Published December 02, 2011
Dear Dr. Don,
This is complicated. I am married and 62 years old. My wife is 52, and we have slightly more than $100,000 and seven years left on a mortgage with an interest rate of 5%. Our combined family income is about $130,000. My wife works part time, so most of that income is from my work.
Our children are 11, 14, 17 and 20 years old. We are facing college expenses and, on balance, are looking at decreasing dependency on tax benefits. Our savings are mostly investments totaling $30,000, and we have 403(b) and 401(k) plan balances. Those plans total about $350,000, and we contribute about $11,000 per year. At age 65, our pensions kick in at $10,000 per year.
Do I pay down my mortgage or save for college? We expect that we will have to rely heavily on student loans. It looks like retirement at 65 for me is a goner.
- Between a Rock and a Hard Place
Dear Between a Rock and a Hard Place,
The overview of your finances doesn't include any Section 529 plan accounts or other mention of a college savings strategy. Now in your early 60s, you must strike a balance between meeting your retirement goals and financing your children's educations. I think paying off your mortgage before retirement is a reasonable goal, but it's not always the right answer.
Paying off the mortgage gets you out from under the mortgage payment. But, if you're just going to turn around and tap the equity in your home for your children's educations, then you'll be right back to having a mortgage payment. You have two children who are at or near college age now. You only have $30,000 in savings outside of your retirement account, and that's likely to be your emergency fund for unforeseen financial needs. Where's the money for the additional principal payments on the mortgage coming from?
If by paying off the mortgage, you hope to fund college costs out of current income, you also can improve your monthly cash flow by dialing back on the retirement plan contributions. Limit your contributions to the amount of the company match.
When the children are in college, consider requiring them to put some skin in the game by taking out federal Direct Loans to pay part of their education. I'm convinced it's an easier sell to get children to borrow to fund their college costs than it is to convince them as adults to borrow to finance your retirement expenses.
A "two-plus-two" plan where the children start in community college and finish up at a four-year school can save considerably on college costs. You may feel you've already established precedent with the 20-year-old you can't go back on for the younger children, but financing three-plus college educations in retirement doesn't look very realistic if you don't put some limitations on the expense.
There are other strategies besides the two-plus-two. You can say you'll pay the equivalent of in-state tuition, room and board for four years and anything above that is the child's responsibility. That's what my parents did, and I made it through with a doctorate. So did my brother. The remaining Taylor sibling, my sister, has her MBA.