Hi everyone, Dan Thompson here. Thanks for joining me on another wise money tools video. Today I want to talk about college tuition and retirement and how they can kind of battle against each other. Not a lot of families out there have the capacity to fully fund college and fully fund their retirement and something typically has to give. So I went and did a little bit of research, if you will, and found bankrate.com. And they talked about the average cost right now. They said for a public college average cost about $17,500 a year. If it's an in state public college that could get up to about $25,000 a year. A public college out of state could be about $40,000 a year and then a private college. And a nonprofit college at that about $50,000. Then they estimate how school paid for, they found that about 34% of school tuition is paid by scholarships and grants, about 29% comes from parents income and their savings.


Then about 20% comes from both the student and the parent borrowing. And then 12% just student income and savings and 5% help from relatives and friends. So here's where I've been running into this real difficult situation. Let's suppose mom and dad if safe for their children's education and again, I see this all the time. Parents can literally be sacrificing their future retirement, just to pay for their college. Pay for kids college. Now don't get me wrong. It's not necessarily a bad thing and if parents have plenty of money, more power to you. It's probably a wonderful thing to give your kids. The problem is many families don't have unlimited funds. And when it comes down to it, they either cover college costs or they plan for their retirement. Let me giving a recent example. It was a situation I was talking with someone who was trying to save both for three kids going to college and then also for retirement. They had a 401k work and they were maxing that out.


And what they did is they presumed that this 401k was gonna be enough when it came to retirement. Well, after we looked at it's performance, then we projected it's values out. Well, it wasn't really gonna come close to what they wanted to retire on as far as producing the amount of income they needed. So they'd also saved a pretty good chunk of money for their kids college. I mean, these people were disciplined and that's great. It good motives, good intentions. They just didn't have enough money to go around. So they had actually saved $100,000 already in addition to obviously paying their living expenses. You know, the day to day needs and then funding the 401k. So they certainly proved that they could save money and live well within their means. So I asked them what they thought each child's education was gonna cost. And between tuition borden room for years, they came up with about $50,000, a child and I said, Well, that might be a little low, especially if you're adding all these things.


And then they had already picked the schools and they had done their research and they kind of had an idea what those costs would be. But one of their child was only seven years old when their kids is only seven years old. So we knew that they were probably gonna be way off. So the current college cost between 12 and $15,000 a year is kind of pretty common. And this one somewhere between, you know the cost of a public college and a private college. But let's just see really what the effect has on them. As I mentioned, they had a 401k, it was projected that if everything went perfectly with no big market setbacks. They'd probably have about $750,000 if they work till age 65 and they averaged about 8%. Now, here's the problem. You may have heard of the 4% rule, what's the 4% rule? Well, this is the percentage that Wall Street uses when determining how much money you can take out of your accounts, if they're still invested. And a 401k would be a good example of this.


So each year with reasonable assurance that you're not gonna run out of money before you run out of life, you shouldn't take more than 4% per year. So assuming they have $750,000 again, kind of a big assumption, but because they really can't have. And the reason that's a big assumption is because they can't have a market crash, they can't have a law, they can't have a decade where they're not making money. They really need to make this 8% every single year, for the next 20 years. Anyway, using the 4% withdrawal rate, they are gonna be able to take out about $30,000 a year. Now remember, this is a 401k. All the money in that plan has been deferred, like other retirement plans, they haven't been taxed on it. So the full $30,000 is gonna come out and this can be taxable. If they stay somewhere near even a 20% tax bracket, that means they're gonna end up with about $24,000 net spendable income or about $2,000 a month. They'll also presumably get some social security and that might be around $1800 to $2000 a month as well. So all they'll probably about $48,000 a year during retirement.


That's a lot of things that have to go perfectly just to come out with about half of what they're making right now. Is it sustainable? I don't know, not gonna be a lot of frills in their lifestyle. And if they live frugally, maybe every once a while they can take a vacation or even a cruise. But let's see what college really cost them. Remember, they were planning on spending $50,000 a child, three children, $150,000 the youngest being seven, so chances are it's gonna be much more than $50,000. But we're gonna just leave it at that. So what I did is I simply took this couple's current account value of $100,000. And then they were saving about 10,000 a year toward the college education. And so they would continue to save that and we'll just say that they could continue to save that till they were 65. So for the next 20 years, they're gonna save the $10,000 a year.


So let's see what happens. What I did is they took a past historical reference of what would have happened over the last 20 years, using some of the strategies that we have. I wanted to see what their potential income could be. It was interesting, I came up with an after tax income of about $70,000 per year. Now remember, the way they were going, it was about $48,000 a year, I also increased the income each year by 2%, just to offset the cost of living. In fact, it's kind of interesting by age 80, they were bringing in like $90,000 a year probably don't even need it by then. Right. Well, looking at it, suppose today, they put that $1,00,000 away for the next 20 years at 8%. Okay, that would grow to about $466,000 if they continue to add that $10,000 per year that they're saving now. Again at 8%, it would be worth over $925,000. Even if we just use the 4% withdrawal rate that would mean about $38,000 in extra income. In addition to the 48,000 that they're currently getting.


So think about that the cost of education wasn't just $50,000 per child, what it turned out to be is nearly a million dollars. And that's just on the income alone. Assuming they live to be age 90, that's a lot of income and in the account value, and they really cost them over 2 million dollars between the income and the account value to send their kids to school, and basically give them $50,000 each. Now again, let me say, I don't think it's wrong that you pay for your child's education. But for many parents, it's a trade off between a comfortable and plentiful retirement and subsistence basic retirement, if it were my parents, and I really understood the sacrifice they could potentially be making, I would probably think twice before I took their money and maybe try to figure out another way, and I could get myself through school. Now speaking of another way, there's a really popular way for kids to pay for school these days and that is student loans.


Student loans are a killer. And I want to kind of walk you through what the true cost of these loans are. Now currently, in the United States alone, we have $1.4 trillion owed in student debt that's come and do at some point, that's gonna affect a lot of families out there. Statistics show that the average student loan right now is about $37,000. If you go to a graduate school, it's about $85,000. And the time to take back or the time to pay back alone is typically 10 years. And the interest rates are right around 6%. So if I amortize $37,000 over 10 years, that's gonna require a payment after graduation of $410 a month. For those that go to graduate school and have loans of $85,000 that same 10 year period of time, that payment is $943 a month. So just for fun, let's pretend this person's 25 years old when they graduate. And instead of having to repay loans, they get their first job, and they actually could save that money instead of putting it towards in debt. At age 65.


So it's a 40 year working career using our look back model to recreate this particular scenario, the one that we're saving $410 per month. It's basically $5,000 a year would have nearly $2.7 million. Okay, that would generate about $200,000 a year tax free. Now, that is the tremendous power of compounding and time. The younger you are, the more compounding periods you have a think about that for the cost of a cheap car payment 400 bucks a month, you could retire on $200,000 a year after tax. If you start young enough. That again is the power of campaign letting it work for you, but it does take some time. Now the person who went to graduate school has $85,000 in debt $943 a month. So basically $11,300 a year that they're paying. If they could save that, instead of putting it toward student loans, they could potentially have $6.2 million Or an income of about 390,000 to $400,000 a year. I mean, that is a massive change, right? All because of compounding periods in time.


Now, my real point here is not to say that you shouldn't go to college. But my point is you should begin saving the moment you get your first job. I hope you've been able to avoid student loans, because as soon as you get that first job, they're gonna take your dough. But if you get that first job, and now you get to save money, instead of taking away from your future. And that time value of money, and that compounding is huge. And the sooner you can start, the greater your potential financial situation is gonna be. Now let's just suppose the same two situations, but they each have student loans right. Now, because of the student loans, they're gonna come out. And they're gonna have to pay those student loans off first before they can start saving. So $37,000 again is the average for a four year degree 85,000 for a graduate degree. So they're gonna come out in the first 10 years of their career, they're gonna pay student loans before they start saving.


Then after 10 years, they can finally start saving the same amount of money that they were paying for those student loans each month. Let's see what the differences in those 10 years does it makes so much difference. Well, again, if I can start from age 25 and save to 65, that's gonna be about a 40 year savings period. If I can't start till age 35, because I'm paying off 60th because I'm paying off student loans, and I saved till age 65. I'm giving up 10 years of growth, so the students saving $410 a month starting 10 years later, instead of having 2.7 million, if they started at age 25, that drops them all the way down to about 1.9 million. Still not bad, right? But waiting to pay $37,000 in student loans cost them $700,000 in future value. And the student paying $910 for their $85,000 School loan goes, this is huge goes from 6.2 million all the way down to 4.2 million.


So the school loans that theoretically cost them $85,000 ended up costing them $2 million for missing out on that 10 year period of letting their money work for them. So young people, especially in parents, just two things to take away from this one. Seriously, get the least expensive education that you can. Now listen, what's so frustrating to me about college right now. We've got the internet and technology, all this, you know, great stuff going on. Yet schools haven't got less expensive, they really should. And the reason is literally because of school loans, be they're given to anybody. There's really no reason to compete. If you're a school, you know that if somebody wants to come to your school, they can just go get a school loan. They don't have to reduce tuitions. And it can be really frustrating. Not very many people shop for schools, you don't shop for the bargain, right? They just pick a school they want to go to, and because theoretically, the loans and the money's there, they do it.


So sadly, unless you're gonna go be in a medical field or some sort of specialty. Really, not many employers care where you actually went to school. And again, that's not in every case. But pick the right school. Make it affordable. Don't come out with school loans. Number two, save immediately as soon as you possibly can. You know, I get an opportunity to work with a bunch of high school kids really bunch of great kids and we have financial conversations every so often. And I'm always telling them, look go mow lawns, wash windows, you know, working at fast food, whatever you have to do, save some money. Because you can imagine what happens if a 16, 17, 18 year old kid can start saving money right now and let that just grow and compound. It is huge money. Compounding is the hardest working money that you'll ever have. And it'll pay off down the road in spades. But you got to be patient. You got to give it time.


All right, finally back to where we started. Parents often times you're sacrificing your retirement to pay for your child's education. That's admirable. However, I don't know if you've really looked at what's happening and the costs and what that means. I mean, if it's the difference between nearly double your income, if you save for retirement, and can avoid having to put so much money out for college. Is that not at least something to consider? Now, I'm not here to tell you how or where to send your child to college. But I hope you'll take a few minutes and realize if you're gonna spend 30,40, $50,000 on a child's education. And you might have 2, 3, 4 kids, it's costing you a lot more than you might realize. Don't be afraid to let your kids figure it out too. You know, I'm not saying I did it, right. But only one of our kids ever took a student loan, and it was on him. And he took it because the money was cheap and he could do other things with it, and he really pay for school.


Then he paid it off real quickly. The rest of them first of all, they worked you know through high school. They'd save some money, then they did it through grants and scholarships. One of them even made money while going to school using grants. So there are ways to be creative. If you look for him, don't just give into the narrative that you've got to provide the most amazing vacation. I mean college for your kids. They'll get through it. And the less debt they have, the faster they can save. And that's gonna benefit them in the long run. Look, this is a debt crisis for sure. But the politicians who say the answer is to give college away for free simply just puts the burden on every taxpayer. It's eventually gonna be paid costs aren't gonna go down. They're gonna go up. Why would it college not want to pack more costs into their tuition if the government's gonna pay for it? Typically what the government touches does not get less expensive.


I would love to see the public sector find solutions through technology, online, all those different things that could really drive the prices down. My fear is college and universities don't necessarily want innovation and reduce costs. They like to kind of stick it to these kids with tuition. And even though they have billions of dollars in their endowment funds at some of these universities. Ultimately, the answer is to make college more affordable, online streamlined, and don't put the burden on these kids for 10 or more years after they get out of school. With some innovation, college can be available and affordable to everyone. Sounds like I'm on my soapbox, now. Sorry about that. Anyway, that's it. Be a saver not a spender and don't shackle yourself and your kids two decades of debt and miss out on years and years of compounding. And parents. You don't have to give up a comfortable retirement just to pay for your kids college. Kids can be creative to work through school pay their own way, choose a less expensive school and so forth. They're plenty of alternatives.


Well, that's it. I hope this was informative, kind of fun to talk about. If you have any questions, shoot them to questions at wise money tools.com. Don't forget to subscribe. And if you have any comments, write them below. We'll try to answer those as quick as possible as well. Until next time, hope you have a great week. Take care.