I Did Not Let College Impact My Retirement

I currently have 2 kids in college and one that graduated last year.  When I mention my 3 kids and college most people assume I am struggling financially.  The truth is, it has not impacted me at all and my children have taken on minimal to no debt. The success of this is based on two simple factors; 1.) planning for this moment and 2.) educational choices made by my children.

First let me quickly describe my children’s educational choices.  Even though they all chose different colleges, all three children had three things in common:

  • Commuted to college which saved ~$60K of on campus living.
  • Attained a semester’s worth of college credits while in high school which saved $5-$6K in tuition.
  • Assumed responsibility for paying back their own debt.  

My oldest graduated with $12K in student loans, my middle child is on a path for $20K in student loans and my youngest is on target for $0 in student loans.  Even with these factors, one would still assume I saved or borrowed quite a bit to pay for my children’s education to keep their borrowing so low.  However, you would be wrong.  It again comes back to planning which started as soon as my children were born.

My wife and I started planning for our children’s college back in 1999 as even then there were fears of how to pay for college and how much of a burden it was.   I witnessed how college costs were burdening older co-workers and family members, I refused to be in that position.  I knew being in my 50s that ramping up savings for that final retirement push had to be my main priority and not college debt, so I had to save immediately for college.

Back in 1999 we did not make a lot of money but knew the power of time and compounding was on our side.  But before we jump into the investment piece, I thought it would help to understand exactly how much we invested into college and for that I will use my youngest son’s current position:

  • $8,000   Used Car
  • $837      Laptop
  • $4,850   U.S. Saving Bonds
  • $3,105   Educational IRA
  • $16,792 total investment for each child ($7,955 for actual tuition)

When you amortize this over 18 years it really was not a big investment.  Of course, ~$8K is not enough to cover 4 years of tuition, the secret really comes down to the Education IRA.  One of the most hyped-up college savings vehicles is the state 529 plan, but when my wife and I looked at our state’s 529 offering it had horrible investment options and fees.  Instead, we chose an Education IRA or Coverdell Education Savings Account as they are formerly called.  An education IRA allows you to choose any investment, but it did come with an annual contribution limit.  For us it was perfect, we did not make a lot of money, so the contribution limit was not a concern and we had the freedom to invest in anything. It is important to note, today’s state 529 plans have drastically improved their investment options and Education IRAs no longer have this advantage.

We chose to go with T. Rowe Price and selected a balanced fund called the Capital Appreciation Fund (PRWCX).  We initially opened the account in December 2002 with a $500 deposit and then there was a change in the tax code that increased the annual limit to $2000 so we made a large deposit in February 2003.  After that we made small contributions up to 2007 to bring the total investment to $3,105 and made no contributions after that. Here is the total return of that investment which has been a buy & hold strategy for the last 18 years. (note: the black line is my investment and the green line is the total return)

That ~$3K investment has ballooned to $23K with an average annual return of 10.44%.  Combine this with the U.S. Savings Bonds, which are now worth $8,853, my son has a total of $32,232 to pay his tuition bills. Since he chose to attend community college his first 1 ½ years, his remaining tuition is approximately $30,000 after he transfers to a 4-year college. 

Hindsight being 20/20 I should have invested more into the IRA and less into the U.S. Savings Bonds, but you will have to forgive me as investing in the 2000s was not the best of times and I was hedging my bets.  Regardless, the story is college does not have to be expensive if you invest early and let compounding do its magic.   Because of this I did not have to take out a second mortgage on my house and I can concentrate on providing my wife a retirement she deserves and not being a financial burden to our children.

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