YFP 368: How Much is Enough for Kids College?

Tim Baker helps parents navigate saving for their child’s college education, from projecting costs and balancing goals to 529 plans.  

This episode is brought to you by First Horizon.

Episode Summary

Most parents desire to contribute toward their child’s college tuition; however, knowing how much to save and plan for can be a bit of a moving target. How much is enough to save for college?

Tim Baker, YFP Co-Founder and Director of Financial Planning, lays out the financial roadmap to help parents navigate the complexities of college savings. Tim emphasizes the importance of prioritizing college savings, projecting future costs, and balancing these savings with other financial goals. He also breaks down the benefits of starting early and making consistent contributions to make the goal more attainable.

Learn more about education savings options, including 529 plans and Coverdale education savings accounts. Tim also shares the ⅓ rule for funding college education that listeners may find make the reality of saving for their child’s future education more attainable. 

This episode is brought to you by First Horizon.

About Today’s Guest

Tim Baker is the Co-Founder and Director of Financial Planning at Your Financial Pharmacist. Founded in 2015, YFP is a fee-only financial planning firm and connects with the YFP community of 12,000+ pharmacy professionals via the Your Financial Pharmacist Podcast podcast, blog, website resources and speaking engagements. 

Tim attended the United States Military Academy majoring in International Relations and branching Armor. After his military career, he worked as a logistician with a major retailer and a construction company. After much deliberation, Tim decided to make a pivot in his career and joined a small independent financial planning firm in 2012. In 2016, he launched his own financial planning firm Script Financial and in 2019 merged with Your Financial Pharmacist. Tim now lives in Columbus, Ohio with his wife (Shay), three kids (Olivia, Liam and Zoe), and dog (Benji).

Key Points from the Episode

• Saving for kids’ college, prioritizing investments, and mortgage options for pharmacists. [0:00]
• Saving for kids’ college, varying opinions on approach. [2:13]
• Prioritizing investing for kids college amidst other financial goals. [6:05]
• Financial planning for education costs, including 529 plans and other options. [11:13]
• Education savings options for kids, including 529 plans and UTMA/Coverdale accounts. [15:41]
• 529 college savings plans with potential tax benefits and flexibility. [21:08]
• Saving for college, including 1/3 rule and assumptions. [25:23]
• Saving for college using 1/3 rule and financial planning tools. [30:02]
• College savings for a 9-year-old girl, with current balance and projected needs. [34:39]
• Saving for children’s education expenses. [38:39]
• Saving for college and financial planning with a certified financial planner. [42:56]

Episode Highlights

“So your retirement should come before your children’s college tuition. There’s no financial aid in retirement, and there’s still a good amount of that, you know, for your kid’s schooling.” – Tim Baker [9:54]

“The further we go in the future, the more uncertainty. But we can make some educated guesses and conjectures. Again, it goes back to the whole idea of, it’s more about planning than the plan, because life happens, things change.” – Tim Baker [13:36]

“Saving for your kid’s college is just like your retirement. It’s like when I say to clients, hey, you need $2 million to retire, you are looking at me like I have 2 million heads. It’s a big number, way in the future. The same thing holds true with education. It just feels more than what it actually is.” – Tim Baker [43:01]

Links Mentioned in Today’s Episode

• First Horizon Pharmacist Home Loan
• YFP 211: The Ins and Outs of the 529 College Savings Plans
• YFP 195: How to Save for Your Child’s Education
• YFP Blog: 7 Things to Consider Before Starting a 529 Plan
• YFP Gives – www.yfpgives.org
• YFP Disclaimer
• Subscribe to the YFP Newsletter
• Tim Ulbrich on LinkedIn
• YFP on Instagram
• YFP Facebook Group
• Tim Baker on LinkedIn

Episode Transcript

Tim Ulbrich  00:00

Hey everybody, Tim Ulbrich here and thank you for listening to the YFP Podcast where each week we strive to inspire and encourage you on your path towards achieving financial freedom. This week, Tim Baker and I revisit saving for kids college, a topic that is top of mind for both of us in our own financial plans. Before we answer the question how much is enough when it comes to saving for kids college, we discussed the priority for investing, including where kids college savings fits among other goals, and the differences between common vehicles that are used for saving for kids college. Let’s hear a message from today’s sponsor, First Horizon, and then we’ll jump in our discussion of how much is enough when it comes to saving for kids college. 

Tim Ulbrich  00:40

Does saving 20% for a down payment on a home feels like an uphill battle?  It’s no secret that pharmacists have a lot of competing financial priorities, including high student loan debt, meaning that saving 20% for a down payment on a home may take years. For several years now we’ve been partnering with First Horizon, who offers a professional home loan option AKA a doctor or pharmacist loan that requires a 3% downpayment for a single family home or a townhome. For first time homebuyers, has no PMI and offers a 30 year fixed rate mortgage on home loans up to $766,550 in most areas. The pharmacist home loan is available in all states except Alaska and Hawaii, and can be used to purchase condos as well. However, rates may be higher and a condo review has to be completed. While I’ve personally worked with First Horizon before and had a great experience with Tony and his team,  don’t just take it from me. Here’s what Emily from Prattville, Alabama had to say about her experience with First Horizon: “Clear communication and excellent guidance from Gail and Cindy throughout the entire process. I greatly appreciated the fact that everything was digital, because I’m allergic to paper, the ability to upload inside everything digitally made the process very efficient, which I prefer. This was by far the best mortgage process I have experienced. This is my seventh when counting refinances.” So to check out the requirements for First Horizon’s pharmacist home loan and to start the pre-approval process, visit yourfinancialpharmacist.com/home-loan. Again, that’s yourfinancialpharmacists.com/ home-loan. 

Tim Ulbrich  02:13

Tim, it’s good to have you back on the show.

Tim Baker  02:15

Good to be back, Tim, how’s it going?

Tim Ulbrich  02:16

It is going well, this is gonna be a fun one. We’re discussing a topic that is top of mind for both of us in our own financial plans. I’ve got four kids 12 and under, you’ve got three kids nine and under. And we’re in that prime window where saving for kids college is getting real, right? We look at our older children and say, Hey, that’s not too far off. And it really begs the question, are we on track? And I don’t know about you. But for me, it feels like early on when the boys were much younger, younger it was this concept of hey, let’s start putting money away. And we’ll worry about that later. Worried about that later is right now.

Tim Baker  02:55

Yeah, life comes at you fast, right, Tim? So, you know, a lot of a lot of people, you know, they might say, hey, I’ll get to that, or, you know, I talk to prospective clients all the time and it’s like, yeah, I really want to, I really want to put money away for my kids college. And I’ve been thinking about it for a while. And, you know, I’m like, Well, how old is your son or daughter? And it’s like, oh, they’re eight? You know, so how long did you think about this? For eight years. So it is one of those things that sometimes that’s true, that holds true for retirement too, Tim so, you know, it’s it’s one of those things where the sooner you bet, you know, the sooner you do it, the better. You know, it makes, it makes the amount that you are, you know, your what you’re trying to do easier to kind of achieve. So, yeah, we’re right in the thick of it and and hoping that, you know, the cost of college, you know, doesn’t continue to kind of inflate at what it has in the past. But you know, no control over that, obviously.

Tim Ulbrich  03:48

Yeah, and we’re going to talk about that specifically because when we get to the part of trying to determine how much is enough, we got to make some assumptions on what is going to be the cost of college into the future. Now for those that are listening, that have kids that are butting up against college, we know what those numbers are going to be or likely be. But for those that have kids that are much, much younger, trying to project out 15, 16, 17 years, what college costs may look like, can certainly be more more challenging. Tim, I want to get your perspective on what seems to be a varying philosophy around saving for kids college. I recently published a poll on LinkedIn asking individuals how are you approaching saving for kids college and there was over 260 people that responded and here Here are the results. 30% said that they plan to fully fund their kids college. 61% said they plan to partially fund and just shy of 10% said you know what? They’re on their own. Kids got to figure it out on their own. So when you hear that and interactions you’ve had with clients and anything surprised you there?

Tim Baker  04:54

Um, I am surprised, I am a little surprised. I feel like, I feel like the 60% of like the partial would have been a lot more. Like that would have been closer to like 80. And they may be like 10 and 10. On, you know, the they’re on their own, or I’m going to do 100%. So that that’s probably the only thing. Because yeah, I talk to clients all the time. And it’s, it’s, it’s, it’s those three things. It’s like, Hey, I went through this. So my kid has to go through it, I went through this, I never want my kid to go through it. And then that in between of like, I want to provide something but I just don’t know what that is. So little surprised by the percentages, honestly, how big of a sample size was that?

Tim Ulbrich  05:37

Over 260 people. So pretty large group that responded. And there was a couple of comments that I think really, you know, drive home some of the differing opinions, and everyone obviously is there on their own journey. One person said, quote, they want to partially fund they referring to the kids, they need to have skin in the game. I’ve also heard of parents giving their kids cash directly for any scholarships they get. That’s a neat way of incentivizing working hard for them. Someone else said, Hey, would love to fully fund, but also need to look at my future and retirement. We’ll talk about that here in a little bit as it relates to the priority of investing, and how we want to think about kids college among other competing financial goals. So we’re going to break today’s discussion into three parts. Part one is going to be just that we’ll talk about the priority of investing, where might kids college fit into the broader part of the financial plan? Certainly, this is not investing advice, but some considerations there. Part two, we’ll talk about the common vehicles. And we’ll spend the most time on the 529 plan. And then part three will really spend time answering the question how much is enough. And I’m excited about that part because this is a piece that we haven’t drilled down into the details as much as the other two and for reference will link to these in the show notes. But we have talked about kids college previously, on the podcast, episode 195, we talked about how to save for your child’s education, and Episode 211, we talked about the ins and outs of the 529 college savings plan. So again, we’ll link to those make sure to check those out for more information. Tim, let’s start with that first part, which is the priority of investing. And I’m gonna go back to the comment that you made that, you know, for some people, especially when they came out with six figures or more of debt, you know, I’m thinking about my own journey of a couple $100,000 of debt, there can be a reaction of, hey, I never want my child to have to go through that either at all or something along those lines. And therefore, I’m going to start shoveling money into kids college savings accounts as early as possible. And not necessarily think about, you know, where that might lie in context with my own retirement savings or emergency funds or other parts of the financial goal. So it begs this question of where does kids college savings fit as a priority as we think about other investment vehicles or options? So what are your thoughts on that?

Tim Baker  07:56

Yeah, so, you know, I’ve had these conversations where people are like, I really want to get started and, you know, save for Jonny’s education or whatever. But you know, we’re looking at $25,000 in credit card debt, right. So not something that should be a high priority. We have to get through the consumer debt. So obviously, like, if we talk about the baby steps, we want to make sure that consumer debts in check, Tim, we want to make sure we have a proper emergency fund. Still a lot of people don’t, you know, come to the table with that. And that’s something that we have to work on. And what is a proper emergency fund? Where should we put it? It’s not an investment. Those that are based on I think, are the the big things, I’d be looking at it. You know, I think beyond that, you know, I think what most people would agree is shift into retirement and looking at what that looks like, you know, do we have a match? At least get the match? And then I think based on that, and again, I would be doing a retirement projection and a nest egg projection, I’d want to make sure that like some of the wealth protection stuff is sure enough, like, do you have the proper life insurance disability, that we have the state planning documents in place, all that kind of stuff, to then get back into the conversation of okay, what’s the next step after this? So a lot of people again, and the analogy that I like to use is like when you’re on the plane, and, you know, they say, Hey, if we lose cabin pressure and the mask come from, you know, that’s a really crappy situation, that’s not going to be fun. But put your mask on first, right? Put your mask on first before you you, you know, handle your your kids. So that’s going to be the same when we’re talking about retirement and an education plan. So your retirement should be should come before your children’s college tuition. There’s no financial aid in retirement, and there’s still a good amount of that, you know, for your kid’s schooling. We might get to a point Tim, where we’re not going to see the money flow as much for you know, for college loans and financial aid and things like that could be a real thing. reckoning that’s happening. However, I think there will always be alternatives, whether that That’s, you know, community college or trade schools are things that you can do that or at least get started. So that, to me is the big thing. I think when you get into the nuance of, of retirement, you know, the question I would I would ask to that person that clients like, are we on track for retirement? And if we are, obviously, like, let the money flow from an education perspective. If we’re not, that’s where I would want to, you know, and I think what a lot of people to Tim, they, what they do is, it’s not even really a question about what bucket they should fill. Part of it, part of what drives us is the tax benefits related something like a 529. So in Ohio, you can get up to $4,000 per student, regardless of filing status that is per year off of your Ohio State income tax. So a lot of people see that be like, boom, that’s what I’m going to do, or I want to get a portion of that without kind of doing the ABCs of where that should go. So I think outside of the match, I would say get the match. But then there’s probably a little bit more nuance in terms of like, okay, how do we then go from here, in terms of, are we putting more into the retirement? Are we are we putting more, are we starting to kind of, you know, flow monies into education planning.

Tim Ulbrich  11:13

Yeah. And what you’re sharing right there to me is such a good example of the benefit, one of the benefits of comprehensive financial planning. Because at the end of the day, we only have so much income to work with, hopefully, we can increase that income. We can only cut our expenses so much, and we’ve got a certain amount of cash flow, that we’re going to be able to assign to different financial goals, right. That could be building up an emergency fund that could be paying down debt, that could be a real estate purchase, that could be put money in a 529, that could be retirement savings for the future. And so we’re left with this decision of, hey, I’ve got all these balls potentially, to juggle in the air. How am I going to do that? And then what order? Second to it depends, probably the most common thing that we say on this podcast is you can’t make decisions in a silo when it comes to the financial plan. We’ve got to be able to take a step back and look at all the different factors so that we can see, okay, well, if I pull this lever, then what’s the impact of this part of the plan? Right? Because by pulling that driver putting money in a 529, that means we’re not probably doing something else. And are we okay with that or not? Okay with that. And if we project that out, what does that mean, for us in terms of achieving our financial goals? The other thing I would mention, and I know this episode is not focused on what we think is the future of higher ed. But because I spent over a decade in that space, I feel the need to comment, like, when you talk about something like the contraction, potentially, of access to financial aid and student loans, man, you’ve got to believe that if that were to happen in the future, there would be a significant shift in the business model of higher education at large, right? It’s already on the brink, I would say of some level of disruption, if that’s not already happening. And if there’s less resource going into the system, what does that mean, in terms of what the actual infrastructure looks like? The degree offerings, the supply and demand. So I think that is a relevant comment because one of the lingering questions behind all of this, especially for those very, very young kids is, what will this model look like in 15 to 20 years? What will the cost be? And that we need to know, or at least project out to some level to be able to do some assumptions? 

Tim Baker  13:20

And sometimes with uncertainty, Tim, like, we can do one of two things, you know, it’s like, Well, I haven’t seen people do this with retirement, it’s like, I don’t really even know. So they maybe they over save? Or perhaps they just kind of throw their hands up there. And like, okay, whatever I have, I have. So, you know, it is a little bit you know, the further we go in the future, the more uncertainty we have, again, we can make, make some educated guesses and, and conjecture, but again, it goes back to the whole idea of, you know, you want to be you want to, it’s more about planning than the plan, because life happens, things change. And the reason I’m kind of, you know, distracted, like, I’m looking at my numbers, Tim, and we’ll go through this later, but like the numbers for like, Olivia is four year like, they went up from the last time I talked to talked about it. So I’m like, Oh, I gotta update these numbers, because they’re a little bit out of date. And what that means is, like, when I looked at these last month, the inflation numbers associated with education were higher than what they were a month ago. So the tool that I’m using was updated. So I’ve kind of updated my calculator to kind of back into that. So like, it’s planning now again, like for Olivia, who’s going to turn 10 This year, I still have eight years to kind of, you know, plan and figure this out, which makes it easier. The closer we get, obviously, you know, when she’s 16 We’ll have a little bit more of a picture of what education looks like but a whole lot less time to kind of change and plan you know, plan for that. So yeah.

Tim Ulbrich  14:48

So let’s shift gears and talk about the common vehicles. Again, we’ve covered this a little bit on previous episodes that will link to in the show notes, but there are various options out there right when it comes for saving for kids college everything from 529 plans which we’ll spend the majority of our time on, to the Coverdell Education savings accounts, UTMAs, Roth IRAs, heck, you could just open a brokerage account and save that way if people wanted to do that, but there’s clearly some pros and cons to these accounts and perhaps why the 529 has risen to the top for many, as you know, I guess if we get picked the most popular among this group, so tell us at a high level about those common vehicles that are out there and then we get into the 529s more specifically. Yeah,

Tim Baker  15:30

So the Coverdales, and the like the UTMAs and UGMAS are very similar. These are just custodial accounts that are like brokerage brokerage accounts, but they have the minor’s name on there. So the reason the Coverdale is aren’t as popular anymore, it’s because the amount of money that you could put in per year was like two or $3,000. I’ve actually I’ve never I might have seen one Coverdale account in my career in financial planning, so I don’t see them very, very often, the UGMAS and UTMAS, I see more often and actually have one for all three of my kids. And then all of my nieces and nephews is kind of my, like my nephew, Timmy just turned 10 yesterday. So I put money into as you know, he’s, he’s he lives out in Oregon, so I don’t see him as much I don’t really know what he’s into from a from a gift perspective. So I just put some cash into that. And the big thing for that, it’s like, I’m managing the account. I’m the, I’m the guardian on the account, once they age, once they reach the age of majority. So in certain states, that might be 18, other states that might be 19, or 21, that money is theirs, right? So so that for me is going to be a gift when all of my nieces and nephews and my kids like turn that they can use now they could use that for school. But they could also use that for something else, right? There’s not the strings attached like a 529 has where you have to use it for qualified education expenses. So with my daughter I’ve talked about it could be for school, it could be she’s talking about a gap year, I’m like, How do you even know what a gap year is you’re nine. It could be it could be to start a business, whatever that is so and that, and that, for me is a little bit more of a in your face vehicle for me to talk more about money on a long term basis, like right now we talk we have allowance and we have a save, spend and gift, this is kind of in the next thing. So that is a powerful tool, but not necessarily not necessarily just you know, for the purpose of education. Now, the big thing with that is like when they go to spend that money, capital gains tax is going to be a big part of that. So you have to you know, and that’s the same thing with, you know, like a brokerage account, if you’re just managing that for your kids, but their kid’s name isn’t on there. The other one that a lot of people will use is the Roth IRA, because you can take out the basis, you know, tax free penalty free. So you could use a Roth IRA, again, you could use your own Roth IRA, if your kid has like income, you could set up their own Roth IRA. So there’s a little bit of nuance there in terms of how you how you use that. I know a lot of people will use a Roth IRA, just because they don’t like the restrictions of the 529 just being used for qualified education expenses. So that’s something that people could use, I don’t personally use that, like I feel very comfortable with a 529, I feel very comfortable that the it’ll continue to continue to expand in terms of what you can use it for. So that really leaves a 529 in terms of vehicle. So the 529, Tim, is it’s a think of it as like a retirement account, except for education. So you can put after tax dollars in there, it grows tax free, you might get a state income tax deduction, like I mentioned, you can get $4,000 per beneficiary per year per person per beneficiary, in the state of Ohio. Every state’s going to be different, some states don’t have anything, some states have very generous, all all 529s are not created equal. So like you’re just some of them are gonna be really great. We were actually looking at the expenses the other day, and we were surprised that Ohio is a little bit higher than we thought. So you have to be cognizant of that. So you put the money in there, it grows tax free. And then if it’s used for qualified education expenses, which is typically tuition, fees, books, supplies, equipment, room and board, computer or like peripheral equipment or software, internet, that can all be you know, kind of, you know, part of that distribution. So, just like in a in a retirement account, you are kind of saving for, you know, 18 years or 10 years depending when you start so you have that accumulation period, and then that the accumulation period typically in retirement might be 10, 20, 30 years as you know until you until you die if you’re it’s typically four six, maybe eight years depending on what your goal is, you know from from an undergrad to, you know, masters, etc. So, that’s the big thing you put the money in, you invest it, a lot of them have target date funds, a lot of them you can you know you can pay the S&P 500. They grow the that tax free. And again, just to kind of reiterate that is, you know, when you buy when I buy XYZ ETF for my daughter in her in her UTMA account, we buy it at 100 shares, or $100 per share when she goes, You know, when she’s 18. And she’s now cashing that out, maybe that portion of her investment is $400 per share, which is great. But we have to pay the $300 per share capital gains and is going to be long term capital gains on that gain that we have. In the education account that you don’t have that. So that’s one of the benefits along with the state. So the UTMA, and the Coverdale gives you in the brokerage account gives you more flexibility in terms of what you can use it on. But there’s tax consequences, that’s the string. And I feel comfortable Tim, and we can talk about that a little bit more that there are enough outs for me from a 529, you’ll feel comfortable, you know, put in a good amount of money and into that to you know, to have for education, expenses. And if Olivia doesn’t need it, maybe my next kid or even grandkids.

Tim Ulbrich  21:10

Let’s talk about that flexibility for a moment. Because I do think that that is the probably the number one objection. Right. And and, you know, you mentioned the tax differences for those who choose to stay in a savings, you know, UGMA, UTMA or another type of custodian brokerage account. So the way I think about the 529 is this is like a Roth for college, right? It’s after tax dollars going in, it has the potential to grow or lose, right? Anytime we talk about investments and we can lose, but growth, hopefully long term tax free, then we could pull it out use it for qualified educational expenses, which there’s been an expansion of over the last decade or so. And that’s what I want to talk about flexibility because I agree with you. I think there are several things that maybe in the sense of of 529s were more restrictive that they’ve expanded upon. So right you think about what is considered to be a qualified educational expense, that would be one area that comes to mind. The expansion several years ago to allow these to be used for K through 12 private education, that’s a second one I think about. And then more recently, would be the Roth conversion opportunities, which is the third one. So it feels like all signs are pointing in the direction of more flexibility, not less when it comes to the 529s. 

Tim Baker  22:22

I think I think eventually, one of the things that got kicked out, was at the very at the very last minute with the Secure Act 2.0 was like homeschooling like that’s not that’s not you can’t use funds for homeschooling. I do think that, you know, again, like when I started advising people on 529s is back in the day, like you couldn’t use a 529 dollars to buy like a laptop for college. Like that was a restrictive thing. And they’ve they’ve improved upon that. Right now, like before, you couldn’t pay if you had, if you had money in your 529, you couldn’t take that money out and pay off a student loan without a penalty. Yeah, they they changed that now, it’s still restrictive. Like, it’s, I think it’s a $10,000 maximum limit, which is silly, in my opinion, just just use that that’s what it’s for, is that kind of, you know, minimize education expenses, like pay off the loan. Yeah, to your point, the Roth was a big thing that they put in and, and there’s, there’s a lot of, there’s a lot of hoops you got to jump through it has to it has to be open for at least 15 years or longer before you can move those dollars from a 529 into a Roth, right? The last five years worth of contributions are ineligible, right. So like, if you’re, if you put that if you put dollars in at 18, you have to wait until you know they’re past 23 to move those dollars over and the maximum lifetime transfer to a beneficiary is capped at 35,000. Which again, I also think is silly. 

Tim Ulbrich  23:49

Might change. We’ll see. 

Tim Baker  23:50

Yeah. And I think they will, I think I think there’ll be again as as I think it’ll adapt it more as like, if higher education looks a lot different. I think they’ll adapt that. They’ve shown that they will be able to and again at the end at the end of the day for me, Tim, and again, not everyone’s going to think this. But like if my kids don’t need it. Like I’m going to cascade that down to Liam to Zoey and if Zoey doesn’t need it. I’ll probably just let it ride for a grandkid. Or, or grandkids. So to me like I don’t, I’m okay I’m okay with that. Like I don’t need I don’t need to go to like, you know, every kid equally or or even my kids can kind of go down a generation. Not everyone’s okay with that. I had a I had a couple last week, Tim, that we talked about education hadn’t started anything and right off the rip they’re like I don’t want to do a 529 and I said like keep your keep your mind open. And part of it is like the tax, part of it is like are you okay with you know, everyone’s everyone’s like, I don’t know if you know, my kids are going to college, you might be different. We’re just all that’s all like fair, right? So it’s yes, we’re you know, a lot of us are open needs, when they’re one they’re toddler, who knows what they’re gonna grow up to be? But for me, you know, I think and again, I’m not looking at 100% solution. So I don’t necessarily need hundreds of 1000s of dollars, like, you know, if I was doing 100% solution. So this is kind of I look at this as kind of a coupon, you know, for future spending from the from the aspect of college tuition.

Tim Ulbrich  25:23

Yeah, and I think too, the other scenario to consider is, you know, when you talk about keeping options open, it’s like, what is the worst case scenario? It’s a 10% penalty, right, when we look at non qualified withdrawals. And the other thing I would add to the discussion, which by the way, nobody wants to pay a 10% penalty. So let’s be clear. But I would add to the discussion that there has also been an expansion beyond the what we think of the traditional four year degree, right. Trade school, certificate programs, apprenticeships like so I think we’re, that’s another example, we talked about flexibility. And I think, you know, for a lot of people, it feels like in the circles of discussions we have with other families of age around our boys about higher education, it seems like the trades is coming up more and more, as there’s some clear demand and in certain areas. So again, keep the options open. And as you begin to think about what what this looks like for you and your family, certainly there are options out there. And if you do look at the five to nine, we’ve got a great resource on our on our blog, seven things to consider before starting a 529 plan. Or if you already have one open, it’s a good refresher. We’ll link to that blog on the show notes as well. Tim, let’s shift to part three, as I mentioned in the beginning of the show, I’m excited about this. We haven’t really talked about this at length beyond the educational part of where does kids college savings fit and the priority of investing? What are the options available? And part three here is all about how much is enough? Now, just like we talked about when it comes to saving for retirement, same question we got to answer here and shout out to you in the planning team, you’ve built a really cool resource and calculator that we use with our clients that we’ll talk through at a high level here to really answer this question of as I’m saving for my four boys. I’m not flying in the dark, hopefully, because we can put some assumptions in place and determine how much is enough based on those goals? And ultimately, am I on track? Am I not on track? And what should we be doing each and every month to get on track? If that’s the case of where we’re heading? So it feels like Tim, the first step in being able to answer this question of how much enough is to figure out what the goal is? What the goal is back back to the poll question. Right, we started the episode with is, what’s the plan? Is it cover all expenses? Is it a partial fund? Is it a no fund, which I guess we could end the episode right there if that’s the case. But if it’s a partial or full fund, at what level? And we’ll talk about the third, a third, a third rule here in a moment at what level the funding is to be desired, is an important assumption we have to make in these calculations, correct? 

Tim Baker  27:52

I mean, and again, I think a lot of people, it probably is, I’m trying to think, you know, of all the hundreds, if not 1000s, of meetings I’ve had with with clients and prospective clients over a lot of people are like, I don’t know, I want to save something. What is that? And there’s, there’s, there’s a little bit lack of like structure there. It’s rare, where people are, again, it’s going to be on the tails there where it’s like, I’m not worried about at all or like I want to do 100%. So I think in the absence of that structure, it’s just a conversation of like, okay, like, like, here’s a framework. And that’s what we talked about the 1/3 rule, here’s a framework does that sound like? Because the beauty of the 1/3 rule, or at least the way you think about it, is you’re talking about what can I do today, but then you’re also pushing it off to tomorrow, because part of like, your funding is going to come in like future earnings. But then also there is that skin in the game, which I love. I think having skin in the game with this decision to go to college is huge, or even like, you know, giving money to your kids for college is huge, because we’ve seen how wasteful is probably not the correct term, but like how wasteful it can be. When you’re looking at schools out of state, private, when you’re, you know, maybe jumping around in majors, I think having some type of you know, some type of realization that like, Hey, you’re going to be on the hook for some of this. And obviously, pharmacists know this very well, is needed. At least that’s the way that I look at it. So I think in the absence of any type of structure, I think introducing that 1/3 rule is important. 

Tim Ulbrich  29:32

Let’s talk about that rule because I think that if we use that as the baseline, you can adjust whatever you want, right? We’ll talk about the three buckets and we’re gonna assume a third, a third a third, but you know, it could be 40% 20% 40% Right. So once you understand the concept, I think from there you could determine Hey, do I like that? Do I not like that and what adjustments you want to make. So walk us through what that third rule is. 

Tim Baker  29:55

So off the rip, a lot of clients we like they look at the look like what their education costs. And they’re like, no, like, like, this is impossible. If I have a couple dollars, you know, that can, you know, rub together, that would be great. But when you kind of break it down, it’s, it’s not as bad as it as it looks. So like the 1/3 rule basically looks at, okay, when your child goes off to college, the sources of that a paying for college is going to really come from three places. A third of that a third of the of that is going to be come from, like, we say, past income or past savings. So today, in 2024, I’m saving out of my paycheck into my kids 529, and it’s going to grow. So that’s the 529. It could be a Coverdale it could be a Roth, you know, whatever it looks like but it’s, it’s you’re doing something today to spend in the future, just like we talked about with retirement savings. The other bucket the another third comes from what I would say current income. And again, this is this would actually be future income, but like when Olivia is 18, and she’s looking at colleges in, you know, eight years, I’m hopefully still working that YFP, I’m making money, and I’m part of the part of that tuition bill is going to come from the cheque that I’m receiving in eight years. And then the last bucket. And the last third would would be that skin in the game, it would be that outside outside funding, where this is going to be grants, scholarships. And last but not least, loans. So this is where you know, and again, we we talked about it with our kids that they’re going to have some money, but we don’t let them know what that is. My parents were like, you’re on your own. And then they helped us like later it was kind of like a surprise. So we kind of talked about it, but they don’t necessarily know what they’re getting. But that’s those are the three buckets. It’s what you’re you’re saving and investing for future college expenses. And then when your kid is in college, using your your part of your paycheck to pay for tuition. And then the last third coming from grants, scholarships, and student loans.

Tim Ulbrich  31:57

Tim, we’ve had several, I think, at least a couple I can think of episodes we featured where pharmacists have really worked, you know, throughout school, sometimes really aggressively to help pay down. Now, you know, if you’re working at $15-$20 bucks an hour, you can only make such a dent and a couple $100,000 of debt. But that has been a significant contributor to minimizing the debt that they’re having to borrow in any given semester. So in that case, when you think about a child working, would you put that in the final bucket? Or where how do you how do you think of that portion?

Tim Baker  32:33

I would put it in the in the final bucket. Again, I think it’s kind of like their skin in the game. It’s like, Hey, you could you could not be a great student and not get anything or you know, I know a lot of people, there’s money to be out there for you know, we just gave out our first scholarship, you know, obviously on the back end for YFP Gives. But there’s a lot of people that don’t take that, you know, go through that legwork. You know, Olivia’s goal, she wants to swim collegiately that’s her big thing right now. And she just missed her JO time yesterday by a couple of seconds. So she’s, she’s, she’s doing well. And again, I think for her, I think my wife would love it if she got a scholarship for that. But I’m like, you know, if happens, great. If it doesn’t, but to me, it’s a little bit of their, their participation in this whole process, because it is a lot of money. You know, when we look at the numbers we’ve go through, if we kind of go through this calculator, the numbers are staggering, right. And like I just said, like, when I was looking at it, you know, as we were jumping on here, the the four year instate for Olivia went up, you know, when I looked at it last month, and I guess they’re just refreshing their their numbers and then in the tool that I’m using, but you know it, these things go up. So I think having a plan in place is is is the way.

Tim Ulbrich  33:44

So with the third plan of the third rules, a framework of where we get started, obviously everyone can adjust that accordingly. Talk us through then the calculation and how we ultimately get to this point of Hey, are we on track? Are we not on track? Or what do we need to be doing each month to get on track? 

Tim Baker  34:04

So I’m using a combination of our financial planning tool called Right Capital and kind of a calculator I built. And part of it was because I wanted to kind of adapt it to the 1/3 role. So I rely on the calculator really for or the financial plans will really for the likely in the inputs I just, I just looked at so in the tool, you can say hey, I want to send my kid to a two year commuter, a four year in state, a four year out of state, four yearr private school, you can actually put in the school that you want or you can I think it’s hard unless you’re right right up against it. So we we put in a four year in state so like, hey, Ohio State’s right down the street, that would be great. So essentially like when I’m looking at Olivia so Olivia was born on Halloween of 2014. Today’s the 15th of July 2024. So her current age is 9.7 so she’s almost a 10 year old, I think she would say she’s, she is a 10 year old. So we’re saying that at 18, she’s gonna go to college. So what that leaves is essentially 8.3 years before she’s got to move out and get out, and I can turn her bedroom into a man cave. Which she doesn’t like that joke.

Tim Ulbrich  35:18

Second whiskey storage unit.

Tim Baker  35:20

Exactly, exactly. So 8.3 years is our accumulation. That’s what’s left of our accumulation. So we make some assumptions about asset allocation. So in my calculator, I put in like an 80%, equities, 20% in bonds right now, she’s all equities, we have a lot of time. But as we get closer, we’re going to be, you know, to avoid sequence risk we’re going to be more conservative when we get to that five ish years. So maybe when she’s 13, 14 15, that’s when we’ll start to really kind of get more conservative until we until we have to spend it. So I’m using kind of a blended, you know, she’s not, she’s not 100% equities the entire time. So I put 80/20, you know, we use, so that real rate of return is about 4.6%. So that’s kind of some of the, you know, if I change that to 90/10, or 70/30, it would change the calculus. So the input that I was changing, you know, that I was mentioning, when I looked at this last month, a four year in-state for her would be $183,653. 

Tim Ulbrich  36:26

With room and board?

Tim Baker  36:27

Yes. So that’s the need. So in what that means is in, I think right to the end, like today, it’s something like $28,000. But when they extrapolate that out 8.3 years in the future, that’s what’s going to cost that $28,000 With the inflation times four years. So that’s where we get the $183,000. So just as an example, my son, who is five years younger than Olivia, so Liam is five will be five next month already. His four year instate will be $234,393. So it goes from $183,600, to $234,400. Four, and then I don’t have Zoe’s calculated, but her four year end state is $284,900. So $100,000 difference between my oldest and my youngest, there’s essentially a 10 year gap for that between them. But that’s, that’s significant. And that’s why like, we’re hoping some of this changes. But that’s the number that I’m using, you know, to kind of say, Okay, this is what I this is what we need. So, if I were to fully fund it, if I needed to fully fund it, I would essentially need $183,000 in eight, eight years. Or you could say 12, and I’m still, you know, saving during that, but typically, that’s not how it works. So currently, currently, today, Olivia has, I guess it’s called a share. That’s right. So currently, Olivia has $28,629. So and we’re we we put in not quite the $4000, we put in $300 a month or $3,600 per year. So we’re on pace to save $103,000. So if you look at that, I need 183 we’re on pace to save $103k. So that our our percentage now was we’re on track to say 56% of her college. Now, that’s not 100%, which is not our goal, but it’s also a lot higher than the 33%. So like we there’s some delta there. So you know, so I kind of break down if we did want to pay 100% percent, you know, what we would need if we, for us to be on pace to save for 100%. To get to that $183k, I would need $67,634 today. I don’t have that I have $28,000. If I if I lost all the monies in her 529 today, I would essentially need to be saving or investing $1,260 for the next 8.3 years to get to that to get to that 183,000. So because I have that, it’s actually I need to increase my essentially increase my savings from $300 a month to $854 per month to get to that. Now obviously, that’s not something that we want to do. So and then I had the same thing broken down for the 1/3 rule. So 33% of 183,000 is $61,212. So again, when you break it down like that, I’m like that’s actually not that bad. $61,000, like that’s doable. Now, the conversation I had just had with Shay when I ran this was she’s like, well, we should should we start saving less and I’m like, essentially, like the argument could be you could save less or we could we could kind of stick to the status quo. My thought is is like that’s one less bill that I have to worry about in 8.3 years like it’s almost. so there’s a tricky one is correct. So like, I part of me is like, do I just get it too, and maybe we’ll talk about this in the next iteration. So like, do I go to 67%, you know, to get to my to like my two thirds of post and present income for that. And then she has a 1/3. So just to break down the math for 33%, I need $61,212. What you currently need today to be on pace would be I would need $8400 and I have $28,000. So we’re beating that. And then if I had $0, like, if I lost all that money, I would essentially need to be saving so $420. So if you have a 10 year old, and you want to send them to a four year in state and you haven’t saved anything, and you want to save at least a third, you would essentially need to be saving $428 per month, between now and when they go.

And then the last column is kind of the choose your own rule. So if I were to if I were to say, hey, Shay, like, let’s, let’s, you know, we have some room in our budget, you know, retirement looks good, etc. If I were to say, hey, let’s let’s go to that 67, that kind of checks off both for us, I would need $123,000.  I would need today $38,000. We don’t have $38,000, we have $28,000. So that lump sum to get us on track would be putting $9700 and I’m on track. And then we would essentially be needing to pay or invest $438 so I’d need to increase my monthly contribution by about $138. And then I go through the same thing with Liam. So Liam, just in broad strokes not to go through every every every calculation. He has, so his, what we need for him and for four year in state 13 years from now, since he’s five is $234,400 essentially. He has currently $13,800. We’re currently putting in $225. So not as per month, so not as much as Olivia. And then we’re on pace to save one, it will we’ll call it $109,000. So we’re 46% of the way there. We’re on track to be at $46, which is still beating our 33% roll. So we’re I look at this and we were in good shape. I think with Zoe, it’s too early to tell she only has a couple 100 bucks in hers. But that’s kind of the calculus that we’re doing from hey, are we on track or not from a from an education perspective. And again, like if the market if the market loses 30% today, Tim like right now it’s been on a bull market. But if loses 30%, and all of a sudden he doesn’t have $13,800, he has $10k, that changes thing. Right now, over the long period of time, we’re still assuming, you know, a nominal rate of return of 8.8%, which is an 80/20 portfolio, and then we adjusted down for inflation. So that’s kind of the math. I know, it’s kind of hard to follow over the podcast. But hopefully that made sense as I was going through the, the numbers line by line.

Tim Ulbrich  42:56

Yeah, what I love about it is it makes kids college savings much more practical. 

Tim Baker  43:01

And patatable, right? Like you hear those headlines. It’s just like your retirement. It’s like, you know, when I say to clients, it’s like, hey, you need $2 million to retire, you are looking at me like I have 2 million heads, but it’s a big number, way in the future. It’s the same thing holds true with education. It’s just, it feels more than what it actually is.

Tim Ulbrich  43:20

Yeah, makes it digestible with a third rule or some variation of that. I mean, it really it’s a compressed nest egg calculation.  And that’s what I love about it is we’re not flying in the dark. What what do we have saved right now? What’s the goal? We’re gonna put some assumptions in place just like we do with retirement planning. And then what do we need per month to achieve that goal. And that last part, is the piece that is so often missing when we talk about long term savings and investing, right? Whether it’s 10 years or 30 years, some of these numbers, as you mentioned, too, feel big, they feel overwhelming, they feel scary. And what we can relate to and put our arms around is what do we need to be doing per month? Or what is the goal? And then we can look at the rest of the plan, the budget all those things and figure out, can we make this happen? Or can we not make it happen? And then what does that mean, in terms of what they have saved? What does that mean for other financial goals? So yeah, I think if we think about it, in that sense, we really can start to implement this and put a game plan in place and make some adjustments if need be. And context matters, right. So I would think, how you think about this for Olivia versus your youngest, Zoe is very different, right? When you get to the potential for over saving with Olivia well, that’s different with your first and your third because option to transfer, so I think a lot of details to be considered as we look at the individual components of how you approach the 529. 

Tim Baker  44:39

I’ve really enjoyed you know, I’ve been trying to get Olivia kind of more interested in like money and the value of money and, you know, she told me the other day she’s like, you know, when I go back to school, can I buy these like $100 like Nike shoes and I’m like, No, you can’t like it’s like, we’ll spend some money and then you can save some with your money, and there’ll be a cap on what you can do. And even my wife said, like, oh, like she gets money, you know, should we put that in a 529? I’m like, I actually, like when we, when she does her allowance, I say like, Hey, any money that you want to put into your UTMA account, like, I’ll match it. So, and I did the same thing like she, she’s going to, she’s going to donate to YFP Gives. And I’ll match that, right? So I want to I want to incentivize that behavior. But I kind of want the 529 to be like, funded by me and mom, right. So like, I don’t want her spend money to go to the 529. So I’d rather have that money go into an UTMA that she can use it, she could use it for school, which she could use it for a car, a business, a gap year or whatever. But I’ve enjoyed kind of like having some of those conversations with her and kind of seeing some of the lights go on. In terms of like, investments and that’s the thing, like I’ve always struggled with like, should I kind of key them into like what we’re doing on the 529 or should be more of like, a mystery because I really don’t want her to like say like, oh, like mom and dad have it paid for like I don’t, you know, I don’t need to work. My mom took the opposite route. She’s like you have to work because we’re not going to help you at all. But I think I think these types of discussions with your kid, even when they’re young, like mine are is, is positive. And again, like, I grew up, we didn’t really talk about too much about money, like outside of like you’re on your own. But I think building some of those behaviors and kind of mindset around money is important because a lot of people that come through the door to work with us. They’re kind of an image of their parents, right. A lot of them is like, you know, if they had consumer debt issues, it’s probably because their parents did. If they were oversavers, its probably because their parents were. You know, some people look at the parents and say, I don’t want to be like that. And they’re trying to fix it, but like the natural inclination is to spend or save. So I think it’s a good opportunity to at least start the conversation around money with kids. 

Tim Ulbrich  46:58

Great stuff, Tim. And that’s a topic we’re gonna talk more about on the show. One because we haven’t talked about it enough. And two, we’re living it firsthand with our own kids. We’re excited to share that journey as well. Let me wrap up by saying for those that are listening, yes, talking about kids college, but also other parts of the financial plan, saving investing for the future, retirement planning, tax planning, debt pay down and so forth. We’ve got a team of certified financial planners, and Sean Richards, our CPA and tax professional that can help you in working one on one as it relates to your own financial plan. If you’re interested in learning more about the services, you can visit yourfinancialpharmacist.com. From there, you can book a discovery call with Tim to learn more about the services and determine whether or not they’re the right fit. Thanks so much for listening. If you’d like what you’ve heard on this episode, other episodes of the podcast please do us a favor and leave us a rating and review on Apple Podcasts or wherever you listen to the show. Have a great rest of your week. 

Tim Ulbrich  47:51

Before we wrap up today’s show, I want to again thank this week’s sponsor of the Your Finanicial Pharmacsit Podcast, First Horizon. We’re glad to have found a solution for pharmacists that are unable to save 20% for a down payment on a home. A lot of pharmacists in the YFP community have taken advantage of First Horizon’s pharmacist home loan, which requires a 3% downpayment for a single family home or townhome for first time homebuyers and has no PMI on a 30 year fixed rate mortgage. To learn more about the requirements for First Horizon’s pharmacist home loan and to get started with the pre approval process, you can visit yourfinancialpharmacist.com/home-loan again, that’s yourfinancialpharmacist.com/home-loan. 

Tim Ulbrich  48:37

[DISCLAIMER] As we conclude this week’s podcast, an important reminder that the content on this show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment. Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcasts. Opinions and analyses expressed herein are solely those of Your Financial Pharmacist unless otherwise noted and constitute judgments as of the dates published. Such information may contain forward looking statements, which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward looking statements. For more information, please visit yourfinancialservices.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists Podcast. Have a great rest of your week.

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