Retirement vs College – An on-going battle

As the years go by the various pundits, periodicals, newspapers, talking heads, radio personalities and so forth often posed the question: Should I first save for my kid’s education or should I save for my own retirement? A decade or two ago the answer was definitively, COLLEGE. Get the kiddos through college first then begin to save for retirement. Lately, and certainly within the most recent decade the answer to the question has become a definitive, RETIREMENT. Why the change? Well, there is a variety of reasons. College has become so costly the idea of setting aside money to be given away forever* in lieu of a diploma versus setting it aside for one’s own retirement is daunting. Most parents do not believe they can successfully do both. Truth be told, most cannot. (I am speaking from experience here. I put my three daughters through 4-year institutions, two of them attending small private colleges which are at the top of the food chain for cost). So they throw their hands up in the air and tell the kids they are going to have to work, borrow, take out a plethora of student debt, take 5 or 6 years to complete a 4-year degree and so on. Here is why: let’s say your parents decide to help you with paying for college and they begin to set aside money for that endeavor when you are very young, and let’s say they manage to set aside $200,000 for your 4-year degree. This is no small task considering you may have brothers or sisters who want the same thing for themselves. You also live in a house or an apartment with a monthly payment. There are payments for utilities, food, cars, gas, insurances, entertainment, travel, retirement savings et al. I think you can begin to see the severity of this task; supporting and paying for college while trying to build a retirement nest egg for you and the misses in the same breath.

I do a fair number of speaking engagements in a given year and love to ask my audience lots of questions. One of my favorite questions is, “how would you define wealth”? I get a large variety of answers on this one ranging from, “all my bills are paid”, to “a stress-free life”, to “money in the bank” to “no debt” and so forth. Here is the answer I believe to be true. “Wealth is the Use and Enjoyment of money”. Think about that for a second. What is the value of a dollar you can’t get your hands on? So, what about placing money in a 529 plan as your college funding mechanism. Once the money has been earned it gets deposited into an account you will never use or enjoy, only to be fully transferred to an educational institution in lieu of a diploma. This defies the definition of wealth. No use or enjoyment. I refer to this as expense funding, not wealth creation. I don’t believe wealthy people set aside money they use for no other purpose to then simply transfer it away and say goodbye to it forever. I believe they put their resources to work at every turn, asking those dollars to do as much for them as they possibly can and then figure out how to accommodate expenses as they come along. Setting aside money, then giving it away to a college creates what is known as a Lost Opportunity Cost. This is what the money could have done for the family had they been able to keep it. The lost opportunity cost on $200,000 (the cost of a four-year degree at most colleges) multiplied by the number of years the family will be without the money (30) at some nominal rate of return (say 6.00%) is enormous. In fact, it would be $1,148,698, $200,000 of cash and a lost opportunity cost on that cash of $948,698. If there is more than one child going to college it would be double or triple that amount or more.
I was fortunate to be introduced to a person who showed me a strategy on how to accommodate both of these challenges and effectively pay for college for my kids without spending any money. I told him if he could do that for me and my family, I wasn’t even going to ask what it was. He showed me how to save money in a place I could use for college without slowing down or interrupting the growth or compounding of that money, use it to buy real property, rent out the rooms to other college students and use their rent payments to pay for my kids college expenses. The benefits to the strategy are too numerous to mention in this article but suffice it to say, I was able to pay for college for my three kids using OPM (other people’s money) then ultimately sell the real property after they had all graduated and recover the money and put it back where I originally took it from once the real estate was sold. I fully paid for their college educations and fully recovered the cost of those 12 years. I can now use those same dollars a second time for my own retirement. By asking a dollar to do more than just one thing I was able to accommodate my kid’s educational needs as well as my own retirement needs.

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– Paul Luchau, Partner @ The Momentous Group / Qualifying & Life Member – MDRT