Retirement or College Funds or Mortgage prepayment?

[TVRodriguez]

Well, it's been a while since I sought advice here, but here goes. I'm trying to decide where to put an extra $12,000 [a year-end bonus after taxes]. Actually, I'm already planning to take $2,000 for a family trip, so that leaves me with $10,000.

The choices I've given myself are not atypical: 1) Retirement/Investment, 2) Kids' College Funds (529 investment or Prepaid), or 3) Mortgage prepayment.

1. Retirement/Investment: We put in about 18% here last year. We're doing okay there, on track to have a nice nest egg in about 10-15 years (retirement time horizon for DH--I *think* I want to work longer than that--as long as I keep enjoying my work). But who couldn't use more invested? We maxed out retirement contributions for 2014, so anything invested would be put in our taxable account. If I put $10,000 into an investment account, there's no guaranteed rate of return, but if it's 7%, that gives me over $9,000 extra in 10 years, but taxable. Or, you know, it could lose money or stay flat. No guarantees.

2. Kids' College Funds: We have 3 kids, ages 3, 5 & 7, and DH is adamant that we pay as much of their education as we can (he and I together had loans of over $320K for our educations, which took a long time to pay off). He signed up for prepaid tuition plans for 4 years for each kid, which we pay monthly. I also opened 529 accounts for each, to which we contribute monthly. The forecast for the cost of their education is cloudy b/c it depends on so many factors (in-state, private, possible scholarships, tuition hikes). DH really likes the prepaid, but that works best if they stay in state. So we hedge with the 529s. I could take $10,000 and pay off one of the prepaid plans entirely, leaving the monthly amount free to contribute to the 529s. If I pay off a prepaid plan, I save about $4,000 in payments over time. I could take the $10,000 and put it in the 529s, which (invested in the market) could lead to an additional $9,000+ over 10 years (but no taxes on that if used for education), or could yield nothing.

3. Mortgage: We have just over 6 years left on our 3.375% rate fixed mortgage (current total due $88,000+) if we pay nothing extra to it at all. We have put extra towards this over the years, so we've already cut our original 30 year mortgage of $301,000 down a lot since buying 10 years ago. If I put the $10,000 here, it cuts off about a year of payments and only saves about $2000 in interest.


I could split the baby, but that just seems less satisfying. I think I'm leaning towards paying off one of the prepaid tuition plans (and getting the guaranteed return of $4,000) plus putting the amount that would have been that monthly payment towards the 529 plan. But then I wonder if I should put it somewhere else? Fyi, we have an emergency fund.

Thanks for reading this long missive! Thoughts?

[bae]

I made the mistake of plowing the extra money into paying off the mortgages, and into college savings.

My daughter got into a very expensive college which guarantees no loans will be necessary. They provide huge grants, so most of the students receive essentially a free ride. Even households with household incomes of ~$150k/year end up paying almost nothing. And they won't dip into your parents retirement funds in their need-based aid calculation.

If, however, you make the mistake I did of simply having the money handy, instead of either earlier plowing it into something that looks more like a retirement fund, or simply spending it on drugs, sex, and rock & roll, even if your household income is near-$0 you end up writing a check for the full $60k+/year.

So either slap it into retirement funds, or buy expensive wine.

[TVRodriguez]

If, however, you make the mistake I did of simply having the money handy, instead of either earlier plowing it into something that looks more like a retirement fund, or simply spending it on drugs, sex, and rock & roll, even if your household income is near-$0 you end up writing a check for the full $60k+/year.

Oh, geez, bae, that stinks! Then again, I suppose it's better to have the funds on hand since there's no way to predict if a kid will be faced with such a situation. . .



So either slap it into retirement funds, or buy expensive wine.

I'll have to add the "wine" option to the list . . .

[TVRodriguez]

I made the mistake of plowing the extra money into paying off the mortgages, and into college savings.

My daughter got into a very expensive college which guarantees no loans will be necessary. They provide huge grants, so most of the students receive essentially a free ride. Even households with household incomes of ~$150k/year end up paying almost nothing. And they won't dip into your parents retirement funds in their need-based aid calculation.

So in retrospect, would you have paid down the mortgages anyway? And did your daughter's college consider home equity similarly to protected retirement funds or similarly to cash/savings/available investments?

Because after re-reading a few of the threads about "investing vs. paying down the mortgage," I'm now reconsidering putting it towards the mortgage and working towards payoff. Paying off the mortgage had been a goal of ours a few years ago, but it got put aside. Now I'm wondering . . .

Honestly, I just need to make a decision already.

[TVRodriguez]

So, a quick google search led me to this website:

http://www.savingforcollege.com/financial_aid_basics/financial_aid_and_your_savings.php

which says that "The equity in your primary home, a family-owned business, insurance policies, and annuities are also excluded from your assets when determining EFC." The EFC is the Expected Family Contribution towards a college student's tuition. Apparently, 2.6%-5.6% of a parent's non-retirement assets and the same percentage of the balance in a 529 account are included in the EFC. Retirement accounts are excluded from the EFC.

Now, we are on track to pay off our mortgage before our oldest starts college anyway, but if we kill the mortgage sooner and prioritize the retirement account savings over the next years rather than the 529s/prepaid tuitions, then our kids will be better off in terms of securing grants. Plus, DH will be over 59 1/2 when college starts, so we should be able to draw from retirement accounts if necessary. Hmmm. I'm now adding the possibility of making a non-deductible contribution to an IRA for last year, b/c even though there's no current benefit to it, it won't count towards that EFC. I know, I know, I seem to be talking to myself here...

[Chicken lady]

We assumed our kids would get no need based aid and wanted to avoid loans. We had 529's for each of them. All three got merit based scholarships to good schools. the oldest got a "full ride" (tuition, room and board for 4 years - but because she majored in a materials heavy area, books and materials ended up costing around $8k). Part of the balance of her 529 will be used to make up the shortfall for her brother. They did choose schools partly on aid - the oldest also liked another school a lot, but not 75k more than the one that gave her the scholarship!

We also paid off the mortgage. Since we haven't had to pay any tuition or food for them out of pocket we've been putting away extra (the old 529 contributions, mortgage, plus less daily expenses) for retirement and also doing some "buy expensive wine" things and homestead improvements.

the youngest has 3 more years of school - we expect her to come out about even, but again will raid her sister's balance for shortfall if needed. Anything left in the 529's will be available towards grad school or rolled over for grandchildren.

[TVRodriguez]

I know, I know, I seem to be talking to myself here...

To finish the conversation with myself, and after discussing it with DH, we decided to just put it towards the mortgage.

I actually looked back at the few posts I made here a couple years ago, when we were so set on getting out from under the mortgage, and it reignited that desire. So, one step closer to that.

[TVRodriguez]

We assumed our kids would get no need based aid and wanted to avoid loans. We had 529's for each of them. All three got merit based scholarships to good schools. the oldest got a "full ride" (tuition, room and board for 4 years - but because she majored in a materials heavy area, books and materials ended up costing around $8k). Part of the balance of her 529 will be used to make up the shortfall for her brother. They did choose schools partly on aid - the oldest also liked another school a lot, but not 75k more than the one that gave her the scholarship!

We also paid off the mortgage. Since we haven't had to pay any tuition or food for them out of pocket we've been putting away extra (the old 529 contributions, mortgage, plus less daily expenses) for retirement and also doing some "buy expensive wine" things and homestead improvements.

the youngest has 3 more years of school - we expect her to come out about even, but again will raid her sister's balance for shortfall if needed. Anything left in the 529's will be available towards grad school or rolled over for grandchildren.

Thanks for sharing your experience. It's helpful. And congrats to your kids on their scholarships! That's fantastic.

[kib]

The choice you picked is the one I would have recommended. You're already doing well by your kids and the whole education arena is incredibly murky - who knows, by the time they're in college perhaps we will have 4 year tuition paid by the gubmint, or vocational programs that start in High School, or your kids will all decide to be cliff dwellers. That big house bill going away sooner will give you incredible freedom to put your future money where it's needed, when it's needed.

[bae]

which says that "The equity in your primary home, a family-owned business, insurance policies, and annuities are also excluded from your assets when determining EFC."

The thing that got me is that our "family-owned business" is our investments - stocks, bonds, loans we provide, real estate. The financial aid community viewed this as "cash to be looted" instead of "business".

So the Simple Living/Your Money Or Your Life approach, which we followed to retire in our mid-30s, failed us here.

[catherine]

The thing that got me is that our "family-owned business" is our investments - stocks, bonds, loans we provide, real estate. The financial aid community viewed this as "cash to be looted" instead of "business".

So the Simple Living/Your Money Or Your Life approach, which we followed to retire in our mid-30s, failed us here.

I'm going to invoke flowerseverywhere (hope she doesn't mind), who wrote this in another thread:


Now that I have grandkids instead of buying them clothes and toys manufactured abroad with cheap labor we are building up their 529's. People tell us we should not do that as it will hurt their financial aid chances. What are you talking about? Isn't the purpose of money to use it on what you feel is important, not to game the system? If there is financial aid it should go to people who really need it.

Yeah, that's the rub, right? My grandson's birthday is coming up and I told DH I thought it would be a good idea to start a 529, and he said, but that might bite our kids in the butt later on by reducing their aid. I agree with flowerseverywhere that hiding your money IS gaming the system, and is unethical, so bae, you may be poorer because of how the system works, but at least your integrity is intact.

I would have put the money toward the mortgage, too, TVR.

[TVRodriguez]

Yeah, that's the rub, right? My grandson's birthday is coming up and I told DH I thought it would be a good idea to start a 529, and he said, but that might bite our kids in the butt later on by reducing their aid. I agree with flowerseverywhere that hiding your money IS gaming the system, and is unethical, so bae, you may be poorer because of how the system works, but at least your integrity is intact.

I would have put the money toward the mortgage, too, TVR.

Thanks! Feeling good about it. Actually motivates me to look for more money to throw at it.

But on the other point, the 529 point, I think that only 529s that are owned by the student or the parents count towards the ECF and therefore should not hurt aid chances. Although it's possible that any 529 money received in one year might count against the next year's aid, so maybe grandparents should hold their cards till the last year of school and spend it then! Not 100% sure of that, as I wasn't reading for that yesterday, but the website I linked to earlier might have that info, or some of it at least.

[flowerseverywhere]

Catherine, no problem. Every day I feel so lucky for everything I have. Eating out, fancy clothes and cars and other luxuries mean nothing to me next to spending money on education and enriching experiences.

But we all are shaped by our experiences and I know many people have different opinions about these issues. I have so much respect for Bae, with what he has accomplished and the wonderful things he does for his community. We just think differently on a few things. for the OP, what a tremendous accomplishment to be able to actually have to figure out where to best save money when so much of the world is struggling with poverty, war, oppression and no future. We are indeed fortunate.

[TVRodriguez]

Every day I feel so lucky for everything I have.

... to be able to actually have to figure out where to best save money when so much of the world is struggling with poverty, war, oppression and no future. We are indeed fortunate.

YES!!

[LDAHL]

Having known a number of families in bae's situation, and since we'll be old enough to tap tax-deferred accounts at college time, we have established the following priority order:

1) Keep the emergency fund topped off.
2) Maximize the available space in deferred compensation plans, Roths, HSAs, and pension accounts.
3) Mortgage prepayments.
4) 529 plans.

Hopefully whatever credits are available at the time will at least partly offset taxes due on retirement plan draws.

[flowerseverywhere]

I was thinking about this thread and I was thinking, just because I think the way I do, someone more bright or experienced might be able to manipulate their finances for the greater good.

Say you could figure out how to save money on taxes and college tuition and with that saved money did something for your community. Like opened a small business, fund a fire department employee, send a kid to tech school. There are many ways to use money for the greater good.

Money is is just so difficult to manage. It can be toxic or the greatest gift.

[TVRodriguez]

we have established the following priority order:

1) Keep the emergency fund topped off.
2) Maximize the available space in deferred compensation plans, Roths, HSAs, and pension accounts.
3) Mortgage prepayments.
4) 529 plans.


So, as an update, this is what we're continuing to do. I've been having a good year at work this year (self-employed, so income fluctuates) and have been able to send additional amounts to the mortgage after accounting for income taxes and after putting into Retirement accounts. I'm motivated again to get rid of the mortgage. Got it down to less than $58,000.

Wow, in looking over this thread, that tells me that it's gone down by $30,000 since I started this thread in February. Makes me so grateful that I'm able to do that. And grateful for having a DH who is in agreement with me doing that instead of wanting to buy a new car (ours are 7-16 years old) or something else.

I am indeed fortunate.

[TVRodriguez]

The thing that got me is that our "family-owned business" is our investments - stocks, bonds, loans we provide, real estate. The financial aid community viewed this as "cash to be looted" instead of "business".

So the Simple Living/Your Money Or Your Life approach, which we followed to retire in our mid-30s, failed us here.

bae, I've thought about your comments about college aid requirements quite often, and I've been considering what to do if we are able to put more away than we can in qualified retirement vehicles. I've been looking into tax-deferred annuities for that particular reason--college aid applications. But first, the mortgage, regular retirement vehicles, and 529 plans...

[TVRodriguez]

At the risk of crowing, I'm updating this to say that our mortgage is down to $35,000 as of today! My business is having its best year ever, and I'm putting my good fortune to work in reducing our debt while I have the chance.

Since I'm not sharing this in real life with anyone, I like to be able to post it here.

[razz]

At the risk of crowing, I'm updating this to say that our mortgage is down to $35,000 as of today! My business is having its best year ever, and I'm putting my good fortune to work in reducing our debt while I have the chance.

Since I'm not sharing this in real life with anyone, I like to be able to post it here.

Well done! It is hard to want to share in one's excitement but RL isn't a good place to do that so post away and we can be pleased for you and with you.

[TVRodriguez]

Thanks, razz!

[SteveinMN]

Nicely done, TV! It's hard to follow intentions with actions, but you have and you're enjoying the rewards of that. Good for you!

[iris lilies]

Great news op!

[catherine]

I am so totally jealous! I'd have done exactly the same thing. Congratulations!

[TVRodriguez]

Thanks, Steve, iris lillies, and catherine! I appreciate the good comments.

[TVRodriguez]

Well, I did end up sharing our mortgage paydown plan with one friend IRL, since she was telling me about how she had minimized all her expenses to be able to put as much into retirement as possible for the next five years. She started a new job about a year ago and it's paying her a very high salary, so she is trying to make the most of it by keeping her personal expenses down so she and her husband can retire in five years (she's 55). She knows that I'm more frugal than some of the other attorneys we know, and so I told her our plan is to pay off the mortgage. She was very excited for me, which is nice, as I was also excited for her in hearing her plan. It was encouraging to hear her comments.

And this week I put another $13,000 to the mortgage. It'll be down to $18,500 tomorrow when the payment hits!

[freshstart]

1) Keep the emergency fund topped off.
2) Maximize the available space in deferred compensation plans, Roths, HSAs, and pension accounts.
3) Mortgage prepayments.
4) 529 plans.



This is what I did. Every personal finance book I read, said fully fund retirement accounts before moving to #3 or 4. The theory being you can't borrow for retirement. So I couldn't reach the retirement max each year (close but no cigar) and thus did not save for #3 or 4.

Thank God I went this route. After 23 yrs of working full time as a nurse, in Sept, I became ill, so after many months out of work, I've had to apply for SSDI and long term disability. I never gave much thought that something could happen to me so did not do a lot of planning in this area. Sort of working out for me so far. I had paid very little into a voluntary short term disability policy that became available the year before I got sick, so that paid out. Voluntary Long term disability cost too much, but in hindsight, I should've sucked it up and done it. Now that I am disabled, I can touch retirement accts without fines. I've spoken to two financial planners who worked out how much I can take out each month without ever touching the principle. Hoping to never do this, the comfort that that money is there is immeasurable.

I felt guilty that I never got to filling 529s but if I had, what the heck would I have done? So I feel badly about this but it doesn't have to be a complete disaster. If the kids live with me, they should get a ton of financial aid and they have their dad to help.

So even though it is very tempting to spread your available money to fund #1-4, I am proof that you shouldn't move onto #3 and 4 until retirement is funded to the max allowable. My two cents