Should I pay for private K-12 or save for retirement?

Summary:

One of the most common financial anxieties I encounter with young families is trying to figure out whether they can afford Private K-12 education without harming long-term financial goals like retiring at a reasonable age. In this post we’ll do an analytical deep dive to show you how to think about these tradeoffs.

Private K-12 tuition hits everyone’s budget hard

These middle years can be tough. You need to balance your career with the demands of caring for young children, and in many cases, for aging parents.

You’ve had a lot of professional success but costs are adding up and you’re not sure if your mid to high six-figure family income is enough to provide the life you want for your family today while still making sure you’re not robbing yourself of your future goals.

I’m 40 and we have two young children so I’m intimately familiar with what many of you are going through.

The enormous cost of private school for the K-12 years affects everyone from C-Level executives to physicians and everyone in between. Coming up with the $100,000+ per year it takes to put three kids through private school while also paying for the mortgage, family vacations, and day-to-day life in a high cost-of-living city puts a hole into the budget no matter how much you make.

How much will spending tens of thousands a year on private school impact my retirement?

There are lots of tradeoffs that people weigh when figuring out if they can afford private school. Making your yearly budget work to fit in the costs is painful but straight forward. But figuring out the long-term implications on goals like retirement is where people often want help.

The wealth management industry has done a good job educating people on the need to aggressively contribute funds to retirement throughout their entire career. This is sound advice for the average household making the median income throughout their lives.

But keep in mind, some of this is manufactured fear created by an industry that makes money off of how much people keep in their accounts. They lose revenue when you choose to spend your money intentionally on things that are important to you.

Many people we speak with have been aggressive at putting excess savings towards retirement for years. They are lucky enough to already have seven figures saved up by the time they come to the end of their 30s. For these people, putting more money towards retirement is a nice to have, not a necessity, to live the retired life they want in the future.

Let’s go through the numbers

Here’s an example.

• James and Lucy have both worked high paying jobs since graduating.

• They’re both around 37 years old and already have $900,000 saved up across their retirement and investment accounts.
• They’ve been contributing a combined $40,000 a year into their retirement accounts for the past couple years
• They anticipate spending $125,000 a year in today’s money once they’re retired at 65 with no mortgage payments or kids to support
• They have two kids they want to put in private school but they would need to reduce their retirement contributions by $20,000 a year.
• They’re unsure if this is something they can afford to do.

Let’s take a step back and look at the worst case scenario.

• Even if James and Lucy never contributed to their retirement accounts again, their nest egg could be worth just a bit over $7.7 million by the time they retire at 65 (assuming a moderately aggressive allocation that returns 8.0% a year between now and then).
• Using the simplified 4% Rule, those $7.7 million in assets could support a yearly retirement spend of $308,000 (and this is before taking into consideration other income sources like Social Security they might be receiving).
• If inflation averages 3.0% between now and when they retire, their estimated retirement costs by then will be $285,991.
• The $308,000 the 4% Rule implies they could spend from their portfolio is $20,000 more than their expected expenses

In this situation, they could likely focus on providing the education they want for their kids now while knowing time is going to do a lot of heavy lifting on the assets they’ve already built.

This is where having a solid idea of what you want your future lifestyle to be can better define the tradeoffs you might be making today.

If you liked this post:

I work with a lot of young families and write about the tradeoffs that come between work, life, and family. You might find these other posts helpful as well:

• 42% of Heirs Spend Their Entire Inheritance Within the First Year
• Where Do Trump Accounts Fit In?
• The Four Disadvantages of Trump Accounts

Feel free to reach out if you’re trying to think through how kids affect your financial plans and strategies.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.