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July 09, 2013

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Doing very well. How come no more real estate??

I live in a very high cost of living area on the east coast. I don't think direct investment in real estate makes sense in my market, and I feel the complications of adding real estate in a different market would be too much for us to handle with our lifestyle.

I've looked at REITs, but I only really invest in things I understand, and I don't know enough to understand their structure.

We are in a very similar situation in terms of networth and age of first child. What is your goal number and monthly contribution for your child's 529 plan? Do you think $2m will be enough for retirement once you have 2 kids. I used to think so, but then baby # 1 arrived.

We contribute about 10k/year to 529. I've recently decided that what we should be doing is opening a joint trading account with 40k before doing the 529 as this would allow my daughter to accumulate a little wealth and would be under the UGMA limits.

My retirement goal is 2.5M (net, including equity, 2M without equity). I look at retirement as a "light working" retirement. I figure I'll have a low stress parttime job, that takes up some of my time, and possibly finances the family vacations, etc.

I'm pretty confident that 2.5M is enough. Frankly, even living in a high cost of living area on the coast, I think we could do it with that number. We'll probably relocate to someplace cheaper (like Oregon, or Maine), which I fell will dramatically increase our odds of 2.5M being enough.

But once you retire, which sounds like it will be well before your daughter goes to college, your income will be relatively low, so I wonder if it is possible that she would qualify for some financial aid. I've heard that a child's 529 plan is a ding against financial aid. Just wondering if you've considered and researched this issue and if that has to do with your decision to open a joint trading account, or if you are aware of other investment vehicles that wouldn't count against the child when applying for aid. I anticipate being in the same situation as you at that time - lots of assets but relatively low income. I've heard that if you own a business you can pay your child through the business and put the 'salary' in a roth IRA which can then be used for college or toward buying a first home. I haven't researched though.

I have spent more time thinking than researching. I believe that by the time my daughter goes to school, the rules will have changed at least once, possibly twice, and who knows what they'll be; therefore, what good is researching to N-th degree. I work under the following assumptions:

* "That which cannot continue, won't." The cost of college education is rising at an incredible rate. It is unsustainable, and clearly a bubble brought about by states cutting funding to public institutions, and the inability for people to BK out of student loan debt.

* If worse comes to worst, I can always get another job. I am voluntarily entering retirement. There's no reason why I can't start a business or get a job in the future. So, if I have to (for her sake), I will.

It may be naive of me, but I believe that between the ~60-80k I expect to make off investments, plus 10k for part time work will easily provide for my children's education.

@Jack,

"clearly a bubble brought about by states cutting funding to public institutions"

So based on that reasoning the bubble in costs exists only at public universities right?

Yes, I agree. We plan to be in a very similar position. What I wonder is if we are oversaving in the 529 plan. If income is 60-80k, would our child qualify for financial aid, but for the 529 plan? Then we've 'waisted' a bunch of savings. If that's the case, is there some other way to save for college that doesn't count against our child's aid application (assuming lots of assets but low income). What is the ideal total amount saved in a 529 plan for college beginning in about 16 years? $100,000? Less/more? Maybe it will all change over the next 16 years. But I don't want to be 'punished' for being a saver, either.

@Apex:

I think you forgot your *sarcasm* tag. I believe the price of private institutions is being pushed up to continue to offer elite status over the public ones. In other words, they charge more because they can.

@BH:

I agree, but frankly I don't think there's anyway to know. I project we'll have anywhere from 100k-200k for each child saved. I can't say what that will mean in the future. And if I have to, I'll withdraw the money from the 529 and take the penalties. There's no way to predict the future. You can only do the best you can.

Two thoughts:

1) What are your thoughts/budget on health insurance and expected costs in your semi-retirement...would you be able to get a group rate for a family?

2) I've seen the 4% rule applied and modelled for 60 year olds....does it give the same probablility of portfolio survival for someone at 40?

@Jack,

I thought you might argue that. I have to say that is not very compelling. Your arguments do not follow basic economics. Raising the prices of your product because your competitors raised the price of theirs does not result in a static demand curve let alone an increasing one like we have had in education. Raising the prices of all competing products in a product set results in lower demand.

The only thing that can allow continual increase in prices is shrinking supply or increasing demand. Since we don't have shrinking supply that leaves increasing demand. Everyone raising their prices does not create increasing demand. That is econ turned on its head. Increasing demand lets everyone raise their prices.

The question is why is their increasing demand that is undeterred by increases in price. Answer that and you will have your answer.

@M:

I subscribe to the MMM theory of health care: Get a high deductible plan, pay out of pocket. I also believe medical tourism (through the US and world) will increase in the coming decades. I am not scared of paying my due.

You're right, the 4% rule is a "worst case" rule for 30 years of retirement. It just so happens that picking a SWR less than 4% increases the odds dramatically. Additionally, the year in which you started saving and the year in which you retire also play a large role. I can't predict the future, which is why I generally use a 3% SWR (2e6*0.03), hence my ~60k/year figure in a previous comment.

For an interesting discussion, I'd recommend reading the Trinity Study on SWR, and the updated study.

@Apex:

It's been years since I took economics in college. I'm guessing that you're arguing that there's an increase in demand for education, pushing up prices universally. Without studying the figures, I'd have to say that's true. I'd also assume you're saying that we don't have a static demand curve. Both are likely true.

I don't have the answers. If you do, I'd love to know. :)

Just a thought (you’re probably already doing this) – you can use an HSA like an additional retirement plan. We max it out the HAS every year but never withdraw from it - there is a double (or triple depending on how you view it) tax benefit in that you deduct it going in and never pay taxes when it goes out, plus it grows tax free. Ours is invested in in index funds. So while it’s only a bit over $6k per year, it adds up, and if you have some catastrophic event in early retirement and have a high deductible plan, you're covered.

On education, the cost of education is too high, clearly. It is worth it to figure out how to allocate assets in a way to qualify for aid if you anticipate a relatively low income (like, less than $100k adjusted). $100-200k per kid is a lot of money.

@Jack,

I don't have any exact answers. I have some suspicions of partial culprits but it is likely complicated and multi-faceted. I don't think there is going to be any magic bullet solutions as I suspect the causes are varied. I suspect the same thing with health care too by the way. I was merely suggesting that your statement that started with "clearly" might not be so clear.

I commend you for having a plan and sticking to it. Keep up the great work!

Very interesting conversation. I am only 30 and far from retirement but it's great to see success stories like this. My goals are similar...to have 2 kids and still retire early by using HSA, Roth IRA, SEP IRA, etc. Anyway, I'm sure I'll share more in a "reader profile" soon enough. Thanks for sharing yours.

Jack - just an fyi - if you do consider real estate make it close to home. I am going thru a nightmare scenario where a rental condo in FL has water damage. the condo manager refuses to accept responsibility (leaking roof) had to contact ins. co and now "red flagged". My ins company says they are only responsbile for wind driven rain. have to find a lawyer now and and sue the heck out of people 4 states away.
good luck to you and your family.

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