Tom’s Investment Philosophy on Competing Priorities
Transcript:
Katie Nealis:
I have so much money to save. Should I be investing for retirement or college education for my kids?
Tom Vaughan:
Ah, okay. That’s a loaded question. So basically what happens for most people, you know, just a limited amount of money to save, right? I mean, not for everybody, some people have money for everything. But for most of us, you know, there’s some choices we have to make. And so this comes up a lot, hey, you know, I’m in my 40s, or 50s, or whatever, and my kids are going to hopefully go to college, and should I be funneling lots of money into college savings or, and not doing so much in my retirement plans, or vice versa. Now, I’ve read a lot of articles, and almost every article is says, Oh, you should be doing money into retirement plans at a much higher rate than you would do in a college savings. Well, I looked at some of those authors, they don’t have kids. So you know, I’m a, I have kids, and they’re my number one goal, as I do everything I do. I’m here today, because I want to make sure that they’re taken care of but I had a weird experience growing up personally, where my parents are really into college, they both went to college, they took us to all these colleges, when I was growing up, and we got really excited, I got into some great colleges. And when I was 17, I found out that they didn’t save anything at all for college. So I ended up having to pay my own way through San Jose State, which there’s some benefits that partly, maybe reason I’m here, but but I didn’t want my kids to do that.
So there’s this, you know, competing pieces. And it’s actually it’s emotional, or more than than analytical, and my opinion. And so what I recommend is actually kind of a bifurcated approach, where you would do three pieces. Number one, you would make sure if you’re going to contribute to retirement plans, if you have a 401k with the match, get the match, I mean, if that takes all of your savings, then that’s the way it is then just try to work towards more savings in the future. So if the company is going to match up to 3% of your salary, and you put in 3%, you’re getting 100% rate of return on your investment that you can’t beat that you got to do that there’s too important to miss out. But in a perfect world, you’d put a third of your savings money that you do have available in your 401k a third into a 529 plan, which is a college savings plan that has some flexibility, you can change which child gets it, if you don’t have it child, one child doesn’t go and the other one does, or what have you, you can use it for your grandkids, it’s got some fun, it grows tax free, as long as you take the money out for college. And then I put a third into just a regular account, a joint account or trust account, where you know, if the, if the child went off to college, you could use that if they did, then it’s for your retirement, because a lot of people don’t have enough money outside their retirement accounts in retirement. And it creates all kinds of issues. So you’d want to have that anyway. And if you did need it for college, then it’s there. So I think that’s the best way to kind of balance it is like a third into retirement plans. And third into college plans, I would recommend a 529 and a third into just a regular account we call a taxable account. there’s pros and cons to all of those. But then when you’re kind of evenly distributing your savings into all three, I think that’s a good strategy.
Easan Arulanantham:
Yeah, and a lot of people when they, you know, after their kids go to college is kind of their peak accumulation period, you know, where they have the highest income, and essentially, they have the lowest expenses, yeah, usually is paid off, or is getting close to being paid off. And they’re not paying for their kids anymore, which is a big expense for a lot of people.
Tom Vaughan:
And that allows people to do a catch up. And we’ve all seen the studies though, that if you save from 20 to 30, and then didn’t save again versus the guy that saves from 50 to 60, the same amount. It’s amazing how much more money and have. And so, you know, great idea to save for retirement before you have kids. That’s, that’s a winner. But yeah, once you get into the situation where you’re kind of deciding, you do have that possibility of kind of a catch up, right? sort of depends on what age you are when your kids are born, right. I mean, whether you have that gap, but a majority of people save a majority of their retirement assets from 55 to 65. And just like he said, that’s when you have the most money, you know, your peak earnings and your career, your you know, maybe your house is paid off, or it’s at least more manageable. Your kids might be out of college at that point in time. And you’re really motivated at that point. And I’m heading for retirement and I gotta save, save saves. So yeah, you know, ignoring your college costs, making your kids go someplace that’s lower than they might have been able to go. I don’t know, I’m not an advocate of that. Personally, I think she’d take care of the kids. But, you know, hedge your bets because they may not go to college, right? So if you’re putting everything locked up in a 529 it’s a little bit difficult to get out without a penalty and they don’t go to college. That’s kind of a you know, that’s a problem too.