Reader Profile: JN

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader JN. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 48, married (wife is 49) and have two girls who are 14 and 18. I am an in-house real estate lawyer and VP of a investment real estate company. I have been with the same company for 22 years. I live on the east coast in an expensive city. I have done pretty well -but because of high living expenses—it continues to be a challenge to tackle all of the financial challenges and still live a modest but nice lifestyle.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

My wife and I both work. I earn about $180K (plus a –sometimes- bonus) as a lawyer/ real estate executive and my wife runs a home based design company and earns about $50K. I realize that this is a substantial amount of money and that we are incredibly lucky. My wife uses her money (about 25K/year NET or $2000/mo NET) for daily living expenses for all of us—every day stuff…clothing,  medical co-pays, gifts, restaurants, kids expenses, tutoring, kids camp/ summer activities, tennis lessons for the kids, etc…  It basically gets spent and allows my income to be allocated toward saving. I pay the “bills” that come in the mail -- the mortgage, taxes, utilities, pest, alarm, cable, etc…and am in charge of “savings” and investing.

We, over time, have been able to max out in my 401K for many years, max out a KEOUGH retirement account for my wife, and currently save about $1800 a month on top of that. With that $1800/mo I put $600 into college savings and $1200 into investment accounts at fidelity each month allocated to a conservative mutual fund portfolio. My savings rate has not always been so high—it has slowly increased over the years. Each time I get a raise—I try to increase my monthly savings.

My net take home after all of the taxes, medical, 401k retirement savings, life insurance etc… is about $8000/ month. So the $1800/month saved amounts to about 22% savings from my net take home pay. Add the 401K savings and my  monthly savings are about $3450/month or 43% of my net take home pay. This makes me very proud. And it just goes to show that it is possible. And trust me— although we do not live high on the hog and we are not social climbers or “show-offs”—we live a nice life.

All of this has allowed us to have a net worth of about $1.5 million dollars. $1 Million in various retirement accounts that are not assessable until 59 ½ of age and about $500K in fidelity investment accounts.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

• Paying for college
• Saving for and executing my own retirement
• I am an employee—and as such, my job is never really secure…..

What are your plans for the future (retire early, build your career, etc.)?

At this point I have the following goals:

• COLLEGE- I have always dreamed of paying for my kids education. I would like them to enter the world without school loans. My oldest will be going to college this year. The costs, as you know, for a private school are about $40K year. If both of my kids go to private colleges—it will cost $320,000. I am not eligible for any need based scholarships because of my income level. I plan to pay for much of this out of current income ( since the mortgage is now paid) and the balance with my “college savings” account which has about $150K in it. Is it smart to put all this cash into college tuition or should I get loans?
• RETIREMENT- I would love to retire a bit early. Maybe early 60’s? Not sure if it’s feasible since Medicare and social security do not kick in until 67 I believe. And I would need to have a lot more money saved to pull this off safely. I am a conservative chap and would never do it unless I could really afford it.

QUESTONS for the group:

• RETIRE - How much money will I need to realistically retire. Can I live on less than I make now since there will be no need to save? I realize that medical and travel will be large expenses in retirement.  I also realize that I spend a lot more money when I am not at work (weekends…)  If I am retired and “every day” is a weekend--- My expenses could skyrocket! Although we make $230K /year (gross) – after deductions and savings--we only spend about 75,000 (net). I figure to earn $75-80K/year I will need $2 Million invested at 4%. If rates go up—I would need less.  That gets me over the hump until social security kicks in 5-7 years later.  Does this make sense? Is it possible to achieve this in the next 10-15 years?
• COLLEGE - How should I pay college costs? Out of income and savings as planned?  Or should I get loans? Did any of you other high earners fill out the FAFSA student loan government form? It seems like a waste of time since I am not likely to get any aid based on my circumstances.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

• FEAR is your friend. Protect yourself from the unknown by having a financial cushion.
• No one will ever care about your finances as much as you should.
• Live below your means and think long term.
• Tackle milestones early—plan-plan-plan!
• Living paycheck to paycheck is self defeating.
• Strive to always increase your net worth and become financially independent.
• Pay yourself first.
• Become debt free.

Comments

[JAM]

First I'm in a very similar situation - about the same age, income and savings. Two daughters about the same age, too - the oldest starting college this fall.

Regarding your RETIRE questions: Not only do I think early retirement is possible for you, I'm counting on it (as I'd like to do the same thing). You mention a mortgage but I didn't see anything about the remaining term/balance, etc. Is that a part of your $75k in annual expenses? If so, paying it off before ER could make a big difference. Also, if desired, some sort of part-time income would be very do-able with your professions. Even a few thousand a month of income (doing something your really enjoy and are excited about - not "work") would make a huge difference, keep you plugged in to the community, and (since you're worried about it) limit the amount of time you'll have to blow money on other activities! Play around with FIRECALC and see what it says.....it's a great tool.

COLLEGE: We made a couple of commitments years ago regarding college for our girls: (1) We wanted to help them as much as we could, and (2) Under no circumstances would we borrow money to do so. There are so many ways for kids to get a great education without spending so much money (IMO). Because our oldest is graduating early (home school is great!), we won't let her go away to school in the fall. Therefore she'll be going to the local community college for a year and knock out a lot of the "gen-ed" classes for little cost. Then we'll look at other schools she can transfer to. With pre-paid and 529 plans, we have enough saved for both girls to get a quality education with NO DEBT. Can they go to any private school they'd like? No (at least not without significant grant (not loan) aid). I have yet to see a study that shows paying twice as much for a private school education (vs. a public university) makes a difference in their long term success. IMO, you have plenty saved for college already, and additional retirement savings (if you're considering early retirement) makes more sense. But don't borrow money for college!

Whatever you decide, y'all have done a great job earning and saving money. Congratulations and keep up the good work.

[Matt]

FAFSA is needed by the colleges to determine financial aid packages. Obviously financially you are sound and will be like me and get zip in the way of need based but there is also the chance of merit based or other based help. I have received any of that but I hear it is out there somewhere. (My sons will be attend a public university and I know private univerities are more expensive and there is more aid available.)

However I am also told that you should fill it out in case your financials change. Loss of employment, death, etc. I am not expecting any financial aid and will probably won’t need it but if either of our jobs change drastically we may need to look at the options and the one option would be for the kids to assume some debt. Maybe $10k.

I will have two in college next year, which is a huge expense, but as long as things chug along the same for the next two years we will manage. Short of some Apocalypse we are financially sound for college.

[Mrs. Pop @ Planting Our Pennies]

Food for thought on paying for college: http://www.nytimes.com/2013/01/15/education/parents-financial-support-linked-to-college-grades.html?_r=1&

College grades seem to be negatively correlated with parental financial support - the more money parents give, the lower the grades...

[getagrip]

Retirement:

$1.5 million * 3% above inflation earnings for 10 years (1.03**10) = $2.02 million.

That's without putting in another penny and making a reasonable assumption on earnings for the next ten years. Adding in your approximate $37K (1200/mo + $17.5K 401K + $5K spouse) in yearly savings, at only 3% earnings yields an additional $425K, so given you'd also have a couple of years you wouldn't be saving/paying for college you would be looking at roughly $2.5 million in ten years.

With no interest involved except to match inflation, just pure $75K-80K a year off principal, that's 33-31 years into retirement before you drain it to $0 in your early 90's. That's with no SS included which regardless of when you actually take it out would probably push that number past the 40 year mark, or early 100's. Just as a note you have to sign up for Medicare at 65, even if covered by a company plan. With respect to SS I would recommend sitting with three different fee only financial planners when you get close to the time you want to retire to see what they think and make a decision for yourself on when and how to collect SS after reviewing their advice.

I'm not seeing any real problems here since I'm assuming all life/health/disability/living will etc. issues have been dealt with already.

Good job at keeping your realistic expenses low.

College:

I've two in college now, make much less than you, and fill out a FAFSA and all we qualify for are the government loans every student can get. I would think if you're just filling out a check for their schooling, there's technically no need. That said, I suspect that if your child does qualify for even a merit scholarship they would want the FAFSA in hand. So I'd check with whatever college your child wants to attend as to whether they need the FAFSA or not. My feeling is to do so, since IMHO there is no reason to turn down possible money if you don't need to.

Finally, and please understand I have only the smattering of information you provided, but IMHO based on the little you provided you may want to look closely at your idea of "retirement". The people I know who thought of retirement as an endless weekend interspersed with travel were bored out of their minds by the end of the first year, and many are back to some type of paid work just to have a reason to get up in the morning. Those I can think of that seemed to do the best were those that had something to retire to. I suggest you and your spouse need to plan beyond just the financial "can we", and plan a bit more on your expectations of life post 9 to 5 work (plenty of books and articles in that area when you get closer). I also suggest not putting off dream vacations until you retire, but have some of them now or near future, while gainfully employed and both kids are away at college. You're going to have to learn to live with only one another soon enough, doesn't hurt to get some practice in before you end up just the two of you looking at each other and feeling a bit like strangers with nothing to talk about or not knowing what to do. Even a few weekend get aways can be eye opening.

Best of luck.

[Mc]

Hi JN, I can relate to your situation because it is similar to my own. Two comments:
1) re college financial aid, you should definately meet with a financial planner now about that because maybe there are things you can do to increase your eligibility, and you should definately fill out the FAFSA because you never know, maybe you will get some aid. From my own research it seems that your retirement accounts will not "count", neither will equity in your home, so you could take steps like paying off your mortgage. You may also be able to arrange for deferred compensation from your job, thus effectively lowering your income. If a parent is also in school, this increases your chance of getting aid...so this might be a good time for you or your wife to go back for that graduate degree. Fin aid typically is based on current and some years prior finances, so you need to get solid advice and take action well ahead of time. My own perspective is that any amount of aid would help, so why not go for it and see if you can get some.

Also, as a professor in a medical school who has been involved in admissions for the past 15 years, I know that private schools' reputations are overrated---its all about what the kid does while at college, being at a fancy school does little to impress by itself. So my own kids will probably attend a solid 4 year public Univ unless a private school wants to give them a full ride. Community college for the first 2 years is, IMO, a bad choice since comm colleges offer a far sub par educational experience, and spending time at a comm college is also considered against an applicant for grad school because it is seen as indicating that they were not serious about their education and just wanted to check the box on credentials with the least academic effort. But 4 years at a state college is considered perfectly fine if the student gets good grades, majors in something solid, and (this is critical anywhere) seeks out internships and other relevant work experience while attending school.
2) you might have to decide which is most important to you: retiring early vs. putting your kids thru a private school debt free? Perhaps also think about why you would want to retire early...is your job stressful or do you hate it for another reason? Maybe just find a different job that you like better. even if it doesnt pay as much, you would have a lot more financial security and also health insurance. Personally, I have decided that I'd rather keep working...I like my job, and that way I'm better prepared to help my family no matter what comes up in the next 15 years. I can always retire later.

[Mike Hunt]

Hi JN,

I think you need to probably keep working until both your daughters finish their university, assuming that you are paying for both of them.

You have a nice start of a portfolio but I'd be looking for income from the portfolio that is 1 1/2 times your expenses before really looking at retiring. That is the challenge today- turning a nice net worth into a solid and growing income stream. It can be done, with solid real estate investments or dividend paying stocks. It just takes a little bit of time to set up.

-Mike

[Ivy]

We are in a similar situation, but 10 years behind (10 years younger, so a million less in net worth:-).

I don't know how much you like playing with the numbers, but this is what we did to get comfortable with retirement projections. I don't like the online tools, since they don't account for variable income or expense streams and also I don't know their method of calculation to trust them entirely. So I used Excel, just projecting the next 50 years (or less for you since older)
- income stream by year, increasing by average annual raise
- portfolio growth projection - you can play with it, or just take historical or more conservative number
- expenses - both the regular ones, and bigger and time-specific outlays - we have 6 more years on mortgage, also I plugged in 75k per year per kid for college (in ~15 years)
- projected semi-retirement at 60, going half time
- and expenses changes at retirement, and some SS just in case
All in all, took me 1-2 hours to set it up with all the tweaks I wanted. Now I track it by year to see how we are compared to projection, and modify accordingly. Gives me a lot more clarity on what to aim for

We track our spending with Mint, and I've done different projections on the budget, working off the current one. There is "emergency-level" if I lose my job (husband is stay at home dad), there is "early retirement" with more travel, less medical; there is "late retirement" with heavy medical. Try this - also gives you more assurance in planning. See what you spend on during weekends and think whether you will be doing the same then. If activities with the kids likely not, if beer and gadget shopping, who knows :-)

I hope this helps. No idea about the FAFSA yet, but the advice of the others about completing it just in case makes sense to me

[Jane Savers @ The Money Puzzle]

The children should pay for part of their education. I am sure they have part time jobs and savings already. If you pay tuition and housing they should be able to cover food, books and fun.

My sons will graduate with 40k in debt each but I am a lower income single mom and my sons know how lucky they are to have a great education. They both work during the school term and during summers and have since they were old enough to stack firewood for neighbours.

[sasha]

I think you might be severely underestimating the cost of private university education. Many private schools now cost up to $60K a year (tuition, fees, room and board as well as travel expenses). Heck, several public universities cost almost $40K a year. Unless you've narrowed school down to choices that you have already priced out at $40K - you may want to revisit the cost of college. Also, you need to take into account that college costs do increase almost every year.

20 years ago when I went to private university (cost $30K a year my 1st year), the cost had risen to $35K a year by my fourth year. That same university (top 10 private) now costs $61K a year (according to their own website for the 2012-2013 school year).

You may want to make sure you have put together a list of colleges that your children are not only excited about but also fall into your perspective on affordability. Too many parents encounter nasty surprises as to the costs of college now if they haven't done a lot of research way before it is time to apply to schools.

I would recommend the websites collegeconfidential.com as well as thecollegesolution.com

Good luck

[elb]

You have a great opportunity to start investing for income. Curious as to why you wouldn't put your real estate expertise to work?

[Old Limey]

First off you need to retire debt free.
We retired when I was 52 in 1992 and by 1996, at age 56 when we picked up Social Security, not including investments, our annual income was $65,000. We were able to live nicely on that income and take two or sometimes three overseas trips to a variety of places all over the world. Having both been raised in England during WWII we are both frugal which has helped enormously. We have three grown children and paid nothing towards their education.

The eldest started off as an airline attendant, then became a dental assistant, and finally a paralegal and office manager for an eviction attorney. After moving to Maui she now telecommutes and handles all the billing.

The second daughter put herself through college and obtained a marketing degree. She soon became the manager of a high rise office building but in the process she met a wealthy attorney, married him, they divorced 18 years later when she received a $2M settlement and a $240K/year alimony for 8 years.

The youngest, a boy, never went to college, but turned out to be an excellent salesman, and makes $160K as the Western Regional Sales Manager for a large international company.

Our investment portfolio at Fidelity was $320K when we retired in 1992 and by 1996 when we took Social Security it had grown to around $800K and during those 4 years I had educated myself how to invest actively and had all the tools to be able to do it. The market was then being affected by the growth of the Internet and all the Hi-Tech companies that it had spawned. We still lived basically on $65K/year even while our portfolio was growing rapidly, it peaked at $3.7M in March 2000 when I went to 100% cash over 4 tradings days after the Bubble burst. It then went on to hit $4M on 11/2003, $5M on 2/2006, $6M on 7/2009, and $7M on 7/2012. At the end of 2007 I moved into the slow lane and invested purely in low volatility income investments that minimize our taxes. We started to withdraw from our investments between 2008 and 2010 when we started flying Business Class on vacations. Our last overseas trip was after 2010 when I was 76, my wife was 77 and her walking capabilities were inadequate for the kind of vacations we had been taking.

Starting in 2005 we were faced with large MRDs from our IRA accounts which greatly increased our taxes, so from then on as we moved money from our IRAs into our Trust account we had the estimated tax payments withheld. In spite of the annual MRD payments our IRAs continue to grow.

[Old Limey]

CORRECTION - To first 3 lines of my above post.

First off you need to retire debt free.
We retired when I was 58 in 1992 and by 1996, at age 62 when we picked up Social Security, not including investments, our annual income including pensions was $65,000.

[JayB]

Sounds like you might have to decide between private college for 2 kids or semi-early retirement. I don't see what is wrong with a good public university myself. I finished 5 years ago totaling 25k and I was using all of the money I could get with Federal Aid in combo with working part time on campus. I lived at home which helped, but even now, you could attend USA living on campus for 4 years under 50k. Things have gone up since I attended because we have a new football team, but we are growing fast, replacing buildings and not too far from the beach!

[BH]

As a much newer real estate attorney, I echo elb's question - why don't you invest in deals? The margins, as I'm sure you know, could be so much higher than anything you'd get in the market. Everyday I watch clients make (and in some cases lose) so much money in the real estate game - why aren't playing it too? With so much experience and knowledge, you would have a huge advantage.

[JTS]

I will first echo what sasha mentioned about the cost of private colleges. The overall annual expenses can easily surpass $50K depending on the school.

That said, I applaud you for looking to fund your childrens' college education. I was fortunate to have parents that did the same (and so was my wife), and it definitely allowed us the comfort of being debt free while starting our independent lives and careers. My parents were not wealthy, so they did take out loans for my education, but they paid for everything in full.

I would make certain of two things when helping your kids through college. One, is college the right answer for them. I think we are in a time where college is seen as a necessity, but I believe that there are many career paths that don't require college. My work in IT could potentially be one of them; many software developers I work with never completed a degree. Yes, there are certain companies that will hire me with a Bachelor's degree over them, but a college degree will never make up for lack of work ethic, poor communication, or a myriad of other personality characteristics.

Second, is a private college really necessary. Certain careers are propped up by the college name on the degree, but many (maybe most?) just look for the education and training, and not necessarily the college attended. So I'm not sure a reputable state college should be ruled out. I started at a private Institute of Technology, but finished my degree at a small state school. There is rarely a mention of the school now that I'm 8 years in to my career other than the requisite "where is that?" question being brought up during interviews.

-Jon

[Strick]

With the desire to pay so much for college, and the wackiness of the market, I think the "when can I retire?" question will become pretty clear in 8 years (when your 14yo is 22) but no earlier. That said, with how you're doing I think there's a really good chance you'll find yourself close at that time.

[CD]

I'll limit myself to the issue I have most experience with: educational costs. I, too, am an attorney with a couple of degrees from fancy private schools that cost a fortune. One was paid for largely by student aid, scholarships, my work efforts, and the generosity of my parents, and my law degree was financed purely with debt and whatever I could earn over the summers. I am still paying off the latter degree.

First, as for the FAFSA: fill it out. It can't hurt. It can only help. It's a pain, but if your situation changes or you get lucky, it may matter. Also, it's required for all kinds of things, as someone noted. Finally, even for admissions purposes, many elite schools technically have policies where they don't take finances into account, yet unofficially they "notice" whether a kid has checked the box stating he/she has filled out the FAFSA. There's really no reason not to.

Second, as to college costs: Sasha's post is correct. Tuition plus living expenses at private universities tops $60k at top private schools. If there are still a few years before your daughters start, especially the youngest one, I would budget for $65-70k/year. (College costs are rising faster than healthcare costs now.) So, back-of-the-envelope, you're looking at about $65k x 3 years = $185k for one daughter, and $70k x 3 for the other: $210k. Total: $395k. Round up to $400k. College is always more expensive than advertised. (The expense budgets are really skimpy for things like traveling home, if your daughters are going farther away, so you'll need to supplement.) Also, keep in mind some schools will require your student to live on campus part or all of the time there, meaning the student is locking in most of that living budget too. And there are always other off-budget expenses that the school's official budget doesn't allow for. (Study abroad, research programs, etcetera.)

On a personal note: as others stated, the fancy private education is usually not worth it. If there's a quality state school nearby it rarely makes sense to go to a fancy private school (and this is coming from someone who has a Yale degree). The network is helpful, but you can get a similar-quality education anywhere if you seek it out. Plus, at state schools a truly talented student can rock various campus activities, awards, and so on, to compile an even more impressive resume for grad school; it's harder to do that at a fancier private school. So if your student thinks she wants to go to grad school, go for the public school.

Don't take on debt for your student: the rates are outrageous (6.8%-10%) and never dischargable in bankruptcy. Those debts never go away. And you are at the whim of student lenders who range from incompetent to pernicious. (Dealing with student loan companies has become an immensely time-consuming bane of my existence.) Plus, there are up-front fees for many loans that tack on another 3% (or you pay it on the back end; either way, the real rates are much higher). Lenders' policies are obscure, indeterminable, or unclear, and they cannot help you with them most of the time.

I went to private schools, but I should add that the first degree cost me only marginally more than the local (great) state school would have. (And I do mean *marginally*.) So it made sense. As for the subsequent degree, I took a long hard look at career prospects, salaries, and so on, then, like you, received advice from many who had gone that route to see what made sense. I chose the debt and it has worked out for me, but knowing now all the stress involved I question whether it was the right call--though it'll work out for me regardless.

These days, more and more people are doing community college classes or using hours accrued during high school (at local colleges) to cut the cost of college. The doc above indicated the only disadvantage: it might hurt slightly if your kid applies to a really competitive graduate program (like medicine). But most grad school processes are driven mainly by numbers, and it's a huge help having extra GPA points when applying to institutions fighting for rankings with U.S. News. Same goes for slightly higher test scores. For most programs, those two things will matter more than anything else, even if it hurts slightly to have the community college hours coming in. Plus, if you rock the GPA at state school thereafter it probably won't matter much. Besides, that's a distant prospect when you consider the up-front amount you're shelling out for an extra two years of normal college. If you discount it accordingly (which most people don't), then it probably doesn't make sense.

One strategy some of my friends' parents employed that seemed to work: they made their kids pay some fixed amount of college costs each year. (And these were wealthier parents who could afford to bankroll their kids.) It seemed to make those kids appreciate the cost of their education a lot more. If the kids share some portion of the cost, they're more likely to appreciate what they're doing and look for ways to do things more cheaply.

Anyway, that's my $0.02 re: educational costs. The cost-to-benefit ratio is SO LOW for education that it makes sense to avoid costs however you can. I don't know why people persistently think that ratio is higher. There's *some* return for those fancy degrees, but not enough to justify the huge costs, *especially* if loans are involved. It's easy to underrate the stress and pain of carrying those loans alone, *especially* in today's job market!

Best of luck to you!

[Ruckerz]

Regarding college costs I suggest a 529 account for your kid's education while allowing them to maximize FAFSA aid.

Currently, 529 plans are considered a parental asset of which a maximum of 5.64% contributes to the expected family contribution. And you get state tax breaks for 529 contributions in most states.

There are contribution limits (120k for the previous five years in a single year, and there's lifetime limits that vary by state), so clearly the 14 year old can benefit this more so than the 18 year old.