Been following this forum for a while. This is my first post. I just turned 37 and the wife and I are planning on retiring in 7 years on a budget of about $80-90k/yr.
We are currently debt free except two 10 year mortgages (one rental) which we will have paid off by our 7 year deadline.
One of the things that may throw a wrench in our plan is saving for college. We have a 2 yr old currently and I have already started putting some money in a 529 plan, but I have no idea how much college is going to set us back in 15 years.
We have about $700k in non-retirement funds currently and about $300k in a mix of IRAs and 401(k). We will also be relying on some income from our rental property.
Hope we can make it!
Welcome. I am 40 and we plan to to semi-retirement around 45 and full retirement at 48. It will not matter that much but one variable is the cost of collge for our 2 year old child which I am concerned about just like you.
It is something I been trying to research and estimate this recently. After looking over the data recently I feel that it might not be as bad I thought it was. Of course it depends on what bad means. I thought it was going to be bad reading all these scary articles in the media about how in the last decade college costs has been going up 8% every year and will continue to do so.
I looked into it and found that the large increases has really been for public universities which are at lower cost than private univerisities and the rate of increase for private universities has not been as high. In other words, colleges which are expensive have not increased as a much as the less expensive ones. So your worst case scenerio for a expensive private university is not as bad as what the price tag today plus 8% nominal price increase every year.
I do all my planning for retirement in 2013 dollars and I wanted to model how much will it cost to put my child through and expensive private university in 2013 dollars 16 years from now. I used one expensive private university, one Yale U, as a target for my estimates as it would represent the worst case scenerio in terms cost. I picked it because that is where I went and a lot of my relatives went as well and if my DS could get in I would like him to continue the family tradition.
The data points I used are Yale college tuition+room+board in 1976, then in 1990 (year I started to attend there) and then 2012 (last know data.) So I can then try to figure out what costs my DS will encounter in 2029 when he will start to attend.
I found 1976 cost was $6425, 1990 cost was $20820, and 2012 cost is $55300. There will be personal expenses but I will assume my DS will work on campus to pay for it himself.
What we find is Yale costs went up by an average of 8.8% in 1976-1990 and up an average of 4.5% in 1990-2012. So the rate in increase is actually decreasing. Of coure we have to calibrate against inflation as some of this increase are just reflecting overall inflation in the economy. I found that inflation rose by an average of 6.2% in 1976-1990 and inflation went up by an average of 2.7% in 1990-2012. So doing the math shows Yale costs went up an average 2.4% above inflation during the 1976-1990 period. Also Yale costs went up by an average of 1.8% above inflation during 1990-2012. So if anything the "surge" in college costs is worst during the pre-1990 period than the last couple of decades when there was a supposed unpresedented increase in college costs.
I think it has more to do with lower cost private and public universities moving their prices in line with places like Yale mostly to capture all those student loans and goverment subsidies over the last couple of decades so it does seem to be a massive jump in prices for those places. But for the highest cost places which is the worst case scenerio the situation does not look that bad. I can live with 1.8% higher than inflation. So it is not bad depending on what bad means.
What does this mean for me. Well, if Yale cost $55300 in 2012 and if I assume (a big if) my DS attends Yale in 2029-2033, and if I assume the same 1.8% increase per year on top of inflation (I am pretty sure it would be lower, something like 1.5% as I think this student loan bubble will burst soon) I am left with a cost of $77K per year in 2013 dollars. So that I what I model for as a worst case scenerio. All other scenerios will cost less then that. I should be able to adjust our earnings and investments a few years before our DS attends college to extract some finnacial aid (like I had my parents do a couple of years before I attended college to achieve the same goal which worked) but I will not count on it. It will just be an added bonus.
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