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How To Retire (Your Kid's Edition): Don't Save For College

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Includes: ANH.PC, BKH, CINF, CMO.PE, CVX, CWT, DX.PB, ED, EMR, ESS, IVR.PC, IYR, JNJ, KMB, KO, LOW, MCD, MMM, MO, NNN, NWN, O, PEP, PG, PM, REIT, SHV, SWK, SYY, T, TCO, TGT, TROW, UVV, VNQ, VZ, WMT, XOM
by: Colorado Wealth Management Fund
Summary

It’s a given - contribute to your kid’s college fund or you’re a bad parent.

With the college money spent, wish your kids the best as they’re “starting out.”.

Or consider another saving and investing philosophy for your child’s first 18 years.

As we detail in How To Retire: Don’t Go To College, we’re not fans of the traditional university route:

Young people are taught from an early age that they can't put a price tag on education. That theory is precisely wrong. Colleges put price tags on education. They've been increasing the price dramatically faster than inflation.

Better options exist if your kid decides he or she wants to pursue education past high school. Skip the expensive private school and opt for a more reasonably-priced (though not always bargain-priced) state school. You can also steer your offspring in the direction of knocking out general education requirements and such at a community college.

Or, better yet, drive the conversation toward not going to college at all. We’ll save the details for a future article, but there’s no debating that the definition of work has changed dramatically in the last five to 10 years. It will continue to change as freelancing, remote work, and the idea of a decades-long career working the same job everyday fades into oblivion.

Many young people today “gig” rather than “nine-to-five.” They gain experience via experiences other than traditional routes. Certainly, college can be an experience, but so can interning at a production or financial services company, ramping up a writing career, or taking a fraction of the money you’d spend at Stanford and traveling North America or Europe for six months or a year.

All of this to say, take convention and reconsider it. Make new rules. View the once-obligatory college fund as a potentially much more impactful retirement fund that you start to assemble at or around birth.

The college fund ideal

When you decide to have a child and she’s on the way, you start her college fund. That’s about as much of a given as buying and securely attaching a car seat in your new minivan. We have ingrained the notion of starting a college fund at or around conception or birth into our societal fabric so much so that it has become an ideal. If you don’t have a college fund going, you might feel as if you lack as a parent. You definitely run the risk of judgment and, worse yet, scorn.

If you consider this critically (which very few people appear to do), it’s absolutely absurd.

You likely have a limited amount of money to invest after paying for housing, transportation, other necessities and whatever entertains you. You need a significant chunk of that cash, if not most of it, for your own retirement fund. You might be saving to buy a home. Of course, you’ll want to keep emergency funds set aside for various purposes having to do with everyday life and current or future homeownership. Then, with whatever you have left, you do your responsible parental duty and fund the obligatory college savings account.

Maybe you’re socking $50, $100, $150 or more a month into a 529 plan or some other tax-advantaged vehicle that makes exceptions for higher education. Whatever you’re doing, you have the money earmarked for college and you structure the investment strategy accordingly. In some cases, you effectively hand the decision-making off to somebody else and invest passively like a good parent waiting to wipe away tears at the high school graduation ceremony.

Given that you’ve been “saving for college” for 18 or so years, it has become a given that your child (or children) will attend university right out of high school. From a psychological standpoint, this college fund has contributed to conditioning the entire family into owning “the kid goes off to college” mindset.

You saved for college for 18 years. If the payoff isn’t blowing everything you saved -- and probably much more, alongside, quite possibly, student loans -- on a four-year education at a good school, you "failed". Or have you? Can you reconsider what we as a society consider a given, thinking about it from a fresh and more logical perspective?

Putting your child in the hole once they become an adult

By the time your child hits 18, you have amassed a considerable nest egg labeled “college fund.” Your psychology won’t let you think of it as anything else. It’s money for college. And you’re setting your child up for success by helping him get into a good college and paying for it for him… if you’re lucky. If you don’t have to shell out more money as the months and years go on or, even worse, take out a federal or private student loan, or both.

You might also be helping your new college student with living expenses and spending cash. Beyond that, he’s the typical college student. He “has no money.” There’s a good chance he’ll have to take on a part- or full-time job to make his way through college and have a life in the process. He’s still eating microwave ramen and drinking cheap beer.

As college graduation draws near and the job hunt begins and hopefully concludes successfully, you tutor your offspring on the importance of starting to save for retirement right away. If you’re smart in your 20s, 30s, and 40s, you’ll be able to take it easy when you start feeling too old to work in your 50s and 60s.

That said, the stark reality might be that you saved a whole bunch of money for your kid and you’re dead set on spending it on an education she might not actually need. Our children can certainly pursue alternative educational paths or no college education at all and still reach their potential as fully-functioning, society-contributing adults.

However, quite frankly, it might actually be more difficult for them to get there with zero or little money saved because you had to spend it all on college.

We expect our children to come out of college and embark on the journey of “just starting out.” We have attached nothing but positive connotations to the idea of “just starting out.” Date in your 20s (and don’t save because you’re only in your 20s), settle down in your 30s, finally save (for the wedding), buy a starter house, move out of the starter home and get your second home with room for the kids, who you’ll promptly start college funds for.

This way of thinking, being, and saving for our children could, assuming we’re not flush with abundant wealth to go around, literally put our children in the financial hole by 20 years. By saving so much money and then spending it all in four or so years, you have robbed your kid for two decades’ worth of wealth accumulation.

Would you rather fund an education they might not need? Or give them a potentially massive head start on being able to retire early or, quite comfortably, in their 40s, 50s, or 60s?

An alternative approach

We suggest an alternative route. Instead of loading money into the college savings account, begin focusing on maxing out your own IRA and 401k. Besides the potential for your 401k to include an employer match, you'll also be able to invest these funds a little more aggressively.

For instance, an IRA built for someone who has a few decades before retirement might look like this:

Ticker Name Allocation Div. Yield
NWN Northwest Natural Gas Company 2.15% 2.66%
PG Procter & Gamble Company 2.26% 2.46%
EMR Emerson Electric Company 2.25% 3.06%
MMM 3M Company 2.15% 3.48%
CINF Cincinnati Financial Corporation 2.27% 1.97%
KO Coca-Cola Company 2.20% 2.96%
JNJ Johnson & Johnson 2.12% 2.93%
CWT California Water Service Group 2.21% 1.46%
TGT Target Corporation 2.73% 2.48%
SWK Stanley Black & Decker, Inc. 2.21% 1.94%
MO Altria Group, Inc. 1.88% 7.83%
SYY Sysco Corporation 2.45% 1.98%
BKH Black Hills Corporation 2.12% 2.64%
UVV Universal Corporation 2.10% 5.38%
WMT Wal-Mart Stores, Inc. 2.31% 1.82%
PEP Pepsi, Inc. 2.26% 2.84%
XOM Exxon Mobil Corporation 2.18% 4.80%
MCD McDonald's Corporation 2.08% 2.22%
NNN National Retail Properties 2.16% 3.79%
O Realty Income Corporation 2.29% 3.63%
LOW Lowe's Companies, Inc. 2.44% 1.97%
KMB Kimberly-Clark Corporation 2.09% 3.11%
ED Consolidated Edison, Inc. 2.24% 3.25%
T AT&T Inc. 2.31% 5.56%
TROW T. Rowe Price Group, Inc. 2.31% 2.62%
CVX Chevron Corporation 2.20% 3.86%
PM Philip Morris International Inc. 1.87% 6.39%
VZ Verizon Communications Inc. 2.31% 4.04%
ESS Essex Property Trust 2.33% 2.39%
TCO Taubman Centers 2.19% 6.49%
IVR-C Invesco Series C 8.44% 7.21%
DX-B Dynex Capital Series B 8.20% 7.61%
ANH-C Anworth Series C 8.35% 7.43%
CMO-E Capstead Series E 8.35% 7.31%

Putting that into a dividend portfolio tracker (free tool for subscribers of The REIT Forum), it would look like this:

Source: REIT Forum Portfolio

We can chart the allocations by market value:

Source: REIT Forum Portfolio

We can also chart the income from each position:

Source: REIT Forum Portfolio

That portfolio creates the potential for significant growth.

A college savings account is used in less than two decades, but your retirement account may have three, four, or even five decades to go. That depends on your current age, how long you live, and what type of account you're using.

If you're building a college savings account, you'll need to look at using larger allocations to short-term bond funds to reduce volatility. One fund that works well for that is the iShares Short Treasury Bond ETF (SHV). It maintains a very stable price, regularly dipping after with each ex-dividend date. Within the last year, the share price has remained within a range of $110.70 to $110.20. That's a very tight range. The yield isn't much (around 2.2%), but it is materially better than most money market funds will pay.

Let your child utilize federal loans (low-interest rate, NOT private loans) if they need the capital. You can still help, but do it after they graduate. When they get their first job, you can still provide monetary "gifts" to them. They can use those gifts to pay for groceries or rent, which allows them to use their paycheck to fund their own IRA and 401k accounts. By enabling your child to fund their own retirement account in their early 20s, they will have far more decades compounding.

They also get to learn about investing at a younger age and take advantage of an employer match on the 401k account, which many young adults completely miss.

That’s just another way to look at it. I hope you will. I’m sure many of you will have more to say in the comments. We have more to say on the subject of education and saving for it (or not), as we shift at least part of our “How To Retire” series into a practical thought experiment on how to best set your children up for retirement -- theirs, not yours.

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Disclosure: I am/we are long IVR-C, CMO-E, ESS,MO,PM,TCO,WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.