Want to retire early? Don’t forget to save for college.
The FIRE movement focuses on cutting spending and aggressively saving enough money to gain financial independence and retire early. But, followers of FIRE are not always considering future college costs, putting their children at risk for high student loan balances.
How to achieve FIRE
Followers of FIRE believe you are financially independent once your net worth is 25 times your annual expenses, and you’re comfortable living off no more than 4% of your investment portfolio each year. Many achieve this after just 10 years in the workforce by living frugally and making financial sacrifices. That means living without debt, saving at least 50% of your income, investing aggressively and reducing monthly expenses.
The “retire early” part of FIRE is a bit misleading. While the traditional definition of retirement is to stop working all together, FIRE followers often continue working. However, not only is the new job more fulfilling than their previous employment, their lifestyle is not dependent on the paycheck.
Does FIRE work for parents?
According to a recent survey of FIRE followers on Reddit, 77% of respondents did not have children nor plan to have any children in the future. Parenting is expensive and will slow down the achievement of FIRE goals. The U.S. Department of Agriculture estimates that the cost of raising a child from birth to age 17 is $233,610, and that doesn’t include the cost of college. Parents working toward financial independence will also have a harder time cutting costs since they may not be able to downsize a house or car as quickly.
However, there are parents who are successfully achieving FIRE. It may take some creativity, but it is possible to cut costs when you have children. Instead of downsizing a house, families can move to a more affordable city or town. If one parent retires early, there is no need to pay for day care, which could cost as much as $22,600 in some areas. Parents can also limit costly activities and summer camps and try to find free programs at local libraries and park districts.
FIRE and college savings
If you are a parent aiming toward FIRE, it’s important to budget for college costs in your future expenses. The amount you should save for college will depend on your child’s age and the type of college they will attend. In 2018, even the “frugal” choice of sending your child to a 4-year in-state public college will cost around $87,000 over four years. The total cost of a 4-year private college education, including tuition, fees and room and board is projected to be about $198,000. A realistic goal is to aim to save about 1/3 of projected college costs and cover the rest with student loans and current income.
Some FIRE advocates believe their children will be able to pay for college on their own through scholarships or with money from a part-time job. This strategy may have worked for students who went to college in the nineties, but it would be much more difficult today. According to the College Board’s Trends in College Pricing 2017 report, the price of tuition, fees and room and board for a 4-year public college has risen an inflation-adjusted 56% from 1997-98 to 2017-18.
Over 70% of graduates leave college with student loan debt, with an average balance of close to $30,000. Saving for college helps reduce the burden of student debt for your child and helps get them on track toward their own financial independence. A smart rule of thumb for your child’s student loans is to borrow less than what they expect to make during their first year after college.
Parents who don’t plan for future college expenses could end up jeopardizing their retirement. Sallie Mae’s How America Pays for College 2018 report found that 8% of parents took a distribution from a retirement plan savings account to pay for their child’s college education. If you are less than 59 ½ years old, taking a withdrawal from a 401(k) or IRA could lead to tax consequences and penalties. On top of that, it will be difficult to get your retirement savings back on track with a shorter investment time horizon. That means retiring early may no longer be an option. Enrolling in a 529 plan can help protect your retirement investment and keep you on track to achieve FIRE.
A good place to start