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What's The Best Way to Invest for Your Grandchildren's College Education?
Townhall.com ^ | October 20, 2011 | Carry Schwab Pomerantz

Posted on 10/20/2011 7:56:36 AM PDT by Kaslin

Dear Carrie: I have $85,000 to invest for my grandchildren's education. Where would you suggest I invest it? -- A Reader

Dear Reader: I applaud your idea wholeheartedly, with just one caveat. Before you move ahead, make absolutely sure you won't need that money for your own retirement. Err on the cautious side, and proceed with this gift to your grandkids only if you're confident you'll have the financial resources you'll need for yourself. You are being incredibly generous, but when it comes to retirement, it's hardly selfish to think of yourself first!

ACCOUNTS: LOTS OF CHOICES

That said, let's get to the meat of your question. Essentially, you're looking at four options: a 529 plan, a custodial account, a trust account, or simply investing using your own account (with the plan to make gifts to your grandchildren later).

The 529 plan: The most obvious answer, but not necessarily the right one, is a 529 plan -- the popular tax-deferred vehicle for college investing. (A Coverdell Education Savings Account can offer even greater benefits, but is limited to annual contributions of no more than $2,000 and then only if you qualify based on your adjusted gross income.) In a 529 account, investment income is never taxed, as long as it's withdrawn for "qualified" higher education expenses. Qualified means about what you'd expect: tuition and fees, room and board, and books and supplies.

Some additional benefits of 529 plans:

--You can make substantial contributions without triggering gift taxes. An individual can contribute $65,000, and a married couple can give $130,000 in a single five-year period (this requires a special election on your gift tax return).

--You control the assets. The child is the beneficiary, but the assets are in your name; your grandkids cannot access the money directly.

--You can transfer unused assets to a wide range of family members, which could be important. Say one grandchild was college bound, but the other wasn't; 529 plan assets could be shifted to the one headed for college without penalty.

--You might get a state tax break. Some states offer tax credits for 529 contributions.

So what's not to like? Well, 529 plans offer fewer investment choices than custodial accounts or trusts, and trading and exchanges are often limited. Plus, the funds can only be used for higher education. If you withdraw them for some other reason, you'll pay federal and state taxes on any investment income plus a 10 percent penalty.

A Custodial Account: If you're sure your grandkids will go to college, a 529 plan makes sense. But if your goal is simply to give them some financial assistance later in life, you might consider a custodial account. It's more flexible than a 529 in terms of what you can invest in and how your grandkids can use the money.

That can be a double-edged sword. You would control the investment now, but the assets must be given to the beneficiary when he or she turns 18, 21 or 25 (depending on your state and your wishes). Theoretically, your grandchild could reach the legal age and cash out the account to buy a Ferrari, and there'd be nothing you could do about it.

Earnings don't grow tax-free as they do with a 529 plan, but a custodial account may offer a tax benefit. Under the current tax code, the first $950 of investment earnings is tax-free and the next $950 is taxed at the child's, usually quite low, rate. After that, the marginal tax rate goes up to the parents' rate.

A Trust Account: If you want more control over the money, look at a trust account, either a Crummey Trust (the odd name comes from the first person who successfully set one up) or a 2503(c) Minor's Trust. These are more complex and more expensive than your other options. If they sound appealing, consult a trust expert to see if one of these structures would be right for you. With either a custodial account or a trust account, you will be limited to the annual gift tax exclusion of $13,000 per year per recipient ($26,000 for spouses electing to "split" their gifts).

Keep It in Your Own Account: One final option is simply to earmark that money for your grandchildren and keep it in your own name and your own account. Of course, you would need to stipulate your intentions in your will (or set up a trust), and potentially have part of it eaten up by estate tax. But the pluses are that you'll have complete control over how the money is invested and how and when it's disbursed. In addition, if you should happen to need the money yourself, it'll be available.

So you have a lot of options, though given the amount of money you plan to invest and assuming you are very confident you won't need it yourself, the 529 plan may make the most sense. Pick a plan with low expenses and a wide range of investment choices. Then make investment choices that match the time horizon you need and offer plenty of diversification. Target funds, which rebalance automatically as the date of matriculation grows nearer, offer a simple solution, so check them out.

Good luck -- and I am sure your generosity will be remembered for years and years to come.


TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS:

1 posted on 10/20/2011 7:56:43 AM PDT by Kaslin
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To: Kaslin

Useless. Based upon current inflation, by that time college will run about $1.2M a year. Good luck saving for that.


2 posted on 10/20/2011 8:00:27 AM PDT by pabianice (")
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To: Kaslin

Support your children in homeschooling the grandchildren.


3 posted on 10/20/2011 8:00:57 AM PDT by Tax-chick (You could be a monthly donor, too. It's easy!)
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To: Kaslin

Put the money away...make them work for their education.

Once they’ve graduated, are gainfully employed and are married, give it to them as a downpayment on their first house instead.


4 posted on 10/20/2011 8:05:26 AM PDT by mkboyce
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To: Kaslin

Why force the grand kids into college? By the time they are old enough to leave High School, we will need tradesmen and people who know how to build and create. These are good paying jobs and much more needed than another Sociology or Marketing degree dope whining about no jobs.


5 posted on 10/20/2011 8:05:32 AM PDT by Lazlo in PA (Now living in a newly minted Red State.)
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To: Kaslin

However many M1 Garands you buy with $60,000 along with however much ammo you can buy with $25,000, maybe? Or whatever combination you’re comfortable with.


6 posted on 10/20/2011 8:05:38 AM PDT by WayneS (Comments now include 25% more sarcasm at NO additional charge.)
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To: Kaslin

By teaching them to get their hands dirty and sending them to a trade school.


7 posted on 10/20/2011 8:06:10 AM PDT by cripplecreek (A vote for Amnesty is a vote for a permanent Democrat majority. ..Choose well.)
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To: Kaslin
Set up an UGMA account for your child, that way, if he/she turns out to be a liberal/demoncrat/little monster, you can give the account to them at ate 21 with .02cents in it.

Second. 15-20 year zero coupon bonds when the EPT tests positive. Don't send them to an expensive college, a local state school would be ok, and be sure to make them go to vo-tech school while in HS to 1) pick up college credit, and 2) give them a blue collar education. I suggest welding, machining, electrical and plumbing classes...something to fall back on just in case. They will thank you for it later.

8 posted on 10/20/2011 8:06:18 AM PDT by DCBryan1 ("Forget the Lawyers! FIRST YOU MUST kill the journalists!" - Die Ritter, die sagen, "nee"!)
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To: Kaslin

donate to Organize Wall Street so that in the future it will be free /sarc


9 posted on 10/20/2011 8:07:28 AM PDT by Buckeye McFrog
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To: Lazlo in PA

Discovery Channel’s Mike Rowe nails it.

http://www.freerepublic.com/focus/f-chat/2650612/posts


10 posted on 10/20/2011 8:07:52 AM PDT by cripplecreek (A vote for Amnesty is a vote for a permanent Democrat majority. ..Choose well.)
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To: Kaslin

As a CFP myself I usually tell my clients should never use the UTMA/UGMA for college funding in case there is a probability of financial aid. If a large lump sum can be made early in the child’s life then the 529 can make sense.

If not, give the money to the parents to invest. It works better than in the kid’s names for financial aid.

And I ALWAYS advise them to buy the book “How to Pay For College Without Going Broke” by Kalman Chany, who truly is America’s best expert on the subject.


11 posted on 10/20/2011 8:08:24 AM PDT by LRoggy (Peter's Son's Business)
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To: Kaslin
Oh,....in addition to the UGMA and 0% coupon bonds, and votech.....make them enlist in the military and they should begin college after their 4-6 year active duty.

That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.

12 posted on 10/20/2011 8:09:51 AM PDT by DCBryan1 ("Forget the Lawyers! FIRST YOU MUST kill the journalists!" - Die Ritter, die sagen, "nee"!)
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To: Kaslin

Buy them a pick and shovel...that is where we are headed and they will learn more working with their hands then they will in any of our government financially bloated education centers.


13 posted on 10/20/2011 8:09:53 AM PDT by Mouton (Voting is an opiate of the electorate. Nothing changes no matter who wins..)
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To: All

Take the money you’ve set aside for your child’s college education and invest it in a rolling concession stand. After a couple of years, your kid can pay for their own education if they still want it.


14 posted on 10/20/2011 8:11:10 AM PDT by Maverick68
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To: pabianice

Useless. Based upon current inflation, by that time college will run about $1.2M a year. Good luck saving for that.

First of all, anything helps so useless is not true. Second, pre-pay is an incredible way to save. Tell them to go to the military is another savings as the military has a great GI BIll. Many Many options.


15 posted on 10/20/2011 8:11:42 AM PDT by napscoordinator
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To: WayneS
However many M1 Garands you buy with $60,000 along with however much ammo you can buy with $25,000, maybe? Or whatever combination you’re comfortable with.

And college level textbooks that pre-date PC, along with current reference books that are too generic to be able to turn into propaganda vehicles.

16 posted on 10/20/2011 8:12:14 AM PDT by tacticalogic
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To: Lazlo in PA

Why force the grand kids into college?

Because they want to eat. Seriously trade schools are good if the kid has that ability. Second, going to college in the long run will give you a much better chance for upward mobility. Sure trade schools will allow you to make some money but college will allow you to make much much more. If I had not gone to college, I would not be making as much as I am now. Go to college grandkids.


17 posted on 10/20/2011 8:15:40 AM PDT by napscoordinator
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To: Kaslin

Take the money and buy them as much good fertile farmland out in flyover country as you can afford. You will have absolutely no problem renting it out until they are of age, and they can then decide whether to sell it and use the money to go to college, or keep it and have a source of income and a place to live, no matter what happens between now and then. I’m serious.


18 posted on 10/20/2011 8:16:45 AM PDT by bigbob
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To: pabianice

By the time the kids get there, education will be ‘free of charge’.


19 posted on 10/20/2011 8:18:24 AM PDT by ErnBatavia (Obama Voters: Jose Baez wants YOU for his next jury pool.......)
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To: Kaslin
Oh,....in addition to the UGMA and 0% coupon bonds, and votech.....make them enlist in the military and they should begin college after their 4-6 year active duty.

That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.

20 posted on 10/20/2011 8:18:28 AM PDT by DCBryan1 ("Forget the Lawyers! FIRST YOU MUST kill the journalists!" - Die Ritter, die sagen, "nee"!)
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To: cripplecreek

John Ratzenberger’s mission these days is to push for the importance of trade schools and changing the culture to make it honorable to be a plumber, electrician or heavy equipment operator. We are in need of these people as a lot of them are retiring and because everyone is encouraged to go to college. I agree. I learned more practical stuff from guys in the trades than I did in four years of college.

http://www.ratzenberger.com/

He has a great statement on this near the bottom of the page.


21 posted on 10/20/2011 8:20:41 AM PDT by Lazlo in PA (Now living in a newly minted Red State.)
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To: Kaslin
What's The Best Way to Invest for Your Grandchildren's College Education?

Vote the Marxist Bass Turds and all those who support their policies (RINO's) OUT!

22 posted on 10/20/2011 8:21:13 AM PDT by Don Corleone ("Oil the gun..eat the cannoli. Take it to the Mattress.")
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To: Kaslin
529's are a joke. In my state, the limits are small, and colleges just take them all directly off the top when calculating financial aid.

Like IRA's, I feel they are a scam, this one to the benefit of the "education establishment." Let the little people feel like they are doing something by gathering little pots of money for themselves or their kids. It is all registered and declared anyway, and will eventually wind up in our hands one way or the other....

23 posted on 10/20/2011 8:24:26 AM PDT by PGR88 (I'm so open-minded my brains fell out)
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To: Kaslin

Send them to trade school for two years. Then they caan work and pay their own way through college.


24 posted on 10/20/2011 8:27:09 AM PDT by Mr. Jeeves (CTRL-GALT-DELETE)
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To: Kaslin
Actually, I've been researching 529s for the last few months, but didn't bother to read this article since it was written by Carry Schwab Pomerantz.
I've read her financial advice articles before and they were sloppy, not totally accurate and not fully researched.
As an example - she never heard of the SS "giveback" program and said whatever you get from SS on Day 1 is what you would receive for life. BS.
25 posted on 10/20/2011 8:28:41 AM PDT by oh8eleven (RVN '67-'68)
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To: napscoordinator

Really? Most of the people I went to college with and went into the line of work they degreed in are in dead end jobs that earn less than the couple of us who said the hell with what our degree says and went off and did our own things. In some cases they are making less than some plumbers and electricians I know. A friend of mine knows how to use heavy machinery. No college at all. He makes $100K+ a year.

This meme that college is the only way to succeed is an outdated relic from the Great Depression when you needed an edge. Now everyone and their brother has a degree. They are meaningless.


26 posted on 10/20/2011 8:35:11 AM PDT by Lazlo in PA (Now living in a newly minted Red State.)
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To: Kaslin

bookmark


27 posted on 10/20/2011 8:35:42 AM PDT by spankalib
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To: Kaslin

28 posted on 10/20/2011 8:43:44 AM PDT by douginthearmy
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To: Kaslin

This article is a perfect example of how broken our tax system is. You can’t even give a gift to your grandkids without hiring someone to account for the tax ramifications. And then, there is no right answer, just guesses based on current estimates. It’s past time to scrap the whole rotten tax code and start over.


29 posted on 10/20/2011 8:44:20 AM PDT by tnlibertarian (Things are so bad now, Kenyans are saying Obama was born in the USA.)
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To: Kaslin

“What’s The Best Way to Invest for Your Grandchildren’s College Education?”

Hands down the most cost effective way, would be not any specific investment vehicle, but to work to put in power politicans who will end the BigEducation hog trough.

Specifically, an end to government subsidizing of “higher education” will overnight make these grossly inefficient and hideously expensive institutions conform more to the disciplining fiscal rigor of the free market.

Net result: Markedly more affordable, reasonable and practical programs and educational paths.


30 posted on 10/20/2011 8:46:36 AM PDT by EyeGuy (2012: When the Levee Breaks)
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Weary But Not Beaten!


Click The Pic To Donate

Consider Becoming A Monthly Donor

31 posted on 10/20/2011 8:47:15 AM PDT by DJ MacWoW (America! The wolves are here! What will you do?)
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To: Lazlo in PA

College is fine for some and we need some to go to college but it doesn’t mean squat if we can’t build anything for ourselves.

Both of my sisters went to college. One manages a billing call center the other is a photographer. I’m a high school drop out and I’m a photographer (among other things) and have always landed in management positions in factories. I’m not going to get rich but that sounds like a hassle to me anyway.


32 posted on 10/20/2011 8:51:21 AM PDT by cripplecreek (A vote for Amnesty is a vote for a permanent Democrat majority. ..Choose well.)
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To: Kaslin

look at all these STUPID rules~!!!!!!!!!!!!!!!!!!!!!!!!!!

scrap IT ALL~!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

9-9-9


33 posted on 10/20/2011 8:52:57 AM PDT by Mr. K (We need a TEA Party march on GOP headquarters ~!!)
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To: Kaslin

Horse hockey. Put the money someplace where nobody can get their mitts on it until you are certain that the little cretins aren’t worth sending to prison instead...


34 posted on 10/20/2011 8:58:55 AM PDT by Bean Counter (Obama got mostly Ds and Fs all through college and law school. Keep repeating it.....)
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To: pabianice

The best way to invest for your grandchildren’s college education is to take the time and love necessary to teach them how to work and why work is a good thing. This skill is often neglected by parents who can’t or won’t find the time.


35 posted on 10/20/2011 9:01:45 AM PDT by AD from SpringBay (We deserve the government we allow.)
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To: Kaslin

Junk Bond Fund - steady income, up and down with the market.....


36 posted on 10/20/2011 9:06:21 AM PDT by Intolerant in NJ
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To: Lazlo in PA

Excellent post.

I knew John was on our side, but I had no idea how involved he was.

This is a point I have been pushing for years.

We need people who can make, build, invent and repair THINGS. If we somehow could turn 50,000 of our destructive/make-work lawyers and government inspectors into constructive skilled tradesmen, this country would be on a much more sane future glide path.


37 posted on 10/20/2011 9:12:16 AM PDT by EyeGuy (2012: When the Levee Breaks)
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To: EyeGuy

Pay off your kids’ mortgage and let them pay for tuition from their savings each month. What helped us was paying off our mortgage in 15 years. We then had about a thousand dollars a month to use to pay for our son’s college education. True, the state university still cost about $15,000 a year to attend, but there was no way for us to save that kind of money AND pay on a mortgage.


38 posted on 10/20/2011 9:54:49 AM PDT by scotts8826
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To: DCBryan1
Oh,....in addition to the UGMA and 0% coupon bonds, and votech.....make them enlist in the military and they should begin college after their 4-6 year active duty.

That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.

My grandson is in high school and in the JROTC. He's looking forward to the Air Force not only paying his college tuition but also providing him with a monthly allowance while he's in college. Of course, upon graduation, he'll be a officer in the Air Force.

What I find strange is that a nearby school with an Army JROTC program wants him to transfer to their school. They called - again - yesterday. One of their arguments is that the Army needs more personnel than the Air Force and there is a possibility that mid-way through college the Air Force will determine that they're 'overstaffed', will not need new officers, and will discontinue his scholarship. I wonder if that's true?

39 posted on 10/20/2011 10:55:43 AM PDT by Alice in Wonderland
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To: Lazlo in PA

I am not saying that it is the be all end all. I am saying that it helps to vey in the door. If you have a trade that is great. Military is great. But not everyone can do either of those. To be blue collar, you need some abilities.


40 posted on 10/20/2011 1:06:50 PM PDT by napscoordinator
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To: Alice in Wonderland

“One of their arguments is that the Army needs more personnel than the Air Force and there is a possibility that mid-way through college the Air Force will determine that they’re ‘overstaffed’, will not need new officers, and will discontinue his scholarship. I wonder if that’s true?”

You might get some good answers to that on a military forum like military.com, or google for “military forum” and you will probably find many.

I just read a story that the military is considering laying off a huge number of people, something like 100,000 people. I think I saw the article here sometime in the past week or two. I don’t remember what branch of service it was.


41 posted on 10/20/2011 1:46:52 PM PDT by PastorBooks
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To: Alice in Wonderland

Yes, and there is always the possibility of a RIF. Reduction in force when military people are given ‘pink slips’ en masse.


42 posted on 10/20/2011 1:57:09 PM PDT by Tahoe3002
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To: Lazlo in PA

“A friend of mine knows how to use heavy machinery. No college at all. He makes $100K+ a year.”

You people who keep preaching on about trades (plumbing work and here, operating heavy machinery), you present one helluva an assumption, that the people you want to do this have mechanical ability. And damn it, not everyone does; I’d say few do. So, you’re trying to put the old square rod into the round hole. And they don’t always fit, folks!


43 posted on 10/20/2011 2:21:25 PM PDT by OldPossum
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To: OldPossum

That is fine if someone doesn’t have the aptitude for the trades, that is what college is for. The bigger problem is for the last 30 years or so this type of work has been made fun of and made socially unacceptable. Even when I was a kid, the Votech kids were ridiculed overall for being a lower social status so much that no sensible person would go even if they would rather do that then take the college prep classes. Work like this should get equal importance and respect so that kids feel they can go this direction and succeed quite well.

Even the way our Gov’t handles this stuff encourages this thinking. Look at all these stupid Gov’t programs that have been pushed by Clinton, Bush II and Obummer for the unemployed and the intercity poor. Free or near free college. Retraining for unemployed with college programs. Remember in the 90’s when everyone and their brother was a computer programmer? How many of those did we need? Not many judging how most had to back and do something else. What about focusing on other jobs we need. I am a slumlord and I can tell you that there is a shortage of well trained people in the trades to take over for all the old timers hanging up their tools.

Even if you end up going to college, the problem with my contemporaries in their 30’s and 40’s is that they have absolutely no idea how a screw driver works. When I was a kid, the neighborhood accountant or teacher could at least change a tire or handle light repairs around the house or even cook themselves a meal. Now I have friends who look at me as some sort of wizard because I can install a dishwasher. They are constantly calling the dwindling numbers of blue collar people to do it for them. This is not how the US operated in the past and will not help us get back on out feet. It is time to encourage people getting into these fields again.


44 posted on 10/20/2011 4:10:51 PM PDT by Lazlo in PA (Now living in a newly minted Red State.)
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To: Lazlo in PA

Well-stated, sir.

I agree that manual work, even the highly skilled trades, has been made fun, completely unjustifiably so.

I have nothing but admiration for those who are capable of doing such work. Those folks really make the world go ‘round in my opinion and they deserve our respect.

I was just pointing out that not everyone has the capability of succeeding in such work.


45 posted on 10/20/2011 8:27:57 PM PDT by OldPossum
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To: Alice in Wonderland
I wonder if that's true?

Yes, it is true. THere is an over allocation of officers in the AF and an under allocation of officers in the ARMY. Also, if you are an officer in the Air Force, I think they separate you if you don't make promotion. ...basically "up or out".

46 posted on 10/21/2011 6:11:07 AM PDT by DCBryan1 ("Forget the Lawyers! FIRST YOU MUST kill the journalists!" - Die Ritter, die sagen, "nee"!)
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