Children's college or retirement

**disneysteve** · 01-27-2010, 10:01 AM

This is a no-brainer. Retirement comes first ALWAYS. There are lots of ways to finance college. The student can get grants and scholarships and other financial aid. The student and/or the parents can take loans. The student can work. Retirement, however, has no financial aid system.

**jIM_Ohio** · 01-27-2010, 10:06 AM

Retirement comes first
if you want to fund a child's education, my advice is

a) retirement funding first
b) mortgage paid off second
c) college savings third

Take care of your own financial picture before you worry about others. Best thing you can do is not be a financial burden on your family.

**GREENBACK** · 01-27-2010, 10:33 AM

I certainly agree with the advice given. Remember, your kid may not even want to go to college. Plan for it when you can but don't lock into it before your other major priorities are handled

**disneysteve** · 01-27-2010, 10:44 AM

Originally posted by jIM_Ohio View Post

a) retirement funding first
b) mortgage paid off second
c) college savings third

Jim, would you still follow that order if it wouldn't be possible to have the mortgage paid off before the kid got to college, meaning you'd have no college savings and still have a mortgage?

**jIM_Ohio** · 01-27-2010, 10:52 AM

Steve- if you can plan 20 years out, anyone **should** be able to pay off a mortgage in 20 years.

If you have 5 years (your daughter is 13 right?), then "damage control" would be in order. Damage control- meaning you set aside some for retirement, some for college, some for mortgage payoff... knowing that

a) you will be working up to or past child's college graduation
b) you will have mortgage up to or past child's college graduation
c) even though you need more time, your personal financial picture is still solid.

**disneysteve** · 01-27-2010, 11:14 AM

Jim, I don't think we could have paid off our home in 20 years. We had that little annoying complication of student loans in an amount almost equal to our mortgage. It took 12 years to repay those (instead of the 25 years they were scheduled for). Only then, were we able to start attacking the mortgage. It won't be gone in 4 years.

**jIM_Ohio** · 01-27-2010, 11:47 AM

Originally posted by disneysteve View Post

Jim, I don't think we could have paid off our home in 20 years. We had that little annoying complication of student loans in an amount almost equal to our mortgage. It took 12 years to repay those (instead of the 25 years they were scheduled for). Only then, were we able to start attacking the mortgage. It won't be gone in 4 years.

I am in year 5 of the 20 year plan, and there is a lot more mortgage left than one would like if this "is" the plan. However we also are not planning on paying much towards education for college I think...

Even if the mortgage is not paid off by retirement, if I take that 20 year plan and add 5-10 years to it (5 years is kids graduate from college) and have it paid off in 25 years while also helping with education, then I think that is the point I am driving at- take care of parents whole financial picture (not just retirement) before attacking college savings.

Unless a person is putting beaucoup money in a 529, I believe the tax savings over a 15 year period is minimal (Ohio is 5% state tax for us, so $1000 in is $50 saved). Over 18 years, that $50 savings would be $900 per $1,000 per year contributed. $18,000 contribution saves $900 in taxes.

Put same $1000 on a mortgage and the savings is much higher than $50, PLUS you can use federal education tax credits, which could save you $2000 or more that one single year in taxes (assuming you qualify for the credits).

**disneysteve** · 01-27-2010, 05:47 PM

Originally posted by jIM_Ohio View Post

Unless a person is putting beaucoup money in a 529, I believe the tax savings over a 15 year period is minimal (Ohio is 5% state tax for us, so $1000 in is $50 saved). Over 18 years, that $50 savings would be $900 per $1,000 per year contributed. $18,000 contribution saves $900 in taxes.

The 529 money is also growing tax-free, so it isn't just the deduction for the contribution.

You also have to consider the investment performance. Most of our 529 is in an age-based portfolio. Of course, it did lousy for a couple of years along with the whole market, but last year it earned 17.18%. Had I put the money toward the mortgage instead, I wouldn't have earned anywhere near that much. Prepaying the mortgage is a guaranteed return, though, which is attractive for other reasons.

I've been debating reducing how much we put into the 529 at this point, or stopping contributions entirely. We've got enough to cover about 1 year at a private school (not the costliest of privates but most) or maybe 2 years at a public school. And that money still has 4+ years to grow.

**minnie1928** · 01-27-2010, 06:24 PM

I've also debated paying the mortgage vs. saving for college. My oldest is 11 and we just moved last year from cheap PA to expensive NJ. After running the numbers I realized that there was just no way I would be able to pay off the house before he goes to school. So, while a send a few extra dollars each month to the mortgage....more of the money is going to 401k, savings & investments.

**jIM_Ohio** · 01-27-2010, 07:30 PM

Originally posted by disneysteve View Post

The 529 money is also growing tax-free, so it isn't just the deduction for the contribution.

You also have to consider the investment performance. Most of our 529 is in an age-based portfolio. Of course, it did lousy for a couple of years along with the whole market, but last year it earned 17.18%. Had I put the money toward the mortgage instead, I wouldn't have earned anywhere near that much. Prepaying the mortgage is a guaranteed return, though, which is attractive for other reasons.

I've been debating reducing how much we put into the 529 at this point, or stopping contributions entirely. We've got enough to cover about 1 year at a private school (not the costliest of privates but most) or maybe 2 years at a public school. And that money still has 4+ years to grow.

Steve- if you use "nominal average" rates of return (8-10% range), it is my opinion that

a) a 529 cannot be invested as aggressive as a retirement portfolio based on the time to save for college (max time money is in a 529 is 18 years, possibly 22 years).
b) an average rate of return of 9% suggests the money deposited first year doubles twice- that assumes high risk
c) most money deposited within 5 years of need should be cash, meaning rates of return on that money are lower than the nominal (average) rate of return.

Sure you got 17%, and in my kids 529, the windsor II fund is 50% larger than the TIPs fund. And my kids have 16 years until they need the money. My take on the money deposited is that if college costs 100k per kid, then MY contributions will be close to 50-70k and the interest will be close to 30k. If the interest is 50% of the college contribution, that would be high, and even if interest was 30% of the tuition bill, I would be surprised at such good performance.

I did some math

If you contributed 3k per year, and earned 9% on average for 18 years, you put in 54k and have 130k for college, so interest makes up 2/3 of the amount.

If you taper risk off last 9 years (cut return and risk in half) same 54k of deposits, account balance is 103k, so now interest is less than 1/2 of account balance.

The tax deferral value only holds water if you would otherwise invest the money in a taxable account... meaning comparing the tax deferral on gains cannot be compared to paying down a mortgage... because paying down the mortgage is about cash flow, not investing, in my strategy.

**LMA** · 01-29-2010, 10:02 AM

You got two things here: the actual economics of college savings and the more important, teaching your children a valuable lesson by having them pay for college themselves.

First, for the economics part, you might want to consider a Roth IRA since that can be used to pay for college without penalty. That way you get the advantage of saving with tax benefits and if junior decides to not go to college then you keep the money.

The second one is up to you and what type of parenting you are/want to do. I can only offer my rationale on this; college costs for some universities are downright outrageous and they will only get worse. Although I believe in the lesson they can learn by being responsible for SOME of their college costs I do not want them to start out their professional lives in debt which is about the only way they will be able to pay for some tuition charges. So I believe in helping them out, I don;t want them to carry the whole burden because after all I want them to go to college to study and do well and not worry if they will have money to eat.

**Mike75** · 01-30-2010, 02:07 AM

He is just two years old... You don't even know what career path he will take in his life. But the one thing that you can be sure about is that you will grow old one day.

So, retirement fund should be your first priority.

**Like2Plan** · 02-02-2010, 05:50 AM

Children's college or retirement?

You absolutely should fund your retirement first....But, the question is will you pay for your child's college no matter what?

There are some folks who feel so strongly about this and are willing to sacrifice retirement in favor of working longer (or forever) in order to fund their child's college.

If you are in the category of funding no matter what, then you can make some key decisions which will make the cost of funding college less expensive.
From least expensive to most expensive
1. Child get's full scholarship/grants. (if it were easy, we'd all be doing it, right?

)
2. Tax write offs (there is a risk it might not be offered or the parent does not qualify for the write off when the time comes).
3. Save up and pay cash.
4. Arrange cash flow so there is money that can be taken out of the monthly budget to cover costs. (I put this one after saving up cash because there is a higher risk that the monthly cash flow will not be able to cover the costs out of pocket).
5. Get a loan and pay it back. Cost of interest can vary depending on source of funding. There is a risk that the interest costs are higher than anticipated when it comes time to fund college.

**wincrasher** · 02-02-2010, 06:19 AM

My sister's "plan" is to refi their house to pay for college for my 2 nephews. One is 13 now, the other is 11 next month. I don't think it will be enough.

Question is how much to save? I think each will need a minimum of $100k. I think with the short time we have, tax savings and interest earnings of 529 plans just won't make it. It will have to be flat out deposits to savings accounts - $50,000 a year for the next 4 years. Yikes!

Children's college or retirement