The Greatest Risk To My Retirement Goal

The Greatest Risk To My Retirement GoalMore 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?

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  1. Congratulations on the new baby!

    We have one child and my concern is over saving, because we don’t have that rollover. We’re purposely saving about half of the recommended amount and figure we’ll figure out the rest when the time comes, either through income, investments, or she can work summers and/or take out loans. Mine will turn 18 in 2029, we’ll be 51.

    1. Amy,
      The rollover should definitely help with the planning. We’ll be able to cut back on saving for our third if our first has a surplus. We can also stop contributing in their teens if the numbers are looking good. Better to save more early on and let it compound. Writing this makes me want to put in an increase today!

  2. Of course, congratulations on number three. While the planning and spreadsheet mapping is important, I think the key point in this entire post is the value you place on your children, priceless. As for college, while I don’t have kids now, the goal will be to pay for most of their school, with the expectation that they play a role in footing a piece of the. Having put myself through school mostly on my own, working full-time and still able to graduate early, to me there is some value in having some ‘skin’ in the game.

    Naturally, this is subject to change depending on the kid and how motivated academically they are. If they are anything like my wife, I won’t need to worry at all.

    1. WYOR,
      Thanks a lot. There is something to be said for having skin in the game. Had I had some, I’d have probably been more studious. That said, I think stressing the ROI starting early will be a strong motivator. That’s ultimately what an education is for. People who start school later and pay through loans and working probably understand this better than high school seniors. But then again, not all education is a good investment. Certain online programs come to mind.

      Your wife must be a reader here too. Nice brownie points!

  3. First and foremost, congrats on #3! I stumbled across your blog a couple of weeks ago while researching the VA 529 plan and have enjoyed reading through your archives. We share a lot of similarities in the fact I’m your age, have 2 young kids, a rental property (that we used to live in), and reside in NOVA just outside the beltway.

    Unfortunately, I’m late to the game getting started on a 529 for both kids – one of which is in Kindergarten and the other two years younger. My 401k and investment accounts are in good shape – I’ve just been dragging my feet on the 529 for no good reason. I’m in sales and just got a nice commission check I plan to dedicate towards finally opening accounts for both kids.

    After reading this post, I can’t help but wonder if the “Virginia529 prepaid” might make sense. At first glance, I thought pre-paying $7800/semester sounded like a rip-off considering the average in-state tuition in VA is roughly $10k annually. However, looking at your numbers is making me consider pre-paying a semester for each kid while I have a lump sum to throw into their accounts.

    I would then also start contributing monthly to the “VA 529 inVEST” with the thought of eventually pre-paying 2 years each and having the inVEST account cover the other two (plus expenses.) My thought is this would help make up for lost time while covering me in case one kid doesn’t go in state (the one prepaid account would then be transferred to the other and she’d have 4 years prepaid. The other would then use the money from the inVEST account…obviously, this scenario would only work if my oldest decides to go out of state and youngest agrees to stay in VA.)

    I’d welcome your thoughts on this strategy. In your opinion, is the prepaid program worth it – or do you think someone with a lump sum is better suited to go with the traditional “inVEST” 529?

    1. Scott,
      Thanks for your comments. Three should be a lot of fun!

      I personally was not interested in the VA 529 prepaid program because it only works in-state. I want my kids to stay in-state, but also don’t want to force them to stay in-state. By the numbers, it does seem like a good value. But I prefer to be in control of the funds instead of handing it over 15 years before my son starts. I don’t discourage the prepaid, it’s just not for me.

      Your idea of splitting like that does make some sense assuming that the transfer would be easy and one or both of them stays in-state. And that the law doesn’t change. That way you are hedging you investment somewhat. One thing I didn’t mention in the article was that I learned years after college, my Dad thought about offering to buy me a car had I stayed in state. But he didn’t want to influence me too much. I probably would have taken the deal and he would have saved money. You could always pull that one out if you need sway your youngest to go in-state!

      Keep in mind the tax deductibility is rather loose as I mentioned in the Simplified piece. According the the Bogleheads forum I linked to and the tax laws specifically referenced within it, each fund we invest in is considered a separate account and therefore we can contribute $4000 to each one and get the tax benefit. So you can add more than $4000 per kid per year and get a VA tax benefit to all of it. It seems to be kind of a mistake when the wrote the law.
      Good luck.

      1. Thanks RBD – I had forgotten about the $4k per account rule. With the prepaid plan I’d be missing out on quite a bit of tax savings. At $4k per kid per fund we could contribute $16k this year and write it all off. Whereas the prepaid contribution of $16k (a semester for each kid) would leave us eligible for only $8k in deductions. Definitely something to consider!

  4. I’ve got four children and the issue weighs heavily on me. My viewpoint is that if an academic scholarship isn’t awarded for a 4-year university, then community college for the first two years should be perfectly fine and would reduce costs considerably. You end up with the same diploma when you eventually graduate from that 4-year institution.

    My other “Plan B” strategy if we don’t have enough saved is for either myself or my wife to go work for one of the state universities when my children get close to college age. From what I’ve seen at the university I researched, even part time employees are given free or heavily subsidized tuition for their family members as part of the employee benefits package. That turns into a guaranteed bonus of many thousands of dollars if you know you will be using it.

    1. Danny,
      Community college is definitely the most economical bang for buck. As you said, same degree. Where I grew up CC was more of a place where kids went who really weren’t college bound to begin with. Many fail out. And from what I heard, many of them partied out. Though one of my good friends went this route, and is now killing it professionally. But he went to a private school after two years of CC and still ended up with a lot of debt. Where I live now, the CC seems better.

      I’d prefer to have my kids start college with their peers, who will hopefully be the smart kids headed to the best schools instead of CC. With 3-4 kids, there’s got to be some give and take though.

      I was more interested in the experience of school instead of the ROI. This was not the right attitude.

      As for working for the school, that is awesome if you can make it work. The blogger Mad Fientist did this for his graduate degree and saved many thousands of dollars.

  5. Congratulations on #3. I eschewed the 529 plans as I didn’t like a single one of the investment options. Crappy mutual funds are not my cup of tea and I have no state income tax here in Alaska. I decided to just go with taxable brokerage accounts for each kid. I make deposits each month plus their PFD checks each October. As I work at UAF, my kids could get free tuition in 11 and 16 years respectively. But I want to be prepared in case they don’t want to attend a UA school.

    I’m debating having them take out student loans and then, if they meet certain guidelines, using the dividend income from their portfolios to repay those student loans for them. Tax savings on the interest paid and the portfolio base will still be intact when the loans are paid off. It lessens the need for a huge portfolio at 18, gets the kids to have some skin in the game (less money if bad grades/6 years to graduate), I can use it for stuff besides school, and it could give me a minimum of 4 years of extra growth and 10 to 25 years to pay it off. It seems like a good plan. Any thoughts?

    1. J,
      Yeah it seems like you’ve thought this out pretty well. You still have 11 years to refine the plan too. Alaska having no state income tax and the PFD certainly adds interesting dimensions. You working in the University system could be the best deal, but that is cool you are preparing for the option of your kids wanting to go elsewhere.

      I agree having some skin in the game would be helpful for performance at school. I don’t want to say that mine must meet a certain grade point or we’ll pull funding. My parents borrowed some of the cost and paid it back, and I believe some of it was in my name and it worked out. So that is always another option.

  6. Congratulations on another child! That’s so awesome.

    Our plan is to pay for our sons undergrad education. Well all children assuming we have more, that’s our plan but who knows what will happen. I meant to get on that last year but it was so hectic with his health issues that was completely forgotten about. Thanks for the reminder to get back on this so I can start saving for it now.

  7. Congrats for your third child on the way!!

    We always thought we’d just have one child, and I modelled all our future financials and early retirement dates around this. But all of a sudden, without any regard for those numbers and that wonderful early retirement date, we just decided a second child would be a wonderful thing, huge school expenses and all! (he’s due in 3 months time…)



  8. My wife and I have two kids under 3, so we opened up 529s for both of them. Our plan is to put money into those accounts from now until they turn 18. Whatever is in those accounts is what we will give toward their college. My wife and I both paid our own way through college….and are still paying the debt. We want our kids to work for some of their college lives (living expenses, etc) but don’t want to leave them high and dry. We figured this was a good compromise.

    1. Nate,
      That sounds like an excellent compromise. I figure I could always leave my kids to pay for some of it on their own as well. I don’t want to, but faced with that or working another 3-4 years it could be a good option.

      With some luck, maybe college costs won’t continue on the same trajectory as the last two decades. Then by the time our kids are ready, our savings is plenty. I’m somewhat doubtful of that unfortunately.