Providing the Dream
Moriah Sells has set her sights on Harvard. Her family had better start planning—fast
(MONEY Magazine) – If you wanted to come up with a one-word description of modern family life, the word would be "swamped." With working parents and their 2.1 kids juggling jobs, school, sports, housework, religious instruction, music lessons and more, just getting through each day is exhausting. Time to think about the big picture—and to plan for the future—is hard to come by.
And then one day, a child turns 10, 12, even 15, and you realize that college is around the corner. As a parent, you start to wonder: Have I saved enough? Can I ever save enough? It's a harsh wake-up call.
Travis and LaTricia Sells of Houston are asking those questions right now, courtesy of Moriah, the eldest of their three daughters. Ten-year-old Moriah is in the Gifted and Talented Program at her elementary school and has announced that she wants to go to Harvard, followed by Harvard Law. Her ambitions may change 10 or 20 times between fifth grade and freshman year. But, as LaTricia says, "You have to take a child's dreams seriously. If Moriah can get into Harvard, I want her to go."
This year, parents of a Harvard student should expect to pay roughly $42,450 for tuition, housing and other expenses. That puts a current price tag of almost $170,000 on a Harvard education. By the time Moriah goes to college, four years will likely top $200,000.
Most parents looking at such gilt-edged schools can expect to get some financial aid in the form of loans or grants. But they still have to come up with a heck of a lot of money, more than half a million for three kids. So how can the Sellses—or any family, for that matter—save that kind of money?
Travis and LaTricia, both 36, have a little money saved: $30,000 in 401(k)s plus $3,000 in an emergency fund. They've built up $170,000 in equity in their spacious home in Riverside Terrace, a Houston neighborhood popular among African-American professionals. They own a second house nearby that's worth $65,000, which Travis is renovating and planning to rent.
But this is hardly enough to educate three daughters, let alone retire. Travis and LaTricia need to get cracking. Although their annual income is $130,000 (LaTricia, a pharmaceutical salesperson, brings in $70,000, and Travis, a realtor, earns about $60,000) the Sellses have found it difficult to set much money aside. In fact, saving has never been a priority. Child care for Moriah, along with her sisters Charity, age 8, and Laurryn, 4, costs $1,000 a month during the school year, more during the summer. Add church donations and dance lessons—plus clothes, barrettes, earrings and cute socks for three girls. There's always more to buy.
The family also travels frequently, taking about five trips a year to such places as Jamaica, New York City, San Diego and, of course, Orlando. Even though they've found a thrifty way to fly (Travis works evenings in customer service at Continental Airlines, which entitles the family to free tickets) the costs mount. Right now, in addition to $3,000 in credit-card debt, LaTricia has a debt-consolidation loan for $5,000.
To get the Sellses on track, MONEY turned to Philip Taggart and Lowell Bass, who are CEO and chairman, respectively, of the Taggart Financial Group, a Houston investment advisory firm. The pair were ushered into a glass-walled conference room, and after a few niceties Bass opened the conversation by asking them what their absolute top priority was. "Wealth is part of a larger life," Bass explained. The Sellses were quiet for a few moments, then LaTricia spoke for them: The kids' education came first, even before their retirement plans. Travis nodded his agreement.
Then Taggart lowered the boom. Two-thirds of Harvard's undergraduates receive financial help, but aid is based on need, not merit. The Sellses have little money saved, and their high income means that any financial aid would meet only a portion of the tuition burden. They must set aside as much as they can now (at least $1,000 a month if they want to cover just 40% of the costs) and do so in a way that is least likely to jeopardize their eligibility for aid.
Even then, taking the conventional route and simply saving more won't guarantee that they can educate Moriah and her sisters and retire comfortably. The couple seemed a little shocked to discover how far their assets lag behind their goals. Yet LaTricia conceded, "You know that when you haven't done anything, you're absolutely behind."
But the Sellses have two opportunities that could work in their favor. For one, LaTricia completes her M.B.A. in global management in September and is hoping for a promotion and a raise as a result. Second, Travis has ambitions to invest in real estate in their neighborhood—and the background to do it right. He also has access to inexpensive capital in their house. Given that, the advisers suggest a three-part plan.
1. JUMP-START THEIR SAVINGS. Simply put, LaTricia's job is to save. As a sales representative for Ross Products, a division of Abbott Laboratories, she earns about $70,000 in salary plus bonuses. Once her M.B.A. puts her on the management track, she says she could easily double her salary in five to seven years. As that additional income comes in, she can plow it straight into savings without constraining the family's lifestyle.
The best place for LaTricia's stash is in her 401(k). Right now LaTricia sets aside just 5% of her pretax income in Abbott's plan, but she can contribute 18%, or $12,600 at her current pay (Abbott matches the first 5%), and she should build toward that max, even if it is an ambitious goal.
Using a retirement plan for college savings, Taggart acknowledges, isn't always prudent. But parents often turn to their 401(k)s to finance education—thereby putting their retirement at risk—simply because it's their largest financial asset. LaTricia can borrow up to half of her 401(k) to pay for tuition. Plus, when colleges assess the family's financial need, 401(k) assets typically won't reduce aid eligibility. And if the Sells kids don't go to expensive private colleges or manage to get generous aid, the assets in LaTricia's 401(k) can stay put for retirement.
2. SET FUTURE SAVINGS GOALS. Bass and Taggart realize that they have set a high bar. But it's still not enough. Once LaTricia fully funds her 401(k), the next step is for each parent to set aside the maximum $3,000 apiece in Roth IRAs. With Roths, they can choose to make penalty-free withdrawals for retirement or college tuition (after five years); and like 401(k)s, Roths usually don't reduce aid eligibility.
If they manage to max out LaTricia's 401(k) and a pair of Roths, they can open a 529 college savings plan for each child. Texas offers no tax benefit for sticking with the state plan, so Taggart recommends Nebraska's plan, which includes low-fee Vanguard funds.
3. USE HOME EQUITY TO BUILD WEALTH. With LaTricia's savings earmarked for school, the couple need a backup plan for retirement. Before Moriah was born, Travis renovated, rented and sold three homes in his neighborhood, and now that the kids are older, he'd like to do it again. As a realtor, his hours are flexible, so he has time to devote to being a contractor and landlord. His neighborhood is hot—houses are snapped up within weeks. And Travis' job makes him one of the first to hear about what's coming on the market.
With that in mind, Taggart suggests that the Sellses refinance the $95,000 mortgage on their primary home, now worth $265,000, and take out another $120,000 in cash. "It's never a good idea to refinance a house to provide cash for idle spending, but that home equity is invaluable if you leverage it to build wealth," he says. With that money, they can pay off their $8,000 in consumer debt and buy a fixer-upper.
Taggart readily admits that adding debt when LaTricia and Travis are already struggling to save is a risky move—the refinancing would double their $1,182 monthly payments (good-bye, five vacations a year). He recommends it only because Travis has a successful track record in real estate investing. And if the houses don't sell? Travis should be able to rent them out until the market takes off, giving him income to offset the higher mortgage costs. When they are ready to retire, Travis can sell any houses he still owns.
By the end of the meeting, the Sellses were pumped. Bass and Taggart's enthusiasm for their financial potential was infectious. But they will need luck—and even then the couple have a tremendous amount of work to do. Once out of the office, on the way to their car, Travis said, "We get so busy just getting through every day. It's amazing to take a step back and realize that we're surrounded by opportunities we just didn't see." Now, though, comes the real work of putting their plans in motion. And one more thing: making sure Moriah keeps her grades up.
How much do you need to save?
With the expected price of a private-college diploma for today's four-year-old topping $250,000, you may blanch at the thought of saving the entire tab. It's more realistic to aim to pay a portion of the bill out of savings and cover the rest with aid, loans or cash flow. For 10-year-old Moriah, the Sellses must save $528 a month to pay half at a private school vs. $1,056 to cover the whole cost.
NOTES: Cost estimates include tuition, room, board and fees for four years and are based on historical figures from the College Board. Monthly savings amounts assume a 7% annual return, Compounded monthly; that the student begins college at age 18 and Investments continue until the beginning of the fourth year of school; that the money grows tax-free in a 529 plan; and that tax-free distributions from 529 plans are extended beyond the 2010 scheduled expiration. SOURCE: Upromise Investments (upromise.com).
WHICH ACCOUNT IS RIGHT FOR YOU? Before you put aside a single dollar for your child's college education, consider these four questions.