Making A Million Dollar 18-year Bet

… (or Smart ways to fund your children’s education) This is a guest post by Platinum Sponsor Johanna Fox of Fox & Co. Wealth Managementt, a fee-only financial planning firm. Until recently, she was also our financial planner. Saving for college is on the minds of most of our clients since around 75% either have young children, are pregnant, or both. The amount you need to save for education depends upon the choice of college, how many children you have, how much your funds grow, and the percentage of college, grad school and/or med school you want to fund. For a family with even two young children, you can easily looking at a need of $1M – $2M by the time they are ready to start college, especially if you plan to fund post-grad. Of course, that’s not even considering private school for K-12. Planning ahead and doing it right will both save taxes and increase your long-term net worth. But planning so far into the future for little creatures with minds of their own is a daunting and expensive challenge. To explain how to build an education savings plan for your own family, let’s review a case study. I’ve built a composite family, the Varkeys, using details from several clients’ plans:

• Dual physician family earning $680k/yr with children ages 2 and 6 plus another on the way
• Want to save enough for 4 years at Georgetown University, their dad’s alma mater, and maybe medical school.
• Hope to send children to private high school @$15k/yr/child.
• Student loans of $150k, refinanced @3.875%
• 2 mortgages: $850k on a $1.3M house and $450k on a rental duplex
• One spouse has access to a 401k and the other has access to a 403b/457b combo, and they both do annual backdoor Roth IRAs.
• And by the way: they hate debt

Let’s get some perspective about sending a child to Georgetown (or a similar school): the cost of attending today is $69,313/yr for tuition, books, room and board, and other expenses. By the time the baby attends, it will cost the Varkeys $493,660 in future dollars. This requires a plan! While we would need a lot more information to fully develop a financial plan, we’re using this case study to focus only on some key principles to consider when planning for education.

Prioritize

One of the biggest challenges of planning is prioritizing how to allocate limited resources to achieve your goals. The first rule in saving for education is not to sacrifice your own future: there are no scholarships for retirement and you will not be doing your children a favor by providing for nice educations at the expense of having to rely on them in retirement. However, you may be able to forego some retirement savings in the near term in favor of early education savings, and then get back on schedule. So, if your projections show that you will be able to skip a few years of 457b and backdoor Roth IRA contributions and have a few million dollars left at death, and that’s the only way you can fund your education accounts, then we might consider frontloading education to launch early tax-free growth and then return to maximizing all retirement space possible. Save for school or pay off debt? Since the debt feels so burdensome, I wouldn’t have a problem attacking the student loans heavily for 3 years but not the mortgage or rental interest. The reason is that student loan interest is not deductible, and lingering student loans are oppressive to many graduates because it represents nothing tangible. The interest on the mortgage is deductible as an itemized deduction and the interest on the rental will be deductible at some point – either when their rental begins to show a profit or when they sell it. And having tangible assets that are appreciating in value mitigates the emotional aspect of paying for “nothing”. Note: If you have access to an HSA, I would not forego contributing – ever (but that’s another article.)]]>