to as the Phi Beta Kappa of medical schools. He performed his internship at Presbyterian Hospital and was appointed a Fellow in Rheumatology and Immunology. Ted subsequently became board certified in Internal Medicine, Rheumatology and Geriatrics. He has served in leadership positions for several health-related organizations including that of Board Chairman of the Arthritis Foundation and President of the Medical Staff of UPMC St Margaret Hospital, where he is currently Chief of Rheumatology. Ted has published numerous articles in the medical literature and is actively involved in teaching physicians as well as trainees. Ted has been a member of the Margolis Rheumatology group since 1981. The group was originally formed by Dr. Harry Margolis here in Pittsburgh in the 1930s and Dr. Margolis is recognized as the country’s first Rheumatologist.

Dr. Osial gives hope to his arthritic patients, using the newest treatments available. He describes the evolution of Rheumatology treatment from what was originally a certainty of chronic pain and debilitation, to one of ever increasing hope and functionality due to evolving treatments, especially biological agents to control rheumatoid arthritis. Research is currently being done in the hopes of providing Rheumatologists with the ability to halt the progress of degenerative arthritis and one day apply cartilage regeneration to repair osteoarthritic joints. Rheumatology coupled with physical therapy and improved orthopedic procedures, such as joint replacements, can return many patients to an active lifestyle. Ted credits better diagnostic tools with early treatment which then leads to better outcomes.

This story becomes even more interesting when it is revealed that Dr. Osial took the medical school entrance exam “as a lark” while wondering what he might do with his Zoology degree. Though he had worked one summer during college as a nurse’s aide, becoming a medical doctor wasn’t in his plans until that fateful whim was acted upon.

Ted grew up as one of three boys and one girl, the children of Ted, Sr., an engineer at Westinghouse and Mary Jane, a homemaker. Ted, Sr. was a radio operator during the Philippine invasion of World War II and returned home to gain his electrical engineering degree from the University of Toledo and then his master’s degree in math from the University of Pittsburgh under the G.I. Bill. He ended his career working on the AWACS guidance system that has become a mainstay of U.S. strategy and tactics. Both Ted Sr. and Mary Jane remain healthy and engaged with life and are now in their 80s.

That striving served as a role model for all four children to gain an education and meaningful employment. Ted’s sister, Mary Jo, is a project manager for IBM. His brother Rick works for the Joint Chiefs of Staff traveling the world as a public affairs assistant. His brother Jim is a CPA working with a start-up company in California. Ted and his siblings grew up in the post-World War II era of Pittsburgh’s manufacturing and commercial activity. Ted attended St. Bartholomew’s Elementary School and Central Catholic High School.

The tradition of accomplishment through education continues with Dr. Osial’s children. His son, Jim, attended Carlow College’s Elementary School, Hotchkiss Prep in Connecticut and then Stanford University majoring in Economics and Computer Science. Jim works for a start-up company in San Francisco. Ted’s daughter, Alissa, is completing her degree in Fine Arts from Carnegie Mellon University after attending the Ellis School. Alissa has had her work recently exhibited on billboards around Pittsburgh meant to highlight students of promise locally. She aspires to work as an art museum curator. Ted is demonstrably proud of his children’s accomplishments and their career paths.

Ted holds a life-long interest in the arts and has succeeded in combining his love for the arts with the practice of medicine. Ted began taking music lessons in elementary school and played clarinet in Central Catholic’s band and the University of Michigan’s marching band (including in the 1970 Rose Bowl). He continues to play the clarinet as an avocation. He has served as the physician to the Pittsburgh Symphony and will soon take his 20th world tour with them, this time to Europe. His daughter Alissa will tour with Ted having taking her first such tour at the age of three. Alissa describes all of the many tours as formative and culturally broadening and something that clearly influenced her career choice.

Ted’s wife, Alexandra, died a few years ago and we were privileged to know her as an engaging person. It is fortunate that Ted has found a life companion, Linda Shooer. Linda shares Ted’s love of music. While attending Oberlin Conservatory of Music, Linda studied with renowned pianist, John Perry. Linda currently works as Director of the Professional Development Center at CMU’s Software Engineering Institute and continues her musical avocation by teaching private piano lessons. Linda volunteers at the Children’s Institute with her therapy dog Leo. Ted’s chocolate Labrador, Coco, and Leo, the Portuguese Water Dog, are best of friends.

Ted expects to practice another decade of medicine full-time and then evolve to part time status. That will leave time for traveling with Linda and for clarinet and piano duets. Ted is realistic about the rapidly changing medical environment and the need to balance the business side of medicine with simply being a good doctor, as he phrases it, focusing on his patients.
Ted is also cognizant of the changes brought about by this decade’s economic downturns and the need to place Social Security and Medicare on a more solid footing as retirement resources. He credits Fragasso Financial Advisors with providing him peace of mind during the downturns and says he’s glad we were handling his portfolio and following predetermined investment management guidelines. As a result, he says he slept well. We, in response, are privileged to have Dr. Ted Osial as our client and grateful for the confidence he has placed in our firm.

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Living in Interesting Times
by Gregg Daily

"May you live in interesting times" says the ancient proverb. That can mean many things, and I think it means many things when we look around us right now. High sovereign (government) debt levels around the world, a slow-paced economic recovery here in the U.S. and in Europe, and extreme stock market volatility are at the forefront of all of our minds. It has been said that these conditions have created a traders market. What is generally meant by that is that a good portion of the volatility we see over short periods of time is created by traders (think hedge funds, traders at brokerage firms, and other short-term buyers and sellers) who are making very fast buys and sells on a sometimes daily basis. This is a very different philosophy from investors, which defines our firm and our clients, who make decisions based on a longer term view and the strength of conviction on the direction of economic trends. That doesn’t mean we don’t make rapid changes in order to try to protect our clients when we feel it’s necessary. As we've seen recently, we will try to move quickly to make changes in the portfolios when we believe that conditions call for action. But that is very different from being a trader.

What must be remembered is that a traders market is not always based on fundamentals, or even logic. It is often based on riding daily or weekly trends, with very little concern for the longer view. And we must remember that markets over the short term are fickle, in that what seems all important and critical right this moment may be easily dismissed and forgotten when the next trend takes hold. No one will fire a starter pistol before the market changes direction again in a positive way. As investors, there is no efficient way for us to play such short term daily or weekly trends, and we therefore have to keep the strength of our convictions, as if we were in a kayak paddling toward shore in the midst of very choppy seas. While we can’t control the force of the waves in this traders market we use our expertise to position ourselves to not be overturned by the waves, and always remain focused forward. This can feel like a difficult ride at times, especially given the type of markets we’ve seen . But it’s very important to remember that even in times like these, problems find solutions, business gets done, innovation occurs, and profits are made. Someone, somewhere, is finding a way to do something faster, cheaper, more efficiently and better. Realizing that keeps us focused on the opportunities ahead. 

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What do your children know about building wealth?

What would you like to have known at 18, 25, or 35?

When you were 20 or 25, what was your level of financial literacy? What did you think of when the nightly news mentioned Wall Street or the Federal Reserve? Did you even care about those things at that time?

Few young adults fully understand how wealth can be built. That’s a shame. Decades from now, many will wish they had started planning to amass wealth earlier in life. How can you encourage your children to start that process?

Help them start before they turn 18. If your child is a minor, there are still several ways she or he can get a head start on growing wealth. Besides the basic move of opening a savings account, it is possible for your child to open a Roth IRA. The I.R.S. sets no minimum age limit for IRA contributions; if your son or daughter has earned income from a job and filed taxes, he or she can open a Roth or traditional IRA with your assistance and contribute to it. Your child may also buy a government bond with your help, or buy equity shares or make a direct stock purchase via a guardian account or custodial account.3,4,5

Encourage them to set life and financial goals. Why not? It is not far-fetched if your teen wants to become a millionaire; given inflation over time, we may need to be millionaires down the road. Even if your son or daughter simply sets a life goal – for example, to start a business someday or to graduate from a prestigious university - he or she will start to think about what that will take financially.

Wean them off plastic. As your children become young adults, the great lesson is a simple one – spend less than what you make. If they have to go into big debt, it better be for education’s sake and not for comparatively frivolous reasons. Remind them that it is possible to pay off debt and plan to build wealth at the same time.

Look back over your life for a moment. What shaped you more – the material things you bought when you were 18 or 21, or the experiences you had when you were 18 or 21? It is wiser for your son or daughter to spend money on an experience that may “pay off” in life skills and character development, rather than on a material item that will inevitably depreciate.

Convey that is not what you own, but what you do that counts. Hopefully, your son or daughter will start investing early – and sensibly. Some young investors like the thrill of day trading - of looking for the next hot stock that will be the talk of Wall Street. It is better for your son or daughter to learn principles of diversification from the start (and not retrospectively). Getting rich slowly is not a bad idea. Investing seriously means staying invested through market cycles.

Remind them of the power of compounding. If your child opens an IRA or 401(k) before age 30, that does so much in terms of retirement savings potential. Yet few young adults focus on these retirement savings tools. The tax information service CCH took a poll in 2007 and found that just 4% of employees aged 25 and younger were maxing out retirement plans. That same year, Charles Schwab conducted a survey and learned that only 40% of adults aged 26-40 were contributing to an IRA.6 Looking back, what did you wish you had known? Today is as good as any day to let your son or daughter know about some investment and asset-building principles. At first glance, it may seem boring to them – but making money sure isn’t. The more they know now, the more years they have on their side to grow wealth. 

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Citations:

1 bucks.blogs.nytimes.com/2010/04/16/how-a-roth-i-r-a-conversion-can-hurt-financial-aid/ [4/16/10]

2 fa-mag.com/fa-news/5452-roth-ira-rollovers-could-affect-college-financial-aid.html [4/21/10]

3 irs.gov/publications/p590/ch02.html#en_US_publink10006507 [TY2008]

4 kiplinger.com/columns/drt/archive/2008/dt080130.html [1/30/08]

5 investopedia.com/ask/answers/06/underagebrokerageaccount.asp [1/30/08]

6 articles.moneycentral.msn.com/CollegeAndFamily/MoneyInYour20s/YoungAdultsAllButIgnore401ksIRAs.aspx?page=all [5/3/07]