College vs. Retirement         

Have you ever seen the articles discussing whether a person should pay off debt or invest?  It’s a reasonable question.  Maybe I’ll write about that some day soon.  Here’s one that doesn’t get discussed as much but I think it is quite common.  I have kids.  I want them to go to college because I understand how important it is for their future, but I also want to have enough money when it is time for me to retire.  What am I supposed to do?  Let’s take a look at a few options.

Bad News First!

Unfortunately, there is no such thing as Retirement Loans.  The closest thing might be a reverse mortgage on your house when you are older, but generally there is nobody who is going to help you out at retirement time.  I read a lot of articles that view retirement planning as a three legged stool of Social Security, pensions and savings.  Here are some interesting numbers regarding the sources of retirement income.

More than 85% of people aged 65 or older receive income from Social Security.  Among those people, 50% of married people and 71% of unmarried people receive more than 50% of their income from Social Security.  The average monthly income for retired workers is a little over $1500.00 per month. 

I always hear people saying Social Security is not going to be around by the time they retire.  They better hope this prediction is incorrect.  If it wasn’t for Social Security, there would be A LOT of seniors in desperate straits. 

Next, let’s talk about pensions.  There used to be a myth that people worked for a company their whole life, then when they retired, they received a gold watch and a pension that paid them for the rest of their and their spouse’s life. 

Today, only 31% of retirees receive income from a pension.  That number has been trending down over many years.  While some occupations like teachers, firemen, police officers and railroad workers generally have a pension, most private employers offer some sort of defined contribution plan like a 401(k).  This puts the onus of saving for your retirement on you.  Yes, your employer probably offers a match of some sort, but the bulk of the burden lands on you.

The last leg of our stool is savings outside of your retirement plan.  I have discussed in the past statistics showing that 40% of Americans cannot handle a $400.00 emergency.  To think they are going to be able to handle a retirement lasting 30 years or more might be a bit of a stretch.

Wait, There’s More Bad News!

Have you seen how much college costs?  It’s ridiculous!  Here are the average retail costs for various types of colleges and universities for tuition, room and board.

• Private University: $48,770.  This is the average.  Big name brand schools cost even more!
• Out of State Public University: $37,260.  Going out of state is expensive!
• In State Public University: $20,880.  A bit cheaper, but multiply that by 4 or 5 years and 2 or 3 kids and you’re starting to talk about some serious cash!

On top of that, inflation for college expenses are way, way higher than normal inflation.  It’s been in the 5% - 8% range per year.  I just looked up the cost to attend Duke University in 2002.  The tuition that year was $26,000.  For the year 2019, the total cost to attend Duke was $74,339.  This consists of $53,760 of tuition, $15,178 for room and board and $3195 in books and fees.  That means the tuition inflation worked out to 4.13%.  Not quite 5-8% but still pretty depressing.

Finally, Some Good News!

Social Security is going to be around when you retire.  I get a lot of push back on this one, but in my opinion, as long as people are having babies and there are jobs, there is going to be some form of Social Security in the United States.  Over the years, my employers and I have been contributing to Social Security since I was 15 years old.  Jimmy Carter was the President of the United States when I was 15.  I’m not saying I’m old, but Jimmy Carter was the president a long time ago. 

Go to www.sss.gov and create an account.  This will show you how much you can expect to receive at age 62, Full Retirement Age (67 for people born after 1960) and what you will get if you wait until age 70.  If you’re married, ask your spouse to do the same thing. 

I don’t think you want to solely depend on Social Security for your retirement income, but having an extra $20,000 - $50,000 per year doesn’t suck.

401(k) Plans

While the percentage of jobs that offer a pension has decreased, a lot of employers do offer a 401(k) or some version of an employer sponsored plan.  Plus, a lot of employers offer some kind of match or they contribute to their employees plans.  In addition to this, we generally have a lot more time to accumulate money for our retirement.  So, even if you have kids or you got off to a late start, try to contribute so you get your employer’s match.  Then bump up your contribution by 1 or 2% per year until you are saving 15-20% of your income.  It sounds hard, but it gets easier as you get used to saving.

Paying For College

The bad news about college is it’s really expensive and you generally don’t have a long time to save for it.  The good news is most people don’t pay full retail price.  In addition to that, we now have tools like www.tuitionfit.org that can help people know what it really would cost to send their child to a particular school.  It will also show people alternative schools that might cost less and still be a great choice for their student.

Beyond that, a kid can start at a community college and then transfer for the last two years to a university.  One of my good friend’s daughter did just that.  When she graduated from U.C.L.A., her diploma said she graduated from U.C.L.A.  It didn’t have an asterisk saying she only went there for two years.  Just think of the money she saved.

Finally, we get back to where we started.  While there are no retirement loans or scholarships, indeed there are student loans, scholarships, merit aid, work study and other creative ways to pay for a college education.  Maybe it takes an extra year because your son had to work while he was going to school.  As my friend, Mark Salisbury says, the idea is to graduate without constraints.  Try to get the best bang for the buck.  There are a lot of options.

So…College or Retirement?

I know it’s not an either/or situation for a lot of people, but many parents only have so much money and they have to make choices.  If you have to choose between saving for your retirement versus saving for your children’s education, I would advise you to pay yourself first.  Even if your kids go to Stanford, they don’t want you living with them when you get old and feeble.  Once you get your budget, your emergency fund, your life and disability insurance and your retirement planning in a good place, then, save for the kids.  Even though you might not have enough to pay for 4 years of Duke for your three kids ($297,356 X 3 = $892,068), you will have a financial plan that takes care of you and your spouse.

If you have any questions about this stuff or want to work out the numbers for you and your family, feel free to reach out to me.  I would be happy to help.  As always, thanks for reading!  KB