Retire before college expenses hit?

[CUinFl]

My DW and I need some help thinking through a retirement scenario.

Currently we are planning to retire before our two kids begin college as we do not want to spend our last working years collecting a paycheck that we will need to turn around and give to the yet-to-be-selected colleges for tuition. We have ~ a 10 yr through 16 year horizon on this, and want to position our kids to have access as many scholarships, grants or loans as they can receive. Has anyone seen strategies helping people think through this?

Here is our scenario....

First, our goal would be to retire in the tax year our first child finishes their Sophomore year of High School as I believe college tuition assistance reviews two years of taxable income when determining grants, loans and scholarships as well as how much tuition a child's parents can afford.

Second, seeing that we will retire before 55, in addition to our traditional retirement plans, I am deferring some of my compensation (pre-tax) to afford us some flexibility between when we retire and when I turn 59.5. This pre-tax comp deferral is not beholden to the pre-59.5 yr withdrawal penalties and, when we begin to withdraw funds, we are trying to minimize deferred comp income during our kids college years.

Third, we are trying to structure our mortgage payment to continue until our 2nd child finishes their senior year in college. While we are accelerating mortgage payments to align our final payment to when our 2nd child finishes their senior year of college (~16 yrs away), with current interest rate of 3.625, we do not feel paying it down faster is prudent as we believe having a mortgage payment will help offset income and position our children for grants, loans or scholarships.

Fourth, we do contribute ~$6k annually to a 529 for each child. We have considered stopping these contributions completely and reallocating any contributions to our retirement, but have not moved in that direction yet.

With all that said, I believe colleges determine grants, loans, etc by looking at income, expenses (e.g. Mortgage) and current bank assets, but do not look at retirement plans.

Any experts in this area who can point us in the right direction?

Thanks....

[daylatedollarshort]

I checked out books from the library but really I don't think they had anything new compared to what you can find at Forbes on arranging your finances to qualify for financial aid -

2013 Guide To FAFSA, CSS Profile, Expected Family Contribution (EFC) And College Aid - Forbes

[jon-nyc]

Another source would be the forums at college confidential.


I'm no expert in this topic, and have never researched it. However I think you might be mistaken about them taking your mortgage payment into account. My understanding is that FAFSA determines how much you should be able to contribute based on income and assets, NOT based on your family budget. In fact, an acquaintance of mine discussed paying down his mortgage as a strategy, as they look at financial assets but not home equity.



I'll repeat, that could be incorrect, as I never researched this, just passing on something I heard elsewhere.

[ProGolferWannabe]

My perspective is that you really do not want to plan to fund your kids' education based upon the "largesse" of others. The availability of federal and/or institutional based aid may change between now and the time your kids get to college; even with aid, it frequently is insufficient to fully fund a 4 year undergraduate degree. Seems to me if funding your kids' education is a priority (and for some people it is not) that it makes sense to continue working as long as necessary to generate the assets required to pay for college tuition, as opposed to "manipulating" your personal balance sheet to maximize the chance of aid.

[bubba]

+1

Quote:

Originally Posted by ProGolferWannabe My perspective is that you really do not want to plan to fund your kids' education based upon the "largesse" of others. The availability of federal and/or institutional based aid may change between now and the time your kids get to college; even with aid, it frequently is insufficient to fully fund a 4 year undergraduate degree. Seems to me if funding your kids' education is a priority (and for some people it is not) that it makes sense to continue working as long as necessary to generate the assets required to pay for college tuition, as opposed to "manipulating" your personal balance sheet to maximize the chance of aid.

[CUinFl]

Thanks everyone for the feedback. As usual, the replies come quickly and with varied perspectives.

DayLateDollarShort, thanks for sending the forbes article. I had seen that article before, but it served as a good refresher and the AGI financials aid table is a good framework to let people know where they fall in the qualification zone.

Jon-NYC, first, I trust your first year of retirement is going well. After receiving DLDS's reply, and rereading he Forbes articles, I tried looking into the components of the FAFSA and CSS profile. I was able to download the FAFSA and did confirm neither your primary residence, nor the associated mortgage expenses, are included in the FAFSA. I could not find all the components of the CSS, but believe that profile will get into primary home value and any associated mortgage expense.

ProGolferWannaBe and Bubba, it is not about the largesse from the Financial Aid systems, it is that we are wanting to make sure we position ourselves and our kids for as many options as possible. If we have the ability, we would certainly continue to pay for our children's education into their college years. We just want to make sure we learn from any mistakes others made in painting their financial future into a corner.

Thanks all....

[Free bird]

W*rk the system anyway you can to get your kids educated. Education should available to anyone willing to improve themselves. The college industrial complex is on the same path as the medical industry. I've saved money outside of what the system considers retirement accounts. I consider any money I have decided to call retirement money just that. People in the US shouldn't have their financial security threatened because they have a kid that wants to go to school & be productive.

[rodi]

My husband is in glide path to retirement (winding down projects.. Very much part time). I'll retire in 2-3 years at 55. Our kids are 11 and 13... So we've been grappling with this issue.

My goal has been to fully fund a public school 4 year education. Looking at the current tuitions at the UC system I'm aiming for $120k per kid. Like you, we fund $6k per kid per year in the 529s. Our retirement spending projections include this commitment through their fourth year of college. It makes the budget much higher in early years of retirement.... At a time our health insurance expenses are also much higher (pre-medicare). It provides a modelling challenge for sure.

I have spreadsheets, use Quicken lifetime planner and have a pension/spending reduction at the time the college funding ends in firecalc. It's also a reason I haven't pulled the trigger yet on retirement.

[daylatedollarshort]

CUinFL, One thing to do is to map out your finances if you retire before your kids go to college and if you wait and retire later.

If you retire before, add up what you might save in SS, state and federal income taxes, job and commute costs, ACA subsidies, college aid, tax credits, reduced tuition programs for middle and low income families, and make in early pensions and savings from being home (more time to price shop, cook from scratch, do your own work around the house) and see how much, if anything, you are still making by continuing to work full time at a regular job.

Also family businesses under 100 employees do not count against assets and income after deductions under a certain amount will not count against you on the FAFSA for aid consideration. Even though you could build up a business and sell it for a profit post college.

It is all a bit crazy from a pure logic standpoint, but I didn't make the rules. I just try to read up on them.

And for study abroad programs, read up on flytertalk and boarding area blogs for free air travel with frequent flyer points.

We told our kids you can go to any public, in state school you can get into (or equivalent private / out of state school with the same net cost to us) and we will pay for all of it as long as there is a positive ROI on the costs. We also printed out the salary data available online by major and by school for them to consider.

[FANOFJESUS]

Do you have over 47K in taxable? If so aid will start to go down.

[Good_Life]

I work for a private small college that has competitive admission standards. I don't know what sort of institution you see your child attending, but if it is a non-state school and not need-blind (only a few elite schools are) using financial engineering too much can backfire. Give two somewhat academically equal students the one who can pay more of their own way without a significant institutional aid package is far more likely to be accepted versus one that needs more need-based financial aid. I don't see that changing any time soon...

[Katsmeow]

DH retired in 2010 and I semi-retired at that time. We now have 2 in college.

If you haven't done it you might look at the fafsa forecasting calculator.

https://fafsa.ed.gov/FAFSA/app/f4cForm?execution=e1s1

In the past we have always had very large EFCs. This year we plan to be spending mostly taxable money so will have a very low taxable income. So in 2015 we might have more eligibility. What I found is that the criteria for a grant (not a loan) under this is very sensitive to even small increases in income.

In any event for us what I have found that has helped us the most on college expenses is sending our kids to school that don't cost a lot of money rather than trying to maximize financial aid.

For example, our son did his first 2 years of college credit at the community college at very low cost. In his case, he lived at home for this although I will note that if you want the dorm experience there are many community colleges that have dorms. He has now transferred to a state university and is still commuting. Tuition is only about $4k a semester. Next year he will probably live in a dorm so the cost will basically double. The point is that by doing it this way his entire cost of college will be well less than many private schools charge for a single year.

Looking at data, we just couldn't see that the benefit of paying for a private university for undergraduate was worth it. And, trying to do gyrations to get financial aid to make an expensive school cost the equivalent of a low cost public university wasn't really worth it for us either. It is possible that our income will be low enough this year that some aid might be available in 2015, but the real way we've been able to pay for college is through choosing schools that don't cost a lot of money.

BTW, now that he has been in both the university and the CC I would say that it is not all the case that the education is necessarily superior in the university. For example, in one school he had to read 2 books in history class and right a long paper and tests were mostly essay questions. At the other school, he had a history class where buying and reading the book was optional, the tests were all matching or multiple choice and there was no paper or other writing required whatsoever. Many might think the first school was the university and the second was the CC...but they would be wrong.

I'm not saying not to try to go get financial aid, just that it isn't the only way to decrease the cost of college.

[jon-nyc]

Quote:

Originally Posted by Good_Life I work for a private small college that has competitive admission standards. I don't know what sort of institution you see your child attending, but if it is a non-state school and not need-blind (only a few elite schools are) using financial engineering too much can backfire. Give two somewhat academically equal students the one who can pay more of their own way without a significant institutional aid package is far more likely to be accepted versus one that needs more need-based financial aid. I don't see that changing any time soon...

Interesting and, dare I say it, good to know.

[jon-nyc]

One other thing I've heard, maybe others could confirm or correct.

Regardless what FAFSA says, the school may very well not pony up the difference in aid. They only have so much to offer, in many cases they'll just point you to Plus loans for the difference.

[Brett_Cameron]

For purely planning purposes, we have projected our spending profile to cover all college expenses for our DS10 and DS17. We plan expenses for two years of community college and two years of in-state public universities with no student financial aid.

For execution, we will of course try for the maximum in scholarships and grants and that will only reduce our spending profile. Our self determined responsibility to our sons does not extend to extra years of college or advanced degrees. I have done dummy FASFAs and they showed little aid would be available.

That is the same arrangement I made and executed for my two adult children.

[Bestwifeever]

Quote:

Originally Posted by jon-nyc One other thing I've heard, maybe others could confirm or correct. Regardless what FAFSA says, the school may very well not pony up the difference in aid. They only have so much to offer, in many cases they'll just point you to Plus loans for the difference.

DD went to a small private college (absolutely the best place for her) and after she was accepted, we received a letter from them saying she would not qualify for financial aid from them. We had not even applied for any. I bet this is why.

[Shanky]

If I recollect, FAFSA considers income and assets. I still had a very high EFC even with no earned income. The EFC exceeded any possible tuition scenario for the two that were still in school. Net result, had to pay full cost for all of our kids.

[foxfirev5]

Worked and saved for 15 years , likewise our three kids worked and saved as well. All attended state schools with two of three graduating. No loans or grants for any of them. Nothing fancy here. My best advice is to save up and pay for it.

[sengsational]

The cheapest way out would be to forget financial aid, put them through community college for 2 years (living at home!!) and then transfer to a state school. That was not in the cards for me! I had two criteria: 1) accredited 4 year degree program and 2) far enough away so you couldn't pop in to do laundry!

The way the FAFSA formulas worked a few years ago was roughly like this:

You have a contribution from income: Calculated based on income after you net out taxes and less $25K "income protection allowance". So that's "available income".

You have a contribution from assets: Calculated by taking all non-retirement assets less $55K and multiply that by 12%. So that's "available from assets".

You add those two numbers and take 27% of $29,300 plus 47% of total exceeding $29,300. That's what you're expected to spend on ALL of your kids' education that year. The old thinking that "you can't afford to have two kids in college at the same time" is bunk if you're getting financial aid. In that case, you get a 50% discount!

The FAFSA formula will decimate anything the kid has in her name. So gift that to mom and dad! Hopefully they don't have any UGMA accounts.

That, above, was from some chicken-scratch I found from a few years ago. I'm sure the numbers have changed a bit (indexed), but I think the process is still the same.

So "non-retirement assets" is key. Of course you can't put any more into your Roth and 401k than is allowed by the tax code. That might leave a lot open to the (.12 * .47). So one strategy is to buy an insurance product that qualifies as a retirement asset. "Variable Annuity" is a dirty word on this forum, but Vanguard offers products that are basically some of their index funds wrapped by an insurance company. As I understand it, you never have to annuitize if you don't want to. You just pull money out as needed, but of course you don't get the benefit of capital gains tax treatment, and the gains come out first, which could be painful later. Another strategy is bitcoin, hehe. Just KIDDING! LOL! But as was mentioned, even if you execute on the asset shuffle, you may end up with the same workstudy/grants package, but just have a dollop of plus loans in your package. Of course if your kid is a whiz kid (high SAT) they don't want to go to an elite school, and the less than elite school want to prop-up their numbers, then they might just get those big discounts.

You can't win with the home equity play; you don't know which school your kids will attend so you don't know which formula the school will use. It might ignore home equity (FAFSA) or include it (CSS/Profile). Or the school might just compute both and pick the one that's worse for you (**coughDukecough**).

You can easily move money between beneficiaries. No tax consequences and it just takes a form mailed to the 529 fiduciary. So if one kid goes to a private school and the other goes to a public school, you wouldn't need to plan/fund both for private since you could move money around.

You also might consider what to do with leftover money in the 529 after your children are out of school. One option is to just sit on it, let it grow, and wait for your grand kids to come along. You can pull it out, paying tax on the gains and paying a 10% penalty. You can NOT get penalty-free money out of a 529 to pay off student loans! You CAN get penalty-free money (but not tax free gains) out of a 529 equal to the amount of grants and scholarships, but it's not 100% clear to me if you can do that retroactively (i.e. after 4 years of school, add-up the grants and scholarships and yank that out). You (or the beneficiary if the check was cut to her) will get a form in the mail and when you do your taxes, you tell the IRS how much is in the legit school spending, semi-legit scholarship offset, and not legit just yanked it out.

As to the "deal" offered by the FO's, it will probably erode year-by-year, but hopefully not by too terribly much. It will have a federal work study component and, if you qualify, subsidized loans. If you don't qualify, non-subsidized loans. My strategy was to have my kids take the work and loans. The work is good because then they don't need to phone home for pocket change. The loans are good because they've got skin in the game. Beyond work and loans, you get the school's grants/scholarships, which basically is the discount that you're looking for! The FO's, no matter how nice they seem, are your adversary. I'm bitter because I trusted what they told me (in writing) about a Roth conversion which increased taxable income, but in fact drained my cash flow. They said they would adjust so it wouldn't effect financial aid. Well, my daughter ended-up with a bigger and non-subsidized loan after that, and the discount was reduced.

On the topic of whether or not you should fund your kids' education at all, I don't pretend to know your situation. I know mine and I was all about extending my kids' childhood, but they know after years and years of living with me that the gravy train ends here. If you read "Millionaire Teacher (Hallum)" you'll hear thoughts (repeated from "Millionaire Next Door", I think), that says people who get handouts are actuall worse off. Both of my daughters have read the teacher book. They said "he sounds like you daddy". I think that the giving handouts is not helpful is mostly true if the recipient has an entitlement mindset and gets "set-up" to live beyond their means. I'm not sure paying for college quite fits that. If it did, I'd have some serious cognative dissonance to deal with.

On the topic of getting accepted or not based on financial need, I agree that even if a school claims to be "need blind", your kid may get passed-by for someone similar with more money. There are studies (admitedly with causality issues) that suggest that lifetime earnings is often as high for people who apply to an elite university, whether they attend there or not.

Concerning the timing, you'll be doing the FAFSA in the January that your kid is a senior in HS. You'll use the tax forms that you filed 9 months earlier, so yes, you need to plan ahead and get things situated before your kid is a senior in high school.

So if any of that generated more questions or if you have any other questions as you plot out your journey, feel free to ask!

[daylatedollarshort]

Payscale has some good food for thought reports on schools, majors and salary potential -

College Salary Report -
2013 - 2014 College Salary Report - PayScale

Assorted ROI reports - by major and college -
College Education Value Rankings - PayScale 2013 College ROI Report

There are some real hidden gems in there in terms of salaries versus net school costs.