OPINION:
Living well, investing in educating yourself, assisting your children and enjoying retirement often seem like competing goals. In reality, our comfort should be viewed as balancing four critical life choices: college, relationships, homebuying and saving for old age.
You can spend too little or too much on college, but most importantly, you can spend foolishly or wisely.
The average debt of a four-year public university graduate is about $35,000, whereas for a private college alum, it’s $60,000. Overall, students attending in-state public colleges earn a better return on investment than those attending private or out-of-state institutions.
Considering further debt for graduate training, private colleges are not worth the financial burdens imposed on future life goals unless you are admitted to an elite private institution that carries a brand employers value.
Choice of major matters, but nurses get paid the same whether they attended Columbia University, where annual tuition exceeds $60,000, or the State University of New York at Plattsburgh on bucolic Lake Champlain, where out-of-state tuition is $17,000.
The list of colleges that return a student’s investment the fastest is cluttered with expensive elite institutions such as Columbia and the Massachusetts Institute of Technology.
The class, however, is headed by Baruch College in New York, with its modest public tuition and emphasis on practical majors such as finance and graphic communications.
With diploma in hand, choosing a life partner who spends imprudently will constrain you in ways beyond numbers. Not everyone has well-off parents to subsidize their education, but be clear-eyed and consider why someone has a lot of college debt before entering a long-term relationship.
With whomever you share your life, remember the rates of return over the last 25 years on the S&P 500, 10-year Treasurys and homes were about 9.1%, 3.8% and 5.2%. That data should influence your choices, but if you hoard like Silas Marner by living in a tiny apartment and buying all the equities you can, you won’t be happy.
Limits on the deductibility of mortgage interest and local taxes and a substantial increase in the standard deduction in the 2017 Tax Cuts and Jobs Act — along with higher mortgage interest rates and rising home prices — have made buying significantly more expensive than renting.
Making the choice to lease, however, entails betting on the pace of rent increases, and the same factors coming to bear on building new housing — zoning laws, regulations, labor and material costs — are burdening landlords too. And they don’t build kitchens or other amenities as you would to suit your aesthetics and idiosyncrasies.
These days, older people are being pushed out of their apartments by rents rising faster than incomes. The same could happen to you one day after your career has peaked or you are living off your IRA and Social Security.
The prudent choice is to buy what you need to raise a family reasonably and don’t churn. Stretch to buy more than a honeymoon cottage, but also a place where you can live if you retire in place to avoid repeated real estate fees and mortgage origination costs.
With student loans and mortgages to pay and faced with the choice of how much to spend or save now — going out to restaurants as opposed to developing domestic culinary skills, as not all thrifty meals need be Hamburger Helper — time is the friend of the youthful investor.
A dollar socked away in an IRA at age 25 will be worth $4.80 at age 65. That assumes a 4% return after inflation, and you should get at least that with a decent equity index fund. If you stash $1 at age 45, however, it will be worth less than half as much.
It is never too soon to put aside 10% of your pay or at least 10% of what’s left after student loan and rent/mortgage payments. And remember, employer matching contributions forgone today can no more be recouped than an ill-spent youth when you are 50.
Gradually build an emergency fund — three to six months’ minimum expenses in a short-term money market fund. Otherwise, invest mostly in stocks — a low-fee S&P 500 index fund like those offered by Vanguard or USAA is best. Then, when you are within 10 years of retirement, gradually shift half your holdings to build a ladder of 10-year Treasury securities.
If you enter retirement with half your assets in stocks and half in 10-year Treasurys, the historical averages indicate an average annual return of about 6%, which should beat inflation.
Full disclosure: I graduated from SUNY Plattsburgh, married a schoolteacher who attended Baruch College, live in the house where we raised our children, educated them without saddling them with debt and started saving in the manner prescribed in our 20s within the constraints of educators’ pay and my employers’ retirement options — and retired comfortably.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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