College-&-Retirement -- #4 of 4
February 28, 2017Taken up in this blog:
- Social Security
- Retirement Readiness
- Paying cash -- is it always best?
- Parent borrowing -- it costs more than you may think
Yes, your social security benefit can be, and will be reduced in order to satisfy a delinquent education loan balance.
There is another interesting survey-based indication that, across three generations from baby-boomers to millenials, people indicate they plan to continue working in their retirement years. Fifty-percent and more say they do not look forward to idleness as part of old age. They want to work. The follow-up question is, however, do you want to have that choice, or do you want to be forced to continue working in order to make ends meet?
Social Security is not a retirement income. However, for those who plan well, that universal benefit does provide an irreducible minimum, a floor if you will, and a hedge against inflation for a diminishing nest egg as the years roll on.
A "must-know" fact for parents and grandparents who are borrowing money, or co-signing loans to help fund their children's educations, is that most of those loans are federal guaranteed. What that means is the federal government can, and will attach your assets, including your Social Security benefits in order to satisfy the debt.
Succeed Where It Counts, Inc. advises against borrowing for college, beyond the Federal Student Aid opportunity. FSA loans are limited to $27,000 over the course of undergraduate studies (that ceiling may rise by an additional $4,500 for some students). For students who earn their degrees, and who secure employment in a career-quality job, that is manageable -- in the $250-$300 per month range, depending on the interest rates.
And that brings us to another subject -- student debt and the expectation of loan forgiveness -- for our next blog.
College-&-Retirement -- #3 of 4
February 21, 2017February 22, 2017
Taken up in this blog:
- Parent borrowing
- Social Security
- Retirement Readiness
- Paying cash -- is it always best?
- PLUS
- SallieMae
SallieMae loans are often co-signed by the student and parent or grandparent. Although no loan fee is charged, interest rates are variable and approach 10%.
Either way the loan is offered based on credit-worthiness, and shows on future credit reports. PLUS and SallieMae loans begin accruing interest upon disbursement. Repayment forbearance is available upon application and approval, but the interest continues to accrue and capitalizes into the balance due on the loan anniversary.
What does that look like in real life? Take a family with two children. The parents are on the hook for $50,000 for each child (either PLUS or as co-signers on SallieMae). Let's assume SallieMae offers the same 6.31% as PLUS (just to keep the math simple). After ten years the $100,000 principle plus interest = $184,392.
Let's say those parents were 45 when they took the loans to pay for college for the kids. Had they paid that $100,000 into their retirement accounts, netting a modest 5% (five and not 6.31) per annum, by their 75th birthday they would have an additional $432,000 for those later retirement years.
That number ($432,000) is called Opportunity Cost. It is, in fact, the true cost of paying for your children's college education.
Is that really what you want to do?
College-&-Retirement -- #2 of 4
February 14, 2017Taken up in this blog:
- Paying cash -- is it always best?
- Parent borrowing
- Social Security
- Retirement Readiness
Here's a specific illustration using the Federal Student Loan program as an example.
- Parent "I don't want my child graduating with debt. Therefore, I will pay the costs of college."
- Stafford Loan privileges = $27,000 over four years ($5,500, $6,500, $7,500, $7,500) @ 3.76% p.a.
- Repayment amortized over 10 years.
- Assuming you can earn 3.76% on your money, if you pay cash and thereby give up that principle plus the accumulating, compounding interest, over 10 years you will realize a cost of $39,054. If your student takes the Stafford Loan and repays over 10 years, the sum of the repayments equals $39,054.
- In addition, by taking advantage of the Stafford Loan, you keep control over your money; you have the cash to pay off the balance owed at any time, and your student creates a positive credit history.
- Obviously, if you can earn more than 3.76% on your money then borrowing makes even more sense. You are leveraging your cash to create wealth.
"Debt free" is the mantra of a money talking entertainer heard on radio stations across the land. What the talk-radio host fails to disclose is this fact: there is a difference between a debt and a loan.
- Debt = a financial obligation which is not offset by collateral of equal or greater value, and which can be discharged only from future earnings.
- Loan = a leveraged position using collateral to retain access, use and control of your cash. A loan, balanced by collateral of equal or greater value, can be satisfied on any given day. Amortization is a tool to retain access, use and control of your cash; or to perhaps even gain wealth through more favorable rates of growth than the loan rates cost.
College-&-Retirement -- #1 of 4
February 8, 2017Taken up in this blog:
- Retirement Readiness
- Paying Cash
- Parent Borrowing
- Social Security
In a Prudential Investments [http://www.prudential.com] study of American's preparations for retirement the facts revealed are
- 80% of us claim that retirement is our top financial priority;
- most surveyed adults gave themselves a grade of C or worse for their own preparation;
- 40% claimed they have no idea how to better prepare;
- 63% say investing is too confusing; and
- well over half plan to work beyond retirement age, at least to supplement retirement income.
- For your nest egg to provide you with the standard of living you want, and still last your natural lifetime, what rate of return must you earn in your current retirement plan?
- For your nest egg to provide you with the standard of living you want, and still last your natural lifetime how much more do you need to be saving on a monthly or annual basis?
- For your nest egg to provide you with the standard of living you want, and still last your natural lifetime how many more years will you have to work?
- If you make no changes to your current retirement plan, by how much will you have to reduce your lifestyle so that your nest egg will last your natural lifetime?
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