The Greatest Risk To My Retirement Goal

More than a decade ago when my Dad retired from his teaching career at age 56, I told him my retirement goal was to beat him and stop working at age 55. It seemed natural to me that in order to live better off than my parents, I should retire before them.

I reject the notion that because younger generations are statistically more likely to live longer than our parents, we will need to work longer.

According to a recent study by Alicia H. Munnell at the Center for Retirement Research at Boston College, the average age of retirement for men in the US is 64. For women, it’s 62. These averages haven’t changed much in the past ten years.

My retirement goal of age 55 is not extreme like some other stories you’ll find out there, but it’s still nine years ahead of the average retirement age for men. It’s a realistic retirement goal for me and my life situation, but it will still be quite a challenge. When I retire, I don’t plan to work another day the rest of my life, just like my Dad.

I’ll turn 55 in 2030. That same year, a major family milestone will become a reality. It’s the year the oldest of our two children will start college. My wife and I have committed to paying for our kids’ undergraduate college education. If we don’t save enough by the time they start school, I may need to keep working to cash flow the balance. As of today, I see this as the biggest risk to reaching my retirement goal.

My College Background

My parents paid for the undergraduate education of both me and my sister. My Dad has always said it was the best investment they ever made. I argue that it could have been even better. You see, I went to an out-of-state school. I received a quality education, but at a more expensive price than was necessary. Had I gone to a similar quality university that was in-state and less expensive, the return on my parent’s investment would have been higher.

They generously offered to pay for any college I chose to attend. My Dad went to college, but didn’t have a lot of options or resources when he chose a school. He obviously wanted me to go in-state, but didn’t push it because he wanted the decision to be mine. All my parents asked for in return was that I worked to cover living expenses, graduated in four years, and do the same for my kids’ college education someday.

I was stubborn in high school and wanted to go to an out-of-state school because that was my idea of adventure; going off to a place where I didn’t know anyone (years later I learned what a real adventure was). In hindsight, it would have been nice to see a few familiar faces from high school when I started freshman year. College was a very positive experience and gave me the education I needed to start a lucrative career. But truth be told, I could have received my finance degree somewhere else for a lower price.

When I chose my college, I did not consider the return on investment (ROI). That is, the return (measured in cumulative salary after graduation), on the investment (cost of tuition, living expenses etc.).

Using very simplified numbers and a five-year period, a basic ROI calculation for college works like this:

Total cost of tuition and expenses = $100,000
Cumulative five-year earnings after college = $250,000
Five-year return on college investment = 150% =($250,000-$100,000)/$100,000

Obviously, there are many additional variables that could be applied here such as major, reputation of school, grades, potential earnings without a degree, etc. The point I want to make, a point that I completely ignored when I selected a college, is that by choosing an in-state school, I would have received the same degree and the same career jump start, but a much better ROI.

Altering the above example using $75,000 as the cost of tuition and earning the same five-year salary, the ROI increases to 233% ($250,000-$75,000)/$75,000.

Simple math, right? Not to a stubborn 18-year-old.

This is crystal clear now that I’m older and wiser. Since my parents were paying, I didn’t grasp the reality of the equation. They certainly did, but still let me make my own decision.

The Generational Tuition Payment Two-Step

My Dad paid his own way through college and graduate school, funding it by working laborious jobs over the summers and student teaching.

A few decades later, he and my Mom paid for their two kids’ college education. He performed a generational tuition payment two-step. Double-duty, so to speak. By choosing to pay for both his and his kids’ education, he’s made it possible for all future generations in our lineage to pay for just one generation of education. My wife and I will pay for our kids’ education, and they’ll pay for their kids’ education, and so on.

You may read over my blog and think, well this guy didn’t have any student debt, so no wonder he was able to travel the world and save so much for retirement. You’d be right. It was a colossal privilege. Having no student loan debt gave me the freedom to work and diligently save upon graduation, which led to the incredible opportunities to travel.

Now that I’m a parent, I more clearly realize the dedication and sacrifice it took to make it happen. Most importantly, college education savings is now a cornerstone of our family’s financial plan. This will provide our kids the same freedom and opportunities I had upon graduation.

Unfortunately, the math tells me that saving for college will be no waltz.

Looking At Today’s Numbers

Our son is now three years old. We started his 529 plan the month we returned home from the hospital. Our daughter was born about a week after I started this blog. I researched 529 savings plans extensively for them both, and wrote a detailed Virginia 529 review, which continues to be the preeminent Virginia-specific 529 review on the internet. The conclusion I came to was that the tax benefit given by the state outweighs everything else. So if your state offers a plan with tax benefits, it’s likely the best choice for you, even if it’s not a perfect plan.

We contribute $300 per month, per kid to a few index stock funds. I’m planning to keep the money aggressively invested in stocks until we’re within 5-6 years of the college years before getting more conservative. The current balance on the two 529 college savings accounts combined is about $19,000. That would pay for almost one year of in-state tuition and expenses. We have a long way to go to cover the other seven years of school, not to mention tuition inflation.

At this rate, if we continue to invest $300 per month on top of what is already there, compounding at 8%, I estimate we’ll have about $150,000 by the time my son is ready for school, and $141,000 for my daughter when she starts.

But is that enough?

Forecasting The Cost of College in 2030

I recently created a new spreadsheet to model what the cost of college will be for my kids, starting in the year 2030. Again, the input variables can be overly complicated, so I tried my best to keep it simple. Estimating the cost of college 15 years out is not an exact science. There’s plenty of online calculators out there, but I particularly like this one dubbed “The World’s Simplest College Cost Calculator”.

Now, while today we’re committing to pay for our children’s college education, we have to make some assumptions in order to narrow the target amount of savings we’ll need. We’re committing to four years of undergraduate studies, including tuition and expenses. For now, I’m also limiting my model to in-state tuition. Private colleges are outrageously priced. Unless we’re substantially wealthier by the time school starts, I’ll strongly discourage a low ROI private college. The one exception may be certain Ivy League or other prestigious schools. The probability of any kid getting into those schools is low, but you never know.

I’ve also made the assumption that my kids will not get any scholarships or government assistance.

In my model, I looked at the cost of room and board for the top five largest in-state universities. Their websites openly disclose the yearly cost of enrollment and living expenses. I averaged the schools total cost per year. For the 2014-2015 academic year that amounted to $23,500. Similar cost estimates online were in the $20,000 to $25,000 range.

Next, I estimated a range of tuition inflation escalators. I used 3% as a low inflation rate, and 7% at the higher end. I then calculated the low and high cost for one and four years of college. Rounding things, I estimate four years of my son’s college education will cost roughly $221,000. For my daughter, $233,000. That tells me I’ll need roughly $454,000 saved up by 2030 or so.

The Worlds Simplest College Cost Calculator gave me values of $191,000 for my son, and $203,000 for my daughter, for a total of $394,000. For an estimate this far out, I’m more comfortable using the higher estimated number from my spreadsheet.

Based on what I estimate we’ll save for my son, we are forecasted to be about $40,000 to $70,000 short of the needed funds to pay all four years of school. For my daughter, we are $62,000 to $92,00o short.

Now again, these are very rough estimates. Any change to a variable alters the numbers by tens of thousands of dollars. For example, if I change the rate of return on investments to 10%, the shortage just about disappears for my son and halves it for my daughter. The key is to continue updating these estimates on a yearly basis. Each year we get closer to freshman year, the numbers become more reliable on both the savings and cost estimates.

I can always increase the amount I’m saving each month too. In fact, I’m considering this right now to take advantage of the many years of compounding ahead. However, I can always access money for tuition from other places when it’s time to foot the bill. In a post I wrote about the Roth IRA and early retirement, I suggested this as a possible source to pay for college because contributions can be withdrawn at any time without penalty. I could also sell investments to cover the shortage, or perhaps cash flow the balance with investment income. I don’t intend to use debt to pay for college, but borrowing via a home equity line (HELOC) would be a last resort.

Paying for the balance with cash flow or selling investments may actually be ideal. What I definitely do not want is to over save in tax advantaged accounts and have to pay a penalty for withdrawing unused savings. However, if I over save for my son in tax advantaged savings, I can transfer unused portions to my daughter’s account.

One Last Thing Affecting my Retirement Goal

The reason I went over the college savings numbers recently is because we’ll need to be adding 50% to our current monthly savings and forecasts. In non-financial terms, we’re expecting a third child. I figured I’d save this announcement for those that read the whole article!

As much as I like to make detailed spreadsheets for all major financial decisions in our lives, this was one decision we made without any consideration of the cost. While you can put a cost on raising child and college, there is no way to estimate the profound impact of welcoming another person into the world. Kids come with a price tag, but ultimately they are priceless.

If my retirement goal is delayed because we had another child, so be it.

What about you? If you have kids, are you planning to pay for their college? How does that impact your retirement planning?

Craig Stephens

Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.