Education Funding
In addition to the current balance of $24,000 in 529 plans, Maria and Joseph are saving $200 per month. By projecting forward their current rate of savings and the likely cost of a public university, we find that by increasing the amount to only $250 per month, a four-year college education can be comfortably paid for. This leaves open the option to provide additional funding from the comfortable cash flow if a more expensive institution is desired.
Net Worth & Retirement
It is now time to incorporate all the improvements to the cash flow with a little help from the US Government. Five years have passed and Maria and Joseph are in a comfortable position with approximately $50,000 free cash flow in their budget. Joseph has now reached the age where he can begin collecting Social Security retirement income with no offset due to earned income. This amount should be in excess of $25,000 per year, so let’s use that number. We are now looking at approximately $75,000 available for the remaining goals.
College and debt are now very much under control. Building net worth, funding for retirement and leaving an inheritance for Isabella are the remaining goals, and they can all be tied to increasing their net worth. Remember the $75,000 per year? Let’s put it to work!
Let’s assume that Joseph is willing and able to work another five years. Let’s also assume there is a modest return on investments of 6.5 percent. The liquid assets of $58,000 in 2011 may now have grown to around $80,000. By adding $75,000 per year over the next five years, that total may swell to more than $536,630. If Joseph decides to retire then (he may also decide to continue as a part-time consultant), they would still retain the ability to save a modest amount. Even without savings, Maria will probably continue working at least 10 more years after Joseph retires. That would allow their investments to grow to more than $1,000,000. Not a fortune in the world of 2031, but significantly better than their current situation.
If Maria is willing to place the balance of excess cash flow from her new employment into a 401(k) plan (let’s assume $350 per month with a 50 percent match of $175) there would be another $271,000 available, for a total of almost $1.3 million. By now their mortgage may be paid and that would allow them to reduce their cost of living significantly. So with Social Security for both and a 4.5 percent withdrawal rate on investments, they could be looking at a retirement cash flow stream of almost $130,000 per year without counting any excess proceeds from the family home. That would be the equivalent of more than $70,000 in today’s dollars.1 Without the mortgage or the expenses of a child living at home, and with the addition of Social Security, it could very well provide a comfortable living.
1 An inflation rate of 3.15% was used
