Ask the grumpies: Retirement vs. college savings

Alice asks:

How do you decide at what income level to begin funding a 529? I know the mantra of ‘max out tax-advantaged retirement accounts first’, but that is a lot of money to put away (~30% of income) before starting any college savings…I assume we’ll be in the ‘squeezed’ middle on college, with too much income for aid but not enough to pay full freight outright. It seems that at least some dedicated college savings are worthwhile after 15-20% retirement savings, even if not optimal as far as taxes go…We’re assuming private or out-of-state public are in the cards, and want to avoid student debt. I’ve heard the ‘Roth contributions can be used’ chorus, but that won’t go far with current tuition rates.

TBH, if I had to do it all over again, I would max out retirement first instead of regularly contributing to 529s. Because of financial aid.  You can read about how our minds have changed on this topic via this cut of our archives, though I’m not sure we ever spelled out the history in one concise post.  (For an alternate cut, here’s the college tag.)

If you’d asked us this question when we started the blog, we’d have told you to make sure you were (getting any employer matches and) saving 15% of your income for retirement (more if you need catch-up savings– we’d have recommended you play with online retirement calculators to see whether or not you were on track) and then put a regular amount away for college with every paycheck.  We’d have told stories of how we knew people whose parents had spared no luxury (cds, cars, clothes, regular vacations to Hawaii, etc.) but then the kids couldn’t go to the fancy college they’d gotten into because their parents made too much money for decent financial aid and they had nothing saved.  And that’s not terrible advice– make sure you’re on track for retirement and then put money away for college to give your kids more options.  I don’t completely regret having taken it when the kids were younger.  Their college savings have grown at a nice clip, and it’s likely both will be on track to go to the private schools of their choice even without financial aid.

These days we’re much more attuned to the importance of College Financial Aid (Forbes Magazine has a great series on the topic– click here for the latest updates).  You can ignore this concern if you prefer to think of tuition as a donation to the school (which for us depends on the school… I’m always irritated at the fundraising letters we get from DH’s graduate alma mater given their endowment).  Will you be squeezed?  It turns out there are calculators for that, and those calculators depend a lot on how much money you have that can be tapped for college.  Formalized retirement savings (even the Roth savings) do not count for financial aid.  This Forbes article from 2017 is a little out of date, but should give you a good idea of how your income translates into financial aid (or not) for different types of schools.

To get an even better idea, you should pick a set of colleges that you could see your kid potentially attending, and spin through their financial aid calculators.  These individual aid calculators have become quite sophisticated and you can see how different colleges will treat your different levels of assets vs. income etc.  So you can run the counterfactuals to see that, for example, if my DH loses his job and makes no income, that won’t at all give us any more aid at Harvey Mudd (which is stingy for high-income folks and extremely expensive) or our local state school (which we could cash-flow), but would make a big difference at Harvard (which is generous up the income distribution).  (Here’s us doing those exercises and contemplating how much we would need to save for a set of private schools .  I just spun through the super simple Harvard calculator and for spendthrift high income folks with no savings, your kids can still get a scholarship at a joint parental income of 260K!  You can play with how hiding assets in retirement changes aid compared to having to report them like with a 529.  Note that Harvard is a bit of an outlier both in terms of generosity and how easy it is to use their calculator.)

Loans for college are not a terrible idea, especially if you can get subsidized loans.  You can put money away for retirement now and then take out loans for college that you can repay more quickly by contributing less to retirement later when the contributions will no longer count for college.  If you’re maxing out your retirement options today at 30%, then you can drop down to the match later when your children need the money.

Many people feel uncomfortable using money for purposes that they have not initially dedicated that money to.  For this set of people, putting money in a 529 is the only way to guarantee that a child will be able to go to something other than the cheapest college option.  If this feeling is acknowledged, however, and planned for in advance, I think it can be gotten around.  You can decide now what money you want to earmark now for college, put that in retirement funds instead, then take out loans and repay them later for the amount in question by putting less in retirement later and cash-flowing.

In terms of using a Roth to save for college– there are a couple of wrinkles to doing that.  Drawing money out while your child is still in school can decrease your financial aid eligibility because some of that hidden money turns into income.   Here’s another post with more details on the pros and cons of Roth IRAs for college savings.  Note that these cons can be gotten around by delaying when you use the Roth until the child is close to graduation, assuming that doing so will not affect a younger child’s financial aid eligibility.  (And the principal rather than the earnings can be withdrawn after college is complete for no penalty.)

College is not cheap, and it may be worth saving 30% or more of your income now knowing that some portion of that is being saved for college (in terms of needing to save less than 15% of your income later) even if you’re not earmarking it.

Now, I noted that today we regret not having put the $500/month/kid in our kids’ 529s (not to mention mortgage pre-payments) in our retirement options instead.  The reason for that is that we are now high income and we are maxing out our retirement options (DH also has much less space to save than he did when he was working for the university).  Any money we save over that amount cannot be hidden from colleges.  There are a number of pricey schools out there that we will not get financial aid at should DC1 get in and decide zie wants to attend.  (DC2 may be better off in terms of financial aid since DC1’s tuition and living expenses will do a good job of eating all of those assets.)  We’ve paid off our house, have replaced DH’s car, will replace mine sometime in the next two years (Financial aid starts counting 2 years before college starts), and are renovating our kitchen, but even after all of that we will have assets leftover that could have been hidden in retirement accounts.  We could in theory buy a bigger house or I could get something other than a sensible car, but I guess I’d rather donate tuition to a university than make those changes.  (#richpeopleproblems)  (Note that if our income goes up more, then we can ignore all of this because we won’t be eligible at any asset-level, but if DH loses his job and our income is halved, then all of this becomes extremely important.)  Here’s our most recent recommendation of what order to save for multiple big financial goals, and here’s our recommendation of what vehicles to use.  Finally, if you haven’t opened up a 529, here’s our thoughts on which one to pick.

Grumpy Nation, what are your experiences with saving for college?

 

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Reminder: Check your retirement (and other stock) accounts!

My sister had 12K that was just sitting in the IRA she opened in college (and thinks she contributed to a couple/few times after getting her first job) making no interest in her etrade cash– it had been sitting there in cash for TWELVE YEARS.  (Her other two stocks in that account were etrade and paypal that she bought in college.  I’m pretty sure I didn’t advise her on that– I was telling everyone my age and younger to buy QQQ!  I understood both that tech was important *and* that broad-based funds (in this case a technology ETF) are the best.  I assume that was advice from our father.)  I put in a order right off to buy Vanguard’s 2060 target date fund with that cash (we chose 2060 because she has a defined benefit pension that has vested, so she can afford to be riskier with retirement savings).  Because if you’re going to set and forget…

Then she put in another 11.5K for 2018 and 2019 and is going to follow the steps to set up a backdoor Roth even though she thinks it’s sketchy.

She also has 30% of her 401(k) portfolio invested in company stock.  She’s been meaning to sell it off for a while, but with one thing and another over a decade has passed and here we are.  She’s not sure if she’s going to sell it all on Monday (the company value is currently coming out of a low point) or if she’s going to set up automatic quarterly sales.  I recommended the quarterly sales (there’s still more of this stock coming in!), and found the number for her to call in an email the retirement provider had sent to her this year saying she had too much invested in company stock, but I also said that if that’s too hard to set up to satisfice and just sell what she’s got.

I’m not a saint either– When I checked at tax time, I had over 1K sitting in my own etrade cash account (taxable) because one of the stocks my father had bought when he was managing my stuff got bought by another company and rather than me getting the other company, I ended up with just the cash.  Which sat there for a few months because I don’t pay attention to that account.  And for some reason last quarter all our QQQ etrade accounts stopped DRIPping (maybe there was a name change again?  It looks like it has lost a Q.) — there was enough in each account to buy one share, but with a $6.95 commission, so I put the money into VFINX instead.  Luckily I do look at these accounts once a year around tax time…  Etrade’s cash account doesn’t even make reasonable interest like Vanguard’s money market fund does!

The other thing we needed to change on my sister’s IRA account was her beneficiary– she’d listed our father, but she’s fairly sure that her niblings have a higher probability of being alive when she’s gone, so now that over a decade has passed and there is a younger generation that didn’t exist when she set up the account, she switched those over too.

To sum:

  1.  Take a look at your accounts to make sure you’re still invested in what you think you’re invested in.  (I’m not even talking about something complicated like rebalancing!)  Sometimes companies merge or die or your dividends stop dripping and you end up with a bunch of cash where you thought you were getting market returns.
  2.  Make sure the people you have listed as beneficiaries are still alive and are still the people you think should be inheriting.  If you’ve had additional kids since listing a beneficiary, make sure you’re not just listing the oldest!

When was the last time you checked your stocks?  Do you know who you’ve listed as beneficiaries?

I bought some plates

They’re the Lenox butterfly plates* I said I wasn’t going to get until my children were out of the house.

What changed?

Well… my MIL bought some before Christmas.  She got the kind that are made specially for Macy’s, so they’re blue.  I made sure to use them at every opportunity and got little sparks of joy while doing so.  They’re thicker than they used to be and the image isn’t printed on quite as nicely as they used to be.  Them not being quite as nice is likely related to the fact that the price has gone WAY DOWN since I wrote that post saying I wasn’t going to get them.  On top of that, the holiday sale that my MIL bought her plates from was still going on, so a set of 6 dinner/salad/cups in my preferred design was only $99 instead of nearly $400.    At that price, I can handle the predicted amount of breakage without tears.  It’s more than the white Corelle we’ve been getting (and slowly breaking into a zillion tiny fragments), but not *that* much more.

Next holiday sale, I think I might get the hydrangea pattern which will come with bowls instead of cups.

Now… we’re not actually *using* the plates right now.  The Corelle stuff (along with the four of our original floral Target at Home plates that haven’t broken) is on top of the Lenox in the cupboard and we haven’t really had time to entertain at all since we bought them.  But I’m happy to know that we have them and they didn’t cost too much.  As we continue to shatter the Corelle we will eventually start using them as daily plates rather than replacing the Corelle.

So… part of being willing to buy nice things is the price of said things dropping!

Are there things you would love to buy if they weren’t so darned expensive?  Do you keep your eye on things in case the price drops?  When the price does drop, do you buy?  For your specific wanted item, is it about not being able to afford it, or about feeling crappy if something goes wrong with the purchase?

*(Yes, I know this is a very grandma set of plates– I don’t care!  The heart wants what it wants.)

Ask the grumpies: Why Leah needs to get a will

Leah asks:

How essential is a will, and how do I get over the inertia and actually get one since I suspect it’s likely really important?

If you don’t have kids, a will probably isn’t that essential unless you’re wealthy and care what happens to your money after you’re gone.  You’ll be dead and may not care if your potential heirs end up giving all your money to lawyers trying to figure out who gets what.  If that’s the case, just let probate deal with stuff.  If you’re wealthy enough to be affected by the estate tax, dying without a will means that the government will probably end up with a greater share as well, but I have a hard time feeling sorry for people in that category.

If you have kids who are not yet adults, you need a will because you need to make it clear where your kids will go (and who will take care of their money) in the event that both parents die.  This alone is the reason we got wills.  If you have kids, providing for their future care is an important responsibility and should be done ASAP.  You don’t want them to end up in the foster care system even temporarily.  It’s also important to make sure that you have named the person who will be taking care of any assets you leave them, for example, the life insurance that you have also purchased because you have minor children.  We have named DH’s brother and his wife’s family as the first place our kids would go (with their permission), but my sister would be in charge of their inheritance.  Her values about paying for education and so on are more in line with ours and she would be better able to force DH’s brother and wife to take an annual stipend for their upkeep.

It is also useful to have advance directives about what happens if you are incapacitated, though depending on what state you live in, you can do this with your doctor or using an online form rather than with your lawyer.  This was part of the full package when we did our wills.  Here’s the info for MinnesotaMichigan allows you to file yours in a statewide registry, which is pretty cool.

How to get over the inertia?

Right now.  I mean, literally right now, contact a bunch of people in your area to ask them who they have used for a will.  Once you’ve got a name, MAKE AN APPOINTMENT.  Spring break is probably a good time to actually go in, but make that appointment now.

Now, they may send you a long form asking detailed minutia about your assets.  If your net worth is nowhere near the estate tax limit, do not let this form stop you from actually going in.  Let them know that you don’t need anything fancy because your wealth is lower than 2.7 million, the estate tax limit in Minnesota (or 11.4 million if you live in Michigan, since Michigan has no estate tax…), (actually, let them know it’s lower than 1 or 2 million if that is true), so that other stuff is irrelevant.  Then you might not need to fill out the form.

You, Leah, (and your DH) need a will because you have kids.  Having a will is the responsible thing to do.  It will be pricey (ours was ~$500, but that was a decade ago!  Though we get to update ours for free in perpetuity as part of that upfront cost), but it will be worth it for your kids if the worst possible thing happens.  It’s worth saving up for.  It’s worth taking out of your emergency fund.

Grumpeteers, how did you get your will done?  Anyone have success with online outfits like legalzoom?

Making a hole in the wall look pretty while still being accessible

Long-time readers may recall that a while back we got a whole-house water filter.  It was a saga.  One of the things they had to do was cut holes in the drywall, which they then taped back up.   Since one of the holes was in DH’s closet, he decided to make it prettier.  Then he wrote up this post and sent it to me.

Picture of a square hole in the wall and ugly tape marks

The hole

The plumbers had to cut into the closet to access the pipes when they installed the whole house water filter. When they were done, they just used duct tape to stick the drywall plug back in the hole. The duct tape looked pretty hacky, though luckily it is in a really out-of-the-way spot (the corner of a closet, right beside a built-in, right above the baseboard).

I like having access to pipes/manifolds, so I didn’t want to just seal/patch over the hole. I wanted a framed door, and could not figure out how to make one easily. So instead, I glued the frame (really baseboard I hand-cut to fit) to the drywall plug, added a knob (with a large washer in back to spread out the force on the drywall), and touched up the paint.

The resulting “door” looks much better, and it just pulls out. It could almost just stand up by itself, but was slightly tilting forward and would fall out, so I added a small square of velcro to the top of the frame to hold it to the wall.

I’m pretty happy with the way it turned out. If I were to do it again: 1) I found it hard to cut the 45 degree angles on the baseboard by hand since we don’t have a table saw, so I would see if I could get Home Depot to cut at least a couple of them nicely, and 2) I don’t like the way the velcro is visible from the top and it results in a gap between the frame and the wall, so I would probably try removing the velcro and instead placing some kind of foam around the drywall plug so that it would be held in the hole by the force of the foam around it. I should probably still go around that corner of the closet with putty to fill in the various little gaps.

So I (#1) think that’s pretty cool.  I don’t normally pay much attention to aesthetics, but this is a really nice example of form follows function.  We had long discussions about how to make this area look nicer while still allowing access, and, importantly, letting future home-owners/renters know that there’s something important back there should they need access (say there’s a leak or a plug).  Making an actual door would be too much effort and would probably allow drafts in (given hinges etc.), but this looks like a door so it signals that there’s something behind there, while still looking pretty.  We also discussed the merits of velcro vs. magnets, but magnets are potentially more dangerous (given kids and animals), and it’s not like this is going to be opened and closed frequently enough to make the velcro wear out.

Ask the grumpies: IRA with Vanguard or TIAA-CREF?

Steph asks:

I’ve managed to swing one month of actual wages this year (my salary is usually all a stipend/fellowship), which means I can put some money in an IRA! I have an existing IRA with Vanguard, but the 1 month job will also let me put money directly into an IRA at TIAA Cref. I won’t quite make enough to hit the yearly max, even pre-tax, and there’s no matching. I’m leaning Vanguard – do you have any suggestions?

Disclaimer:  We are not professional anything except academics– do your own research and/or consult actual professionals before making important monetary decisions.

You are correct to prefer Vanguard.

Vanguard has better fees for IRAs than does TIAA-Cref.  Vanguard is pretty nice to work with.  You already have an existing IRA with Vanguard, so you’ve already done the hard part of getting it set up.

The nice thing about TIAA-Cref is that they will send a person to hold your hand if you need help with something.  But this is just a basic IRA and you’ve already got one.  The TIAA-Cref option is better for people who just aren’t going to get an IRA unless they get help from someone in person.  Which isn’t you.

Finally, depending on how much money you have invested and how you have it invested (we presume low cost broad-based index funds), Vanguard has even lower fees for its admiral funds.  If putting more money in allows you to hit the threshold, then you’ll be paying an even smaller percentage in fees than you were before.

So… I don’t see any downside for keeping with Vanguard or any upside for putting an IRA into TIAA-Cref.

 

Two years without a mortgage

It’s hard to say what has changed because so many other money things have changed as well.  DC2 is no longer in preschool so we’re not paying for that, and DH and I are both getting full-time salaries (and we’ve both gotten raises).

Our non-mortgage/non-daycare spending has definitely gone up.  We were in the city the other day without the kids and didn’t even blink at spending $30 at a cafe for two meals (duck confit and bean ragout for DH and blood orange beet salad for me).  We’ve been flying to DH’s family for Christmas instead of driving.  Whenever I’ve been feeling stressed, I hit up donorschoose and drop $25.  And there’s been all that political spending.  And summer camps aren’t cheap.  But, with the exception of DH’s new car (can we really make that an exception?), I don’t think this additional spending has completely caught up to the $750/month we were spending on daycare plus the $1,214.40/month that was going directly to payoff our mortgage.  (Not including property taxes and insurance, which we still have to pay and both of which have gone up quite a bit in the past two years.)

So I guess bottom line– Not having a mortgage has increased our spending, but it hasn’t been a 100% offset.  Not having a mortgage has also increased our monthly cashflow cushion.  There’s just more left over at the end of most months.  The first mortgage-free year (when DC2 was still in preschool much of the year) I was still having to dip into savings on occasion to pay the big bills like income tax or property taxes, but this year I was able to cash-flow property tax from DH’s salary (DH’s salary direct deposits into checking and mine into savings).  We’re not really living on just DH’s salary because almost all of our retirement savings and benefits spending comes out of my paycheck, but for the past year (minus the car purchase) it sure has been feeling like we don’t touch my income.

We’re also now almost getting to a point in which we have to decide what to do with the extra build-up of money since we’re maxing out our tax-advantaged retirement savings (including backdoor roths!) and have paid off all our debt.  We do have a list of important big expenses that we’ve been going through, which is why we’re now at the Kitchen Renovation bullet.  If we still had a mortgage, I don’t think we’d be there.

Has your life changed after finishing a big regular expense like daycare, a mortgage, or a car payment?