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by Alicia Adamczyk
February 05, 2018
by Alicia Adamczyk
February 05, 2018
This week’s question comes from M3000P:
I’d like to hear about strategies for saving for college (3 kids) while paying off a mortgage...
I wonder if I should stop putting money away for retirement so I can knock out my mortgage before the college bills hit.
I just feel like something has to give and does it make sense to keep saving for some unknown retirement future while I have a giant debt right now followed by another one coming in about 10.5 years.
Personally I don’t believe in the whole “you can deduct your mortgage interest” mantra. I feel paying 0 interest is better than deducting.
And I live in NY where I’m about to lose my state income tax deductions.
This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.
What this question comes down to is your priorities. And according to Roger Whitney, a Fort Worth, Texas-based financial advisor and host of the Retirement Answer Man podcast, paying off your mortgage more quickly probably shouldn’t be your top one.
“When you pay off the mortgage or start to pay down the mortgage you’re not going to save a ton of money in interest, and any extra dollar you throw to your principal you can’t get back, you can’t access if you lose your job or something happens,” says Whitney. “That doesn’t mean you don’t make an extra payment a year, but sacrificing saving for college or retirement in order to pay the mortgage off, I don’t think that’s a good idea when you’re younger.”
Instead, focus on getting rid of other big debt first (particularly if you have any credit card debt) and putting money toward your own retirement and your kids’ college, or what’s most important to you.
“In no case do I see paying off the home first as a good way to go,” says Lawrence Sorace, co-founder of New Jersey-based Mulberry Lane Advisors, LLC. “This is because, typically, home values increase by 5%, or less, per year and the home value increases regardless of how much equity you hold in it. If you use extra income to pay down the mortgage, you forego the opportunity to earn more in [other] investments.”
One caveat to this is that your home equity is not considered in the calculation of expected family contribution on the FAFSA. “Paying off the mortgage—increasing the value of an excluded asset—vs adding to a college savings plan—an included asset—has the potential to increase the amount of financial aid available to the student,” says Dave Bensema, Regional Leader of Wealth Planning with BMO Private Bank.
Philip Weiss, a certified financial analyst and accountant at Apprise Wealth Management, adds that your retirement savings are dependent on their time in the market. So putting them off is unwise.
“If you completely stop saving for retirement, you lose the potential advantage that comes with having your money compound over time,” says Weiss. “The other thing to remember is that when the time comes to fund college tuition, there are many ways to borrow to fund college. It’s much harder to borrow to fund your retirement.”
Weiss, who has four children, says he’s tried to strike a balance between saving for retirement, his emergency fund, and his kids’ college educations, and has had to make some concessions—his emergency fund, he says, is not where he’d like it to be.
But that’s a good lesson for all of us. As you’ve experienced first-hand, there’s just not enough money for most of us to do everything. So take some of the pressure off of yourself.
Instead of looking at things as discrete categories (or envelopes, if you use that method of saving) that need to get paid off in full, Whitney recommends looking at your total balance sheet. “If you build up your balance sheet you’ll have a lot more flexibility when and if life hits you,” he says. “Most people don’t have enough cash reserves when life hits them, and they end up going into debt or raiding their 401(k).”
You may think you need to have four years’ worth of college tuition saved up and set aside in a 529 account before your kid heads off to State U, but that doesn’t have to be, and likely won’t be, true. Instead, save a little for college and retirement—prioritizing retirement—and have a frank conversation with your kids when, they’re old enough, about what the costs are.
“Almost nobody can make the simple math work, it’s just too much money, and we’ll beat ourselves to death trying to do it,” says Whitney. “So save your 10 to 15 percent for retirement, save something for college, and then think about it as, how do I build up my balance sheet and my income so when they hit college I can just cashflow it and supplement it with the 529.”
As much as your kids may not want to hear this, there are other ways to finance a degree besides mom and dad picking up the tab: they can work themselves to help with payments, go to a community college for a year or two and then transfer to a four-year institution, take a gap year to build up savings, or go to a trade school.
And by the time your children are old enough to go, the college landscape could look a lot different than it does now. “If you look at a 20-year old today, they have a 50-50 chance of living past 100, and they’re probably going to have three to four different careers,” says Whitney. “If that’s the case, what’s the rush of getting your degree in four years? If you’re a parent and you have all of these pressures, you can think of it that way—it doesn’t have to be four years, it can be six years and they can work concurrently to help pay.”
That’s true of retirement, too. We all want to plan ahead for these big life events, but using college and retirement calculators now will not make us 100% ready for what the world will actually look like when we reach those milestones. Instead, we need to learn to be more agile with our money.
“I see a lot of people sacrificing a lot of their life trying to make the simple math we use work, and I think there’s a real personal cost to that,” says Whitney. “Don’t give up experiences with your family to fill some envelopes so they can go to a four-year college.”