Thanks for the helpful advice, everyone.
I agree one doesn't know what will happen in 20 years - indeed there are too many variables. But that doesn't mean you don't plan, you just make the best assumptions you can, and move forward on that basis.
Also I'll reiterate that this exercise of mine is
not, repeat not being used as an input into the decision as to whether or not we have a kid. I'm just planning ahead because thats what we FIRE types do.
I'll share my approach, the results of my research, and my conclusions.
In my case, should we go ahead and have the kid, my approach will be to set aside a chunk of money that I estimate to be sufficient for 4 years of undergraduate education at an elite private school, 20 years hence. (key word here being "estimate"). Then if the kid should end up going to a public school (like his old man
) then, hey, I'll have an unexpected 'windfall' 20 years hence, or maybe I use it to fund grad school if the need arises. When I say "set aside", I mean I'll consider it to be 'off balance sheet' as far as my retirement savings go. I'll even exclude it from my asset allocation model, which has a different time frame and risk profile.
Here's what I found from my research:
Harvard Univeristy publishes an annual fact book that has a section about their own expenses in comparison with other elite institutions in the US. In this category they include the ivy league + Chicago, MIT, and Stanford. That seems like a good selection for me to use for my planning purposes. (yes, I know there are better deals to be had, I am myself a product of a state school, but I'm trying to plan for all options)
They list the costs for the 2007-2008 school year as follows: (this includes tuition, mandatory fees, and room and board)
Colombia - 44,812
Chicago - 44,613
U Penn - 44,212
Cornell - 43,757
Brown - 43,754
Harvard - 43,655
Stanford - 43,651
MIT - 43,550
Dartmouth - 43,341
Yale - 43,050
Princeton - 42,870
The average here is $43,750 per year, or right at $175,000 for 4 years.
Ok, now to come up with the proper inflation factor....
People here have argued that the real growth rate of tuition is not sustainable. I disagree. Unfortunately, I think its as sustainable as the trend towards increased income inequality, which is showing no signs of abating. I think we may see more schools take Harvard's approach, and have a sliding scale. But I'm not going to bank on that, plus there's a risk they'll take assets into account as well as income in which case I'd be paying the full amount anyway. Worst case I save too much.
In the same publication, Harvard lists its own inflation rate for tuition as follows:
20 year: 5.2%
10 year: 4.4%
5 year: 5.2%
Inflation (CPI-U) over those spans has averaged:
20 year: 3.1%
10 year: 2.55%
5 year: 2.63%
Thus the 20 year trend has been a growth rate of 2.1% over inflation, the 10 year trend has been 1.85% over inflation, and the 5 year trend has been 2.57% over inflation.
This applies to tuition only, but to be conservative I'll apply it to the whole amount.
These data suggest that I should plan for $
265,000-300,000 in today's dollars, for 4 years of undergraduate education 20 years from now.
265,000 uses the average cost of those schools (175k) and the 20-year real growth rate (2.1%).
300,000 uses the highest cost (Colombia at 179,250) and the higher 5 year real growth rate.
So using my approach one would theoretically take 300k and set it aside in a low risk investment that would keep up with inflation.
My actual approach will be to set aside an equivalent amount of iBonds (which I already own) for this, taking into account that the iBonds grow at a rate higher than inflation. Assuming that my iBonds grow at inflation +1.2%, I could set aside around $235,000 worth.
The other advantage of using iBonds is that, under current policy anyway, the interest on them will be tax free, at least for the part that goes to tuition, as long as I can engineer an income below the cutoff those years, which I should be able to do in retirement.
Comments on my approach?
