So here's where we are at the moment: a child who's a senior in high school, presumably about to enter a four-year college with costs somewhere around $50,000 a year. We're also within 5-10 years of retirement for one or both of us.
The way I look at college expenses, it makes more sense for us to fund the lion's share by borrowing against our accumulated home equity rather than emptying out our savings. (Thankfully, there are good 401ks waiting for us once we get to 59.5) Presumably, we will be selling this home to coincide with retirement and even with the housing market decline, we could pay back any outstanding HELOC plus the mortgage, and still walk away with some cash after a sale.
So my question: what's wrong with this strategy? I'm sure there are arguments against it, but I haven't come up with them. Please play devil's advocate with me.
Unless you're willing to post specific financial details - which I would NOT suggest that you do - I think you need someone to actually 'run the numbers' for you in different scenarios: best case, middle of the road, worst case. Retiring early before Medicare kicks in means being able to fund healthcare during the gap. Can you cover catastrophic illness on one or both of you? What if something unexpected happens and housing prices fall again, or the market really tanks making the value of your 401k's fall again? What if one of you gets disabled? What if your child graduates but can't find a job and needs to remain at home? Will higher taxes (federal, property, state) give you less margin for error?
It isn't strategy that's the issue here. It's being sure that the numbers really work against a variety of "what-if's?" You want to really think about the risks that every decision entails should any of your assumptions fall victim to unexpected circumstances you can't control. Good luck!
You're absolutely right about needing a financial advisor to guide us with retirement issues. That is a given, and we won't make any move before we sit down well in advance and weigh all the options.
But my real question here has to do with funding our child's college expenses. Is looking at a HELOC to do the heavy lifting my best bet, or is there a reason to instead think about other options: borrowing against or withdrawing from 401ks (bad idea, I know, but just throwing it out there as an alternative); going heavily with government-guaranteed tuition loans; or depleting other savings that would leave us without much of a cushion until we can access 401k and IRA funds in a few years.
If anyone has gone through this and can share their experience, it would be helpful. Thanks...
I have posted this before, but will post it one last time.
The advisors who are allowed to do 'financial planning' are Registered Investment Advisors. That category consists of:
1) Certified Financial Planners; 2) Chartered Financial Consultants; 3) CPAs with an additional Personal Financial Specialist credential; and for life insurance purposes only, 4) a Chartered Life Underwriter.
Standard advisor advice is to not touch any retirement or savings funds for college aid purposes. The reasoning is that your children can always get a loan to go to school, but no one is going to give you a loan to retire! I just don't believe anyone on an anonymous forum should be giving you such specific financial advice in this situation. One can posit generalities 'until the cows come home,' but everyone's situation is completely unique.
Can you use your HELOC to fund college tuition? Certainly. Is it in your best interests? It would require financial analysis to determine that. There are pros and cons to every alternative. Without very specific details it is impossible for any of us to say what you should do.
It takes time to find a good RIA. You will want to interview them, see sample financial plans, and check out at least 3 references. Start now, and you should find one within the next three months. Then you will need to have all your papers ready, and it will take more time to analyze them and produce the financial plan and related recommendations. This is not a simple or instant process. I urge you to get started as soon as possible. Again, best of luck to you in making these tough decisions.
I do think a degree is worthwhile – there are so many jobs where they won’t even consider you without one – but going into serious debt to obtain it is no longer a guaranteed payoff. I saw this just two days ago:
""What's a Degree Really Worth?
WSJournal February 2, 2010 (excerpted)
A college education may not be worth as much as you think.
Most researchers agree that college graduates, even in rough economies, generally fare better than individuals with only high-school diplomas. But just how much better is where the math gets fuzzy.
The problem stems from the common source of the estimates, a 2002 Census Bureau report titled "The Big Payoff." The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns $45,400, based on 1999 data. The difference (over 40 years) is $780,000.
Mark Schneider, a vice president of the American Institutes for Research, a nonprofit research organization based in Washington, calls it "a million-dollar misunderstanding."
One problem he sees with the estimates: They don't…factor in debt, particularly student debt loads, which have ballooned for both public and private colleges in recent years. In addition, the income data used for the Census estimates is from 1999, when total expenses for tuition and fees at the average four-year private college were $15,518 per year. For the 2009-10 school year, that number has risen to $26,273, and it continues to increase at a rate higher than inflation.
Dr. Schneider estimated the actual lifetime-earnings advantage for college graduates is a mere $279,893 in a report he wrote last year. He included tuition payments and discounted earning streams, putting them into present value. He also used actual salary data for graduates 10 years after they completed their degrees to measure incomes. Even among graduates of top-tier institutions, the earnings came in well below the million-dollar mark, he says.
And just like any investment, there are risks—such as graduating into a deep economic downturn. That's what happened to Kelly Dunleavy, who graduated in 2007 from the University of California, Berkeley, with $60,000 in loans. She now works as a reporter for a small newspaper in the Bay Area and earns $34,000 a year. Her father is currently paying her $700 monthly loan payments. "It's harder than what I think I expected it to be," she says.
"Averages don't tell the whole story," says Lauren Asher, president of the Institute for College Access & Success, a nonprofit group based in Berkeley, Calif. She points out that incomes vary widely, especially based on majors. "The truth is that no one can predict for you exactly what you're gong to earn," she says. ""
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