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Blind Spot #4: The Impact of Paying for College

| March 15, 2019
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Welcome back to our series of blogs on Blind Spots! We all have Blind Spots, things that are potentially hazardous that we don’t even see, things that we should know, or have awareness of, but don’t. This series of blogs focuses on common financial Blind Spots that we see when working with our clients. In this blog, I’m going to focus on the impact of paying for your children’s college education.

Many of you are planning for your children to attend college. And, I imagine many of you are saving money now to help fund the cost of college. If so, congratulations for thinking ahead! I wonder, though, how many of you understand the implications that paying for college has on your retirement plans.

Here’s what I mean. Every dollar that you pay for college is a dollar that can’t be invested to help fund your retirement. Now, I’m not suggesting that you don’t help your children pay for their college education, but I am suggesting that you understand the financial impact of your choices. Remember, your children can reduce the cost of college by starting at community college, attending an in state college, obtaining a scholarship, being awarded a grant or work study opportunity and by taking out student loans. None of these are available to help you fund your retirement.

Let’s look at a hypothetical situation. Two parents, age 47 are planning to send their two children to an out of state college this year. The all in cost is about $48,000 per year or about $192,000 per child for a total of $384,000 - for both! For illustration, let’s assume that this family decides not to send their children to college and instead will divert that $384,000 to retirement savings. Assuming a 5% average annual return on their savings, the $384,000 could grow to about $924,000 by the time this couple reaches age 65. This nest egg could generate about $37,000 in annual retirement income!

Now, let’s look at a different option – sending the children to an in state college instead. The all in cost is about $22,000/year or about $88,000 per child for a total of $176,000 - for both. Less than half the cost. Now, let’s assume that the parents divert the savings from sending their children to an in state college toward retirement instead. Assuming the $208,000 ($384,000 - $176,000) averages a 5% average annual return, it could grow to about $500,000 by the time the couple reaches age 65. This nest egg could generate about $20,000 in annual retirement income!

The conclusion is that by sending the children to an out of state college, the parents are foregoing $17,000 ($37,000 - $20,000) in potential annual retirement income. About $510,000 over 30 years! That is the Blind Spot. Not knowing the impact of the college decision on the retirement goal. For most families, $17,000/year for life is a significant amount of money. More than enough to pay for the average costs of retiree health care and then some. The question you want to be asking yourselves is this: Am I willing to give up a significant amount of money during retirement in order to send my children to a more expensive college? Or should we be trying harder to find ways to reduce the cost of college without sacrificing our children’s’ ability to obtain meaningful career preparation?

What are your plans for your children’s college? Do you understand the impact that funding college will have on your retirement plans? How do you plan to fund college? To reduce the cost of college? How do you plan to fund your retirement?

As they say, “You don’t know what you don’t know.” Without being aware of your financial Blind Spots it is almost impossible to make sound financial decisions. At Second Half Strategies, we try to identify and help you uncover your various financial Blind Spots. Our Wealth Management process includes Planning, Guidance and Advice. By following our process, you should have the confidence to know that you are taking proactive steps to uncover and eliminate your Paying for College Blind Spots!

What process are you using to find and address your Blind Spots?

This content contains hypothetical examples and are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

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