Reader Profile: RV

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 RV. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

My wife and I are both 49 and we have 2 teenage children.  We have been married for 26 years and live in the Baltimore/Washington DC suburbs.  We’ve lived in our house for 24 years and our county provides excellent public schools.

We both have college degrees.  I worked in private industry for the first 18 years of my career – Information Technology.  For the past 8 years I have worked for the Federal government.  My wife worked in private industry for the first 14 years of her career - Accounting.  She worked part-time after our first child was born and stopped working for about six years after our second child was born.   She has worked part-time for the past 7 years in the public schools.

Recently, I started to pay more attention to financial matters, investments, savings, etc.  I wish I had started when I was 22.  I love reading financial blogs.  We have always lived below our means.  

Describe your financial situation.

Together we earn about 125K a year.  We have no debt.  Our mortgage is paid off and we paid cash for our cars - model years 2000 and 2007.  Both cars were bought new.   

Monthly expenses:

Our take home pay is about $6,150 a month.  This is after all the usual deductions – federal taxes, state and local taxes, FICA taxes, pension contributions, TSP (Thrift Savings Plan) contributions, health insurance, life insurance, CFC (charity) contributions, and HSA (Health Savings Account) contributions.  Wow, is there anything I missed?

Most of our expenses are charged to reward credit cards and paid off in full each month.  You name it, we charge it.  There is nothing unusual about our monthly spending so I won’t list it.  We spend about 5K a month.  This seems high since we don’t have a mortgage or car payment.   I just started tracking our spending using Mint.com to find out exactly where the money goes.

Annual savings (2012):

We were able to max out all tax advantaged savings opportunities in 2012.  This year we are eligible for catch-up contributions and plan on increasing our contributions.

• $17,000 in TSP (+ 5% match)
• $10,000 in Roth IRAs
• $1,200 in 529s
• $6,250 in HSA ($1,500 from insurer)

Assets:

• $780,000 in Retirement accounts (Rollover IRAs, Roth IRAs, TSP)
• $19,000 in HSA
• $40,000 in 529 plans
• $173,000 in Credit Union savings account (emergency fund, new car, home improvements, additional college savings) 
• $285,000 house value 

Liabilities:

• None

Net Worth: 

• $1,297,000

What are the current financial issues you're facing?

Saving for college.  We plan to pay most of our children’s college tuition.  I’ll encourage my kids to attend in-state schools to keep costs reasonable.  I want my kids to be financially vested in their college career.  I’d love to hear any suggestions you may have.  I’ve thought about agreeing to pay all expenses as long as they maintain a 3.0 GPA.

We’ll need to replace our oldest car soon and we have a few home improvement projects we need to complete.

Continue to save for retirement.  Now that we are eligible for catch-up contributions we will be contributing $36,000 a year between the TSP and Roth IRAs.

Move all our IRA’s to Vanguard to take advantage of low-cost index funds.

What are your plans for the future?

My dream would be to retire from full-time work at age 56.  This is the earliest I would be able to start receiving a federal pension (although it would be reduced).  This would be a small pension – about 1K a month.  I would then join my wife working part time (16 - 20 hours a week) and we would both fully retire at 62.  I’ll also get a small pension from a previous employer when I turn 65.

Realistically, I expect to be working until I’m 62.

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

Live within your means.  Collect memories not stuff - it’s better for the environment and your finances.

Comments

[Luis]

I can see you retiring at 56. How will your asset allocation change as you near part and then full retirement?

[JP]

I would focus on cutting down expenses. You could probably retire now if your expenses were only $3k/month.

$5k a month does seem unusual(ly high!) to me, especially with no mortgage.

[elb]

I would cut spending a bit, and back off the tax-advantaged plans until you have a little more liquid ($1m is either home equity or tax-advantaged plans, and those are tough to get to).

It would not be inappropriate to save cash for 7 years, as you'll get plenty of growth from your retirement funds in that time. This should be your "bridge" fund, to get you from 56 to 59.5 and then again from 59.5 to Medicare... you could probably get a good quarter-million in there in 7 years.

[Mrs. Pop @ Planting Our Pennies]

"We plan to pay most of our children’s college tuition... I want my kids to be financially vested in their college career."
These two sentences seem at odds with one another. If you want your kids to be financially vested in college, why not have them shoulder most of the burden. Or tell them a fixed dollar amount that you are willing to contribute and the stipulations behind it. Then they need to either go to a school cheaper than that or make up the difference.

[Joe]

Thanks to everybody for the responses.

@Luis

I recently moved all my IRA's to Vanguard. I follow jlcollinsnh blog and currently have this allocation -

60% = VTSAX Total Stock Market Index Fund.

20% = VBTLX Total Bond Market Index Fund.

20% = VGSLX Index Fund that invests in REITs (Real Estate Investment Trusts).

My TSP account is invested in the 2020 Lifecycle Fund.

I was planning to keep a similar allocation in early retirement. My expenses should be lower at 56 and I was hoping the pension and part time work would cover living expenses.

[Lance at Money Life and More]

As far as college goes I would not pay the whole way for your kids... why? Incentives!

My parents paid half for my college and it gave me more incentive to work harder to do well because I was paying for it. It also gave me incentive to look for scholarships to reduce my burden. If my parents paid for it all I might not have tried so hard for the.scholarships. I graduated debt free and I think my parents paying only half was a great decision.

[Joe (RV)]

@Mrs Pop

When I went to college my parents let me choose a local private college that cost about three times the local public college. I paid for books and commuting expenses but they never talked about tuition costs. When I graduated my Dad handed me bank documents for $10,000 in loans that I was responsible for. I wish he would have provided a little more guidance in my college selection.

I want my kids to be aware of the costs. I like your idea of offering a fixed dollar amount. That way they would be motivated to graduate in 4 years.

[MrAtoZ]

AS someone in the same location, age and financial status, I can say you're doing fine! Specifically, regarding the issue of college costs, if you have two teenagers, $40k in 529s, and are saving $1.2k per year in those 529s, your kids will have to invest in their college expenses (this assumes that only a portion fo the $173k in undedicated savings would also go to college). Even going in state, to Maryland-College Park, is a minimum $80k per child expenditure unless they have some merit scholarship awaiting them.

[Jane]

Wow, you have done very well! I think your target retirement age is very reasonable, given how you've done. We are a little older than you (54) have a lower net worth and lower income but also have monthly expenses less than half of yours, so it makes up for some of that difference.

This is the single biggest thing we've done since we decided on a target retirement age for my husband of 60 (I do not work outside the home): we track our spending very closely and have now for two years. After the first year the benefit became very clear, as I knew exactly what we'd spent in a year's time in each category. At the time he retires we'll have eight years of this data and we will have a very clear idea of what we will need in income in retirement, which is essential for anyone planning to take that plunge, especially retiring early as you wish to do.

You might want to do a little creative thinking about the joint desires to pay for your childrens' college and also have then be "financially vested". The fact is that your children undoubtedly are aware by now that you have some money set aside (even if they don't know the exact amount) and are expecting you to pay for college. If you change the rules mid-stream by springing the "you pay half" you'll likely get a lot of resentment from them...after all, they know you can afford it and I expect you've signalled that you are planning to pay for it. I suggest you and your wife get together and decide on some financial incentives for your children, something like setting aside a certain amount of money for each semester above 3.0 that they will receive to add to their downpayment when they are someday ready to buy a house. Since you want to "encourage" them to attend in-state schools, add a little more to that if they choose a school you prefer. The fact is, when you set aside money enough to pay all of a child's college costs and then rear them to expect that you will do so, you have to think outside the box to get them to feel any financial ownership for how they do when they do get to college.

I feel kind of cheeky offering you advice as I believe you've done very well up to now, but I do think tracking expenses until you know very well where all the money is going, and finding a way to incentivize kids to do well in college when they've been raised to believe that it will be a free enterprise for them are all the tweaking I can see that might be of help.

[Old Limey]

Personally I think that you can do a lot better than keeping $173,000 in a Credit Union savings account. I keep about $25K and my wife keeps about $15K in our C.U. savings accounts.

You may want to take a look at a pair of PIMCO bond funds. PIMIX is Pimco's Institutional Income fund, with a $100K initial investment and PONDX is another version of the same funds that has no transaction fee and a $2,500 initial investment. They pay a monthly dividend of about 5.4%. For the last 12 months the total yield was 22.13% but that was a very good period for bond funds. Their recent performance has been fairly flat but the monthly dividend is the same. The funds have identical asset values but PIMIX pays a slightly higher monthly dividend than PONDX.

We have about $500K in PIMIX and $50K in PONDX, both funds are in our IRAs so that the interest is tax deferred, however we are of the age where we have to make mandatory required distributions every year which this year will be about $165K and taxable.

We each receive a monthly pension and SS check and no longer have any need for an emergency fund but our trust fund is invested 100% in municipal bonds that throw off $167,000 of tax exempt interest every year (4.84% average yield) that I currently reinvest, though in the unlikely event we needed more cash we could always use some of that.

[Sarah]

RV, if you've raised your kids right, they shouldn't need a financial incentive to be invested in college. I always get depressed reading these people who simply cannot fathom that their kids might relish the opportunity to learn in college, or at least would be responsible enough not to goof off irretrievably. If one's kids are that dull and lazy, I'm not sure what the point is of sending them to college at all. (If nothing else moves you, consider this: the kids they will be competing with will NOT be distracted by significant jobs or even big loans.) Let them have a work-study job to earn some pocket money; that's plenty.

[Sarah]

(P.S. I would target some cash specifically to deal with potential furloughs this year.)

[Jane]

Sarah, I think the issue we who've responded are trying to address re RV's children and college is that he wishes for them to feel "financially vested" in something that HE is paying for. The suggestions are about that. No one is suggesting that his children are "dull and lazy", to use your words.

What I got from his mention of college/finances is that he would like for his children to become as adept with good money management as he and his wife apparently are, and a part of that would be understanding the expense of college and the importance of making associated spending choices wisely. Unfortunately, there's just less NATURAL incentive to spend carefully when it's someone else's money (witness our government's budget).

[JM]

I would love to know how you spend $5k a month with no mortgage, car payments, private school, or daycare.

[Retire By 40]

Can you retire at 56 with the 5k/month expense? That seems quite high. If you can cut your expense a bit, retiring part time at 56 is definitely doable.
You probably should wait until your kids go off to college to see what kind of expense they will have as well. They can always get loans though.
You are doing GREAT comparing to other people your age so congratulation.

[Kay]

5K in spending with no mortgage is a lot! Teenagers eat a lot, but THAT MUCH? :)

If you're going to pay for tuition and room/board for your teenagers in college, then fine. I'd put some restrictions on it (must live in a residence hall or keep apartment living costs lower than that, find an internship every summer that pays, etc) and then ask your children to pay their own book and "fun" costs. Usually on-campus jobs will provide enough cash for this while constantly reminding your kids WHY they're in college - so they don't have to work these crappy jobs forever!

Other than that, awesome job on the savings plan and I hope you're able to ease yourself into retirement as you'd like to... that is really neat. I'm definitely aspiring to your financial success!

[jim]

RV is doing very well.

Between your large retirement savings, social security and your federal pension you and your wife should be pretty sell setup for retirement.

I do think it helps for kids to have some financial stake in their college education. Theres a study that shows kids who get lots of parental aid end up with lower GPAs versus kids who have get little help.
You might offer your kids a certain amount of money plus a loan. And then tie any aid to requirements that they maintain certain GPA. THen if you want you can also forgive the loans after they graduate. Don't assume you won't get financial aid especially if both kids are in college at the same time, so certainly file the FAFSA when its time. You have a healthy income so you may not get any, but at expensive schools you're more likely to qualify.

[Old Limey]

You mentioned a desire to move investments to Vanguard to take advantage of their low annual fee index funds. Rather than focus on the annual expense fee which is no indicator whatsoever of a fund's future return, I always focus on two parameters for the period I am ranking. They are:

1) Annual percentage return - ANN
2) Maximum Drawdown during the ranking period - MDD

For the Vanguard family of funds the two funds with the best risk adjusted returns over the last 12 months were:

VWEHX - Hi Yield Corporate Bond Fund, ANN=11.41% -- MDD= -2.34%
VWINX - Wellesley Income Fund, ANN=10.08% -- MDD= -2.31%

I think you will agree that PIMIX beat both of these funds rather handily.

PIMIX - Pimco Institutional Income Fund, ANN=22.13% -- MDD= -0.53%

MDD is a great indicator of a fund's volatility and represents the greatest percentage loss you would have realized if during the period being examined you bought at its highest value and then sold it at its subsequent lowest value.

[Joe (RV)]

Thanks again for taking the time to comment.

@Old Limey

I will look into PIMCO. I agree 176K in a Credit Union is probably not the best use of the money.

@Jane

You expressed my thoghts perfectly. My kids are hard workers but when I think back to my past I wish my parents had given me a little more direction. My wife and I paln to take an active role when they choose a college.

@JM

I started using Mint.com but lost some of the data when my bank changed the logon process. I ended up with duplicate accounts and had to delete everything. I hope to post January and February numbers tonight. One large expense I had in January was $600 for 160 gallons of heating fuel.

[jim]

Sarah, "if you've raised your kids right, they shouldn't need a financial incentive"

Wrong. Its not about poor parenting. Its not about lazy and dull kids. Frankly that response of yours comes across as insulting. Having a financial stake in something naturally motivates someone. Thats just human nature. Of course everyone is different and it depends on the kid. But its not bad parenting or lazy kids that leads people to think that the child should have some financial stake in their education. And even if kids aren't super motivated to learn thats not a general failing. Its not as if every 18 year old relishes the prospect of endless hours reading dry college textbooks and listening to lectures from academics. Geez.

Maybe you're someone who loved college and your parents gave you a free ride. I can see how you might react negatively to the idea that such a situation might make you lazy. But if you don't know people who end up putting in a little less work because they have that free ride then you've not looked around very hard.

[JM]

@RV: Heating a house is really expensive, true. We cut costs substantially here in New England by keeping the main heating temperature pretty low (57, which is probably too low for most people, but you can still save a bundle even if you need it in the low 60s), and use a cheap electric space heater (cost 2 for $30 and they're still going strong) for the places we are at the most. We also wear sweatshirts and fleece jackets while we're around the house. That raises our electricity bill by a few dollars per month, but I estimate we're saving hundred dollars per year in natural gas bills annually this way. Oil prices are even more absurd than natural gas prices, which is why we converted from oil to gas when we bought our house (the oil tank needed a complete replacement anyway, which would have cost a ton on its own, so we decided to bite the bullet and convert instead).

[Luke]

FYI, the contribution limit for 401k (TSP in your case) is now $17.5k instead of $17k. I would look to tweak your contributions up slightly for that extra $500.

[Sarah]

@Jim: My parents didn't give me a free ride. I went to a very good, very expensive school largely on scholarships--my parents could barely afford the small parental contribution the college asked for. I worked myself for money to cover my personal expenses (outside of room and board, covered by the college), which certainly would have limited any tendency to party I had, since I couldn't have paid for enough booze to get drunk on! I couldn't even go home on some of the longer breaks because we couldn't afford the plane fare. My sole "financial incentive" was the couple of thousand a year in Staffords the college asked me to take out.

The point is: I didn't need anyone to tell me I had a fantastic opportunity, both in terms of career and--more importantly--in terms of learning. Did I (and the kids around me) do stupid, irresponsible things from time to time? Sure. I was a teenager/young adult. That's what teenagers do. But if your kids aren't adequately motivated by either the career opportunity or the learning opportunity to basically stay the course in college, then I question whether they're ready to go at all. (Some aren't ready at 18. And some just aren't the type.) I get the impression that many of the "financial incentive" crowd didn't really enjoy college, didn't get anything out of it except a credential, and can't fathom why anyone else would. That's pretty sad.

Finally, speaking strictly from a career perspective, the idea of forcing your kid to go to a lesser school when you could legitimately afford a better one or to spend huge amounts of time working to cover tuition is practically suicidal. The competition for kids entering the workforce right now is BRUTAL. Why would you do anything to make it harder for your kids to succeed? The middle-middle and lower-middle classes are going away in this country, folks. It's climb or fall. Your kids are not going to be able to parlay just any college degree into a reasonably secure office job. That's not the way it should be, but that's the way it is.

[Sarah]

Oh, on a completely different subject: just curious, are you allowed to contribute to Roth IRAs when you're enrolled in an employer-sponsored retirement plan as well? It seems like you're saying you contributed the max to both last year. I was under the impression you couldn't do both. Or is the TSP exempted from that?

[Apex]

@Sarah,

Yes you can do both. What you cannot do is contribute to a tax deductible IRA and an employer sponsored plan. Since the Roth is not tax deductible you can contribute to both, provided you meet the income restrictions for a Roth IRA.

As to your comments on a "lesser" school be suicidal for career prospects, perhaps you didn't follow the comments on FMF's post from a couple days ago about college choices. I posted a research paper there that disputes that claim. Lesser is relative so it's unclear how much lesser could have an impact but good public schools at 1/3 the tuition for students who are good enough to be accepted at an elite school but chose not to go had zero impact on future prospects and future earnings.

The idea of an elite college being the ticket is very over-rated. What is far more important is the field of study, not the pedigree of the university.

[Joe (RV)]

@Sarah,

I re-read your posts several times. I think you might have misunderstood me. I don't want to give them a financial incentive to attend college, I want them to have some skin in the game. I want them to do what you did and what I did. Get a part time job, get a scholarship, take out a loan, have fun but remember you are going to college so that you can get a job. And I'm talking a small financial responsibility. If all goes smoothly I could pay off any loans they took out, as Jim suggests.

[Apex]

@Joe(RV),

I think that shows some real wisdom on your part. When you are young you don't have much so it doesn't take too much to have some skin in the game that matters to you. Having skin in the game can make all the difference. Some people maybe don't need it but for most people it's a really good motivator to have some skin in the game.

[jim]

Sara,

" I get the impression that many of the "financial incentive" crowd didn't really enjoy college, didn't get anything out of it except a credential, and can't fathom why anyone else would. That's pretty sad."

I'm not sure were you get such ideas. Thats not my opinion or situation nor my wifes. We both agree kids should have to contribute to their college.

You did have financial incentive. You had skin in the game. You had the incentives we're talking about.

Wouldn't it have been easier to slack off if you had beer money and 100% free ride from your parents? Maybe not for you but I'm sure many of us know people who reacted that way. Doens't make people dull and lazy.

"Did I (and the kids around me) do stupid, irresponsible things from time to time? Sure. I was a teenager/young adult. That's what teenagers do."

Thats the kind of thing we're talking about.

We're dealing with college age people here. Give them an allowance and ites more likely to go to beer money. Give them a free ride to college and htey're more likely to use it as a 5 year vactaion to delay the real world. And yes, in some cases those kids may be better off not going to college. Requiring the kids to have their own 'skin in the game' helps them make a better choice.

Would you have squandered your college years if you had to work that hard? No, not likely. Would someone squander the 4 years if they didn't have to contribute a dime or day of work?

By the way 'stay the course' is actually more likely to happen if the kids do get more financial support from their parents. But grades are lower on average. Its easier to graduate if its a 100% full ride.

As far as lesser schools, I don't think anyone is saying look for the cheapest school possible. Lower cost schools don't equate to bad schools. Not going to an Ivy is not a death blow to your career.

What exactly do you think everyone should do? Pay 100% full rate to the most expensive private school their kids can get into or fail at being parents??

[jim]

BTW, none of what I'm saying is meant as any kind of generalization that apply's equally to everyone. I know people who got full 100% free rides via parents or aid and got 4.0's in college. I know people who used their parents money to party for 6 years. And everything in between. But in my experience and my opinion, I believe people benefit if they have some stake in the cost of college. Of course every kid is different.

[Sarah]

"Give them a free ride to college and htey're more likely to use it as a 5 year vactaion to delay the real world."

Seriously, if that's truly what you think your kid will do, then you don't think your kid is ready for college, and, frankly, you don't think much of your kid's character, either. How else can you characterize a (healthy) kid who goofs off for five years on their parents' dime BUT "lazy?"

What do I think parents should do? Well, there are plenty of people out there who simply can't afford to send their kids to the schools the kids want. That's just the way it is. But I'm a NYC professional. I see how the children of the people around me are being prepared for the career world. They're not being sent to "good enough" schools and they're not being asked to take on major financial responsibility for it, either. If I was responsible for a kid's education, you're darned right I would pay to send them to the best school of their choice that we could afford, and arrange for them to spend only minimal time working to afford it (pocket money).

But I don't think Joe(RV) and I actually disagree all that much. I was really responding to the broader rhetoric here, the constant sense I see in personal-finance blogging that students just can't be trusted to use their college time well unless their finances are at stake. The underlying sense here is that college is just a credential and the best thing to do is to game the system to get the credential as cheaply as possible, and I find that hideously depressing.

[Bill]

I would argue that a parent who will only send their kid to the "best" school of the child's choice is the one treating a college education as just a credential. They are paying in large part only for the name on the diploma and ignoring that fundamental value of the education received.

I agree with Apex completely on this matter although I didn't read his linked study in it's entirety. People are not very good at differentiating between correlation and causation. I don't mean "you people" I mean human beings in general, myself included. The human brain is very good at recognizing patterns in the data it receives, so good that it often finds patterns that aren't actually there. I'll submit that to a large extent a top level education and a successful career are only correlated but there isn't a strong causal link between the two.

Smart kids who go to top tier schools and then get good jobs don't provide any evidence that a top tier school does anything for them careerwise. You need to look at all smart kids who can go to top tier schools and compare the relative success of those who attend versus those who don't. I went to a great school, the vast majority of my peers are very successful but that doesn't, in fact it CANNOT provide any evidence that their education had an impact on their success.

It's the same idea as those lame frozen dinner commercials. "Studies show that children who sit down to eat dinner with their family are more successful in school". That is a true statement but further research has shown academic success is only correlated with sit down meals, there is no causal link at all. It turns out that the type of family who sits down for dinner is also likely to be the type of family who values and encourages education. They are more likely to be a two parent family, have higher income, be less likely to have substance abuse, etc. Sit down meals and success in school are two correlated but unrelated results of the same underlying causes.

I just can't imagine that paying for an overpriced overvalued education (if in their case that is true) for my kid is going to be a net positive for them in life. If nothing else it's a terrible lesson on decision making. I honestly believe that in the future smart employers will look on "some" college degrees as a negative for applicants. If the person showed poor decision making in overspending for a degree with little value why would you want them as an employee?

[Old Limey]

This topic seems to have drifted back into the question of what kind of career and what kind of degree a young person should focus on if he or she wants to have a successful and financially profitable life. The case I would like to make is that history shows us that there's an awful lot of Luck involved and since few people are good at forcasting future events it's often very hard for a young person to make a very wise choice at an early age when picking out a career.

I'm 78 now and here's my story.
I grew up during WWII in England. On one occasion when I was 6 or 7 years old I was in our garden watching over my young sister when a German FW 190 fighter bomber zoomed over our house at an alitude of about 100ft. I could see the pilot very clearly and then I saw two bombs drop from the plane followed by large explosions as they demolished a large hotel and a big department store nearby, causing a large loss of life. Just as the FW 190 disappeared from view two of our fighter planes came over our house in hot pursuit and shot down the FW 190 which landed in the ocean about a mile away. That incident started my interest in aircraft and that interest grew greatly throughout the war, particularly during the Battle of Britain where the RAF saved the day for us and made sure that we were not invaded.

In 1950 after I left school I decided to become an aircraft apprentice and hopefully one day be able to help design aeroplanes. So that's exactly what I did and as an apprentice I also worked towards a degree in mechanical engineering that was made available to me by my employer. In 1956 I married, and my wife and I moved to Canada where I easily got a great job as a structural engineer and our ocean passage paid for. Later on I mailed out 3 applications and quickly had 3 job offers. We then moved to California where I continued in my career, obtained my MS degree, again courtesy of my employer, finally retiring in 1992, and never having a day's unemployment or having to pay any tuition for my education. My only cost was for textbooks

The one big fact that I didn't realize until much later that enabled me to easily find great jobs and get quite a few promotions along the way was "The Cold War". This lasted from 1947 until 1991 and created a huge demand for engineers, particularly in the fields of aircraft, missiles, and satellite programs. Thus my timing was perfect and my early choice for my education and career was also perfect. Bottom line - I was very lucky that I started down the right road and was at just the right age to retire when my employer offered a lucrative incentive program to retire in September 1992. I was planning on retiring about 6 months later in order to bump up my retirement pension another notch but instead I took the company's generous offer which enabled me to retire debt free.

[Luis]

Paying for your child's college or letting them do it is dependent on parent's income, assets, and any investments (such as 529's). For those who did not have the income to do nothing beyond funding their own retirement are largely right to go thru the student loan process by way of FAFSA (Mrs Pop's situation?). Those like RV who have higher incomes and a large 529 account makes no sense to pursue a "fixed dollar" scheme. Likely, the child would not qualify for FAFSA and then be stuck with the ugly and nasty private student loans.

If you decide to do it RV, then the morally right thing for you to do would be not to claim your teen for withholding and then take the tax ramifications with it. I'm not sure what you would do then with the 40k already in your 529 account. I assume it would be a legal mess.

I second Jane's advice on your particular situation and make up financial incentives outside tuition.

[RH]

@Apex

I believe that you can use a deductible tIRA even if you have an employer sponsored plan. The income limits are just lower than they are for a Roth IRA.

[jim]

Wow! I just think you guys are incredibly self-absorbed morons. Seriously!!!! You've got that much saved for yourselves and yet you are more than willing to throw your kids to the wind??????? WOW!

[Jane]

I'd just like to make the point that of the gifts that parents can bestow on their children, a college education (top notch or otherwise) is hardly the most important. Wasn't it Limey who made the excellent point a few days ago about the importance of the parents tending to the health of their own marriage? To my mind this is the single biggest benefit we gave our sons, the security of an intact family and the support of its constant commitment. I know that veers far off the track of the subject but from where I sit (all children grown and self-supporting, with young families of their own) I do think such things contribute more to future success than we are comfortable admitting sometimes.

I am always bemused to discover that I have been arguing (mildly) parenting advice with someone who later will write a sentence like "If I was responsible for a kid's education..." And there you have it. For one of us, the opinion is theoretical, for the other it is not. Everything looks a little different to you after you've had the experience, good AND bad.

[Apex]

@RH,

You are entirely correct. I overlooked that. Thanks for pointing that out.

[Bill]

@Jane

I agree with you completely on the value of a stable two parent home. The research done on the subject is definitive on it's value. I think you hit the nail on the head by identifying it as a more important factor in determining success of a child than college education. It's may not be politically correct but it's true.

"Research indicates that, on average, children who grow up in families with both their biological
parents in a low-conflict marriage are better off in a number of ways than children who grow up
in single-, step- or cohabiting-parent households. Compared to children who are raised by their
married parents, children in other family types are more likely to achieve lower levels of
education, to become teen parents, and to experience health, behavior, and mental health
problems. And children in single- and cohabiting-parent families are more likely to be poor.
This being said, most children not living with married, biological parents grow up without
serious problems." - 2003 Mary Parke CLASP

[Bill]

@jim

Equating the acknowledgement that education does not have infinite value and the it is prudent to make a cost benefit analysis of various educational options and throwing "your kids to the wind" is not a credible statement. Your insinuation that these decisions stem from self interest or greediness is baseless and appealing to ridicule doesn't make for a good debate.

Consider the following three options. We can argue about the pricing but I'm using the numbers that have been thrown around recently

1) Pay $240,000 for your child's college education at an elite private university.

2) Pay $80,000 for your child's college education at quality state university and give them $160,000 as a down payment on a home after they graduate and settle somewhere.

3) Pay $80,000 for K-12 education at a private school. Pay $80,000 for your child's college education at quality state university. Give them $80,000 as a down payment on a home after they graduate and settle somewhere.

I added the third because it is the course I am most likely to take with my own children. I find many arguments made toward the limitless value of college education disingenuous for the simple fact that if they were true they should apply even more so to primary education. The relative difference between the average public and private high school is far greater than that between public and private universities. Many (not all) people who argue for sending their kid to "whatever school they want" for college ignore the fact that this implies they should not be sending their child to public school.

I just don't believe that option 1 is the most efficient use of my resources. I think option 2 and option 3 will give them a better chance at a successful life, option 3 being my personal choice. Let's make honest arguments about the relative benefits of each option and not pretend that it's option 1 versus "throwing your kids to the wind."

[Old Limey]

It's interesting that everyone seems of the firm opinion that each of their offspring are worthy and deserving of a college education. My experience has been different from that.

I encouraged my first child, a daughter to enroll at our local State University and pursue a degree in biology or something similar since that was her interest. It didn't take very long for her to find out that she really wasn't college material. She could have been if she wanted to put the time into her studies but that would have interrupted her social life too much. The next thing I heard from her that she was moving to Texas to become a flight attendant, which she enjoyed for several years. After quitting that she trained to be a dental assistant, that also worked for several years. Finally, through her younger sister she met a local attorney, worked in his office as a paralegal for a number of years before moving up to being office manager, and today she is still working for the attorney but telecommuting from Maui and handling all of his billing. The big benefit is that this attorney gave his senior employees a non-contributory SEP-IRA which I manage for her, and at age 54, after all these years its value is now $1.82M.

My second daughter was very different. Her teachers sometime made comments on her report card such as, "Happiness would be a classroom full of Vanessa's. She went straight to the local State University after highschool and had just one hiccup. I persuaded her to become an engineer but after the first engineering class she decided that wasn't for her, and switched to Business & Marketing with a minor in Mathematics. She graduated easily and soon found a position managing a high rise office building. During the course of her work she came into contact with the same attorney mentioned above. After a short courtship they got married but her attorney husband insisted on a stay at home wife so she naturally complied with his wishes. The marriage broke up after 18 years, brought on by the very sad death of her 8 year old daughter from a brain tumor. The daughter was so exceptional that I used to pick her up from school once/week and tutor her to where she was working 3 grades ahead of the class. My daughter is in a new relationship and came out of the divorce with a settlement, now worth $2.92M, that I also manage for her.

Now we come to the youngest, my son. I don't remember him ever bringing a book home from school, he always said that he did his homework in study hall and his grades were terrible. He was however a star athlete in football and baseball. He had no chance of being accepted by our local university and the school advisor recommended that he switch to the school district Trade school and take classes in automotive repair, which he did. Upon graduation he became an apprentice at a Ford dealership. Pretty soon he became obsessed with music and formed a Heavy Metal Rock & Roll band where he was the lead singer. The band moved to Los Angeles and played at several clubs while he supported himself by working for a company that repaired hi-tech vacuum pumps. After a couple of years the band folded because it just wasn't talented enough. That's when he switched from repairing pumps to selling the same hi-tech pumps. After moving from one company to another a few times he ended up working for a German/Swiss company that makes not only the pumps but various related scientific instruments. After becoming the company's top salesman, and now 49, he was recently promoted to being Western Regional Sales Manager, travels a lot in the USA and Europe, and is now making $160K/year.

[Steve]

I think semi-retiring at 56 is a great idea, as long as you work toward getting a good rate/set-up between now and then I think it could become something you'd want to continue as long as healthy, my 70 yo dad loves going to work 2 days/wk just to be able to complain about how poorly everyone is doing trying to replace him there...

I plan to offer to pay for my 3 children's tuition to the large state university. Its only 10 minutes away, so they could feel free to stay at home and eat out of the fridge or find a place if they pay for it themselves. I'm the last person to think college is a birthright (more & more like a scam these days), but want them to be able to afford the opportunity if their path requires it (its not like 25 years ago when I could easily pay for it myself by working summers and a little part-time, like healthcare its ballooned beyond reason). This is just something I'd like to do for them, I don't feel I 'have' to, any person that truly "deserves" in any real way any particular higher education is offered a full-ride anyway.

[Chris]

Off topic but I just wanted to say how much I enjoy reading Old Limey's posts. Always interesting and informative, and of course includes sound financial principles and advice. I also like the level of detail he provides - adds some nice "color commentary". Thank you Old Limey! If we can all do half as well in our financial lives as you have, we will be sitting pretty. Thanks again.

[Luis]

@ Bill

I have to throw in my argument against your plans for your children with option 3. Although I agree with you that there is more value for a private k-12 education over private college, I do feel the need to alert you that the value is placed on students entire private school experience, not just high school.

Private schools instill a love of learning from the outset and they brake barriers to learning by finding out how your child learns best and then they customize teaching to suit their individual needs and strengths in small class sizes. In addition school counselors play a large role while developing personal relationships with every child in the school.

The child's strengths are determined prior to matriculation through required IQ testing (Weichler), a skills assessment, and interview. Not everyone can get into private school, you have to be accepted. Your best chance for enrolling your child into school is at the Kindergarten level where all available slots are initially available. Much of the available slots in high school are given to star athletes with scholarships to help the school win regional and state championships.

With your income (@ bill) I would personally be sending my kids to private school and then guide them to a state school for college which is what most students do in our community here once they finish school. The total for k-12 education is 300k for one child and 600k for two and so on so forth.

[jim]

Sarah,

I'll just ask that you not assume people are poor parents or that they make choices based on the assumption their kids will be lazy. That is fair to ask isn't it? Lets not make it about me and my parenting and my lazy kids? Is that ok for you to do?

You're the one that came out with the statement about raising your kids right. Thats an unfair assumption to conclude people are disagreeing with you based on their poor parenting, and as I said I find it insulting. Wouldn't you be insulted if I said your decision must be based on not raising your kids right??

If you don't disagree with Joe then I probably don't really disagree with you either.

For the record the bit about 5 year vacation was just exaggeration of the worst case scenario, not my parenting plan. Did you really think I honestly thought my kid would end up like that? If you did then I'd ask you to give people some benefit of the doubt and not take things so literally.

[jim]

Note that was a different 'jim' who made the 'moron' comment, not me.

[jim]

Hypothetical:

Your family friend has a son named Bob going to college. He has a high GPA, high SAT and got into UC Berkeley and Georgetown. Both are exactly equally ranked #21 nationally (for argument lets assume thats an accurate ranking). Bobs parents are fairly well off so they have to pay the full bill. These are both great schools and either will be an equal challenge. Your friends live in California. Bob visits both campuses and falls in love with Georgetown for essentially superficial reasons.

Your friends promised to pay for Bob's education 100% and told him so when he was 8 years old. Cost difference to Bob is $0.
Bob chooses Georgetown because he loves it and his parents pay $120,000 extra total for the 4 years.

What if Bob had been told that he has to pay 25% of his college costs? Or what if Bobs parents said they'd pay "up to $25k a year" and Bob would have to pay anything over that?

Do we all give a 17 year old the benefit of the doubt that they'd make the 'best choice' of college? I sure wasn't mature and knowledgeable enough at that age to do so. I don't even assume enough to think I can make the 'best choice' of college today, given what I know as an adult and my own hindsight.

[08graduate]

@jim

Two counter-hypotheticals:

Suppose the same friends live in Arkansas, and Bob gets into Fayetteville and Georgetown. He's one of the best applicants of the year to U of A, so they offer him a full merit scholarship.

A. The friends earn $30K/year, have nothing in the bank, and simply can't afford to help Bob through college. Georgetown pays 100% of Bob's demonstrated need, and so both schools are effectively free to Bob. He's not a fool, so he goes to Georgetown.

B. The friends earn $300K/year and have a couple million in the bank. However, they're unwilling to pay more than $25K per year for Bob's college education on principle. Georgetown financial aid sure isn't giving Bob a dime. Now Bob can go $100K+ in debt for Georgetown - if anyone will even lend him that much - or go to Fayetteville for free. He probably goes to Fayetteville.

Now, maybe he goes on to live the same life either way. We argued that at length recently, and I doubt there's anything new to be said. I just think it's important to note that the parents in (B), even while nominally contributing more to Bob's education, have left him with fewer options. The sticker prices are fictional.

I think good parents can come down on all sides of this question, but I am tremendously grateful that my parents didn't leave me in the lurch of (B). On the spot at age 17, I certainly would have gone to State U; with hindsight, there's no question I would choose to incur the debt for the school I actually attended.

[Old Limey]

In the SF Bay Area there is no need to send your kids to private schools if you are able to afford to live in the particular school districts that have the highest ratings. The San Jose News publishes the rankings and test scores of all the public schools for every school district in the counties that the paper serves, which are also the counties where most of the hi-tech companies are located.

Why not put your money into a really nice home in a top school district rather than spend it on private elementary, middle, and high schools. This is particularly beneficial if you have several children. Along with the better home comes many other benefits and these days it should be obvious to most people what the other benefits are.

[Luis]

@ Old Limey

Many people do choose nice home in a particular school district over using said resources for private school. But when money is no object and you want the very best for your child then a private school can be the best choice in your area. Just for fun I checked the average SAT scores at the best public high school in San Francisco and I picked Lowell High School (second best public school in the US). Math 640, Reading and Writing both were 590. The scores at the private school in just my area yielded SAT scores in the 600's for all three sections of the test. Lowell is exceptional but we must know that as a magnet school you still have to apply and get accepted to enroll. As you can see private schools are great. They have better resources and lower faculty to student ratios. The main disadvantage they commonly have is a lack of diversity.

[Bill]

@jim Hah, the mysterious 2nd jim certainly didn't sound like you.

Luis, I completely agree with you about not only looking into private high schools but K-12. On the other hand the private education I was referencing was a different class of private education than what you are referring to. I live about 5 minutes from a nationally renowned private boarding school that costs $47k per year, that's not the place I'd send my kids. I was using as a potential example another small private Christian academy. K-12 total cost at 2013 prices is $75k. They won't have the resources of a gold standard private school but I don't think that's really necessary for basic education. I'm looking for small class size, dedicated teachers, and the positive selection bias you get in student body by charging a moderate tuition. I don't think I need to spend $30k a year to get that.