Today I’m looking for your opinions on one question. Please leave a comment with your thoughts.
David Spigarelli, The 529 Guy sent me a copy of his book: The 529 Handbook (affiliate link). Unfortunately, I’ve been so busy that I’m just a few pages in. I’m not new to 529 Plans having written choosing a 529 plan and 29 thoughts on 529 plans. I didn’t expect to learn too much, but I was wrong. I forgot that books often give you a deep analysis.
When looking at planning to pay for college, I concluded, college planning is impossible, but suggested that you do it anyway. You’ll never know what the costs are going to be. My 8-year-old is tracking to be an architect someday, and Rhode Island School of Design’s official estimated cost per year is $78,941. People rarely pay the sticker price, but it would be $320,000 for four years. Maybe he gets a free scholarship. Perhaps he goes somewhere else and gets a partial scholarship. There are endless options that make the cost appear somewhere between $0 and $320,000 a year.
Spigarelli’s book has some great advice on tackling this seemingly impossible puzzle. The idea is to break it down into pieces. So at 8-year-old, we’ve got about ten years to save. I will assume that our invested money grows 3% more than inflation. It may not seem like a great assumption with inflation right now, but we can’t use 2022’s 8% inflation and 25% drop in the market as the norm for every year. Instead, we’ll go with investments growing by 6% and inflation at 3%.
With that 3% growth, I can put “1.03 y-to-the-x-power 10” in my calculator. I now know that my money will grow by 34% or about one-third. To pay for $79,000 costs, we’ll need $59,000 invested for each year. That’s $236,000 in total. To come up with a monthly payment, I need to divide that by ten years and then by 12 months. The result is a mortgage-like $2,000/mo. Ouch! Since we have two kids, that’s $4,000/mo.
That exercise was a rough estimate. The money invested at the end of the ten years won’t have time to grow by 34%. We won’t choose to go to RISD if it’s the sticker price. We’ve got a number of other ways to plan our specific case of college expenses which include my wife’s GI bill. We also expect years of private school to give us more scholarship options. The GI bill alone should cut our total college bill in half. (It gets complicated, and it will do less if they both go to private schools, but this is the estimate we’ll go with.)
Let’s assume that we should instead save $2,000/mo. for college expenses. Awesome! We can get started on that, right?
Nope. We’ve got a problem.
Personal finance experts rarely universally agree on anything, but they seem to agree on one thing: You should always fund your retirement before a college fund. The reasoning is simple: You can’t take loans for your retirement. It makes sense, and I can’t disagree with it.
However, with that logic, very few people would ever fund a college fund. Retirement planning is a lot like planning for college costs. You can make some guesses, but life changes a lot. It’s possible to come up with a number and to even be on target with that number, but the percentage of people who do it is likely very low. I would guess it to be under 25%. To complicate matters further, college funds are typically used before retirement funds. I’m 46, and many people I went to high school with have kids in college. I can’t imagine many of them have fully funded their retirements.
Let’s take it even one step further. Those parents had their kids around age 28. (That’s a perfectly reasonable age to have kids, we were later, obviously.) It’s nearly impossible for a 28-year-old to reasonably save for retirement and college.
Finally, my question for the readers is, “If you are supposed to save for your retirement first, how do you ever get to saving for kids’ college?” I’m sure the easy answer is that you have to do both at the same time. However, if that’s the case, how do you divide the money between the two? Do you put 75% in retirement and 25% in college? Do you put 60% in college and 40% in retirement?
The question is too open-ended. It really depends on your situation.
We saved extra for college when our son was born. Now, we save just enough to get the state tax credit. $3,000/year. Also, we are almost 50 years old. Not much time left to save for retirement.
These days, it’s 90% retirement, 10% college. We have one kid so that’s easier as well.
Lazy Man says
When your son was though, I think you were getting close to (or already did) quit your job to retire. So at that time, I guess it was something like 90% college and 10% retirement? That’s hard when your income is dropping. That’s an unusual case, but I don’t know if I would have put much in a 529 Plan in that circumstance.
I was thinking of the typical case or what the Average Joe should do in the Average Situation.
Thanks for the shoutout on my book. I hope it provokes many more questions like this.
I agree that most should fund retirement sufficiently before education. A dirty secret is that education costs are inflated. Yes, tuition and fees have escalated faster than inflation, but so have the “discounts” (aka scholarships, grants, etc.). In reality you likely won’t pay full freight and therefore don’t need to fully fund their 529.
On the other hand, not funding it at all means that you potentially walk away from tax breaks from your state. I think of them a little like matching funds for workplace retirement accounts. It’s often free money and often available even for late contributors.
Lazy Man says
Rhode Island gives a $1,000 tax deduction (for joint filers), so that’s our minimum every year. It doesn’t get too far for two kids, but it’s something. It would be nice if the tax deduction was $2000 per kid as that would be a great amount to encourage everyone to save as a minimum. It’s also only a state deduction, not a federal one, of course.
We didn’t save much for college but instead invested for retirement. We agreed to fund our kids college but only to the level of in state public universities which are still sort of affordable. We could cash flow our three kids there with no dedicated college savings due to my income. If they wanted to go somewhere more expensive that was their problem to solve. The way it turned out all three had totally free rides including room and board and books and tuition. We paid nothing. Our deal was only paying for four year degrees, anything else was on them. Now they all have at least two degrees and one is working on her third. Only the engineer turned medical doctor took out any loans since we did not help him fund medical school. He’ll be fine, he’ll start out at over $400K next year after he finishes residency. I retired slightly early at 60 with a big margin of assets over what we needed. I do believe you do your kids a big favor by taking care of your retirement and never putting them in a place of having to spend a single dollar on you as you age. Not only that but each of our three kids will get a seven figure inheritance some day. I think that’s a reasonable deal from their perspective. The main thing is whatever you decide, and it is your decision, kids get zero votes on it, be very clear so they know what to expect.