Get Ready Millenials – Mom and Dad are Coming Home, to your Home


Hey millennials, glad that those in your generation, who came home after college and stayed another ten years, are finally getting their own place.  Sure, Mom and Dad are footing the down-payment, but at least you’re finally starting to venture out on your own like your parents probably did when they were 18 or maybe 21.  I’m sure that plenty of you also moved out and got a modest apartment when you graduated college or high school like your parents did – it is unfair to stereotype an entire generation – but there are more millennials living at home at age 28 than there were in any of the past generations, at least since about 1950.  There are also a lot of 30-somethings who still have their parents paying their phone bills or helping with other expenses, even when they are adult children living mainly on their own.

Many of us in GenX were worried about this development of delayed maturity.  The hashtag, #adulting, is truly assinine.  Note that Jack Daniels started his brewery at age 14, so it is possible to become self-sufficient and even do some pretty remarkable things way before you turn 25.  We wondered what would happen when your parent’s generation started to retire and people were needed to do all of the important jobs that they had done.  I’m sure your grandparents were also worried about who was going to pay for their Social Security if no one was working.  Also, what would happen if your generation never grew up and moved out before your parents retired or died and were no longer able to take care of you.  Solar Charger, 8000mAh 3-Port USB and 21LED Light Solar Power Bank Portable Battery Cellphone Charger, Solar Panel for Emergency Outdoor Camping Hiking for IOS and Android cellphones (Black)

But this morning I realized that we were worrying about the wrong people.  I’m sure that while 35 is the new 20, eventually those student loans will be paid off and you’ll be working your way up the corporate ladder.  I know that many of you are just waiting for your parent’s and grandparent’s generation to retire and get out-of-the-way so that you can advance.  I’ve also got to believe things like having kids will make you want to get your own space and a refrigerator on which to hang artworks from your elementary schoolers.

The real issue is your parent’s generation.  They don’t have anywhere near enough money to continue to live on their own all the way through a 30 or 40-year retirement that the are expecting to have.  To generate a $50,000 per-year income, which is probably about what it would take for them to continue to live in their home and continue to live about how they are now, they will need to save up about $1M by the time they retire.  Really they should have about $2M since there are also medical bills and a lot of retirees want to do some traveling when they retire.  The trouble is that the average person approaching retirement has about $135,000 saved up.  And that is the average, which includes some people who have several million saved tipping the scales.  There are a lot of people who have $50,000, or $20,000, or $2,000 saved beyond their home.

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In the past, many in their situation would have had the option of selling their home and moving somewhere cheaper.  If they were to move to a small apartment in a safe but unspectacular neighborhood, and not a condo on the beach or in a high-rise in downtown, that would help them get maybe a decade or more before they ran out of money. The issue is that a lot of them still don’t own their home.  They refinanced their mortgage and took out money to put you through college, or upgrade the kitchen, or pay off your student loans or credit card bills.  Many people bought bigger homes in their late forties or fifties and started all over again with a 30-year mortgage.  That means their home won’t be paid off until they’re 80, and they’ll only have maybe 20-30% equity when they hit retirement age since you pay mostly interest at the beginning of a loan.

So what happened with your parent’s generation that didn’t with your grandparent’s?  The issue is that your grandparents had a pension plan where their employer put money away for them and paid them less in salary.  Because they had a lower salary, they had smaller homes, took fewer vacations and cheaper vacations, and cook at home most meals.  Your grandmother is probably a much better cook than your mom, and that is because she has had 30 years of practice.  She didn’t do take-out unless it was a casserole she took to a church potluck.  Your grandparents also probably didn’t have two cars, the expense of two sets of work clothes, the daily lattes, and the cost of childcare.   They also had college tuition costs of about $3,000 per year in today’s dollars since they could not afford any more than that so universities kept frills to the minimum and didn’t ask for high tuitions.   In exchange for this more meager living, they had a pension plan waiting for them at retirement.

Your parents instead got higher salaries with the expectation that they would then save up for their own retirement.  This was actually a better deal since the returns on pension plan investments aren’t as great as returns one can get investing for oneself since the pension plan manager needs to be conservative (and get lower returns) all of the time to ensure there is enough money to keep the payments for current retirees flowing, but an individual can be aggressive during the first 30 years and then shift to a more conservative mix near the end.  The trouble is that your parents used the extra salary to buy bigger houses, take more lavish vacations, pay high college tuition costs and living costs for their college students, and eat every meal out.  Retirement was always something that they would worry about later when they didn’t have this need or that crisis to take care of.

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With $130,000 in savings, living in a standard home even without a mortgage, they’ll probably be able to eek out 5-7 years before they’ll run out of money.  This is assuming that they don’t have any major medical expenses, don’t travel the world, and that the stock market cooperates to a good extent.  A bear market, a mortgage payment, or a big medical bill could cause them to run out much sooner.  And what will happen then?

The most likely thing is for them to give you a call.  At that point you’ll be over at their place, having a big yard sale to sell off all of the stuff they’ve collected over the years (some of it will end up at your house), then they’ll be moving into that home office, guest bedroom, or workout studio you’ve made at your home.  Maybe you’ll still be living at your parents home, so you’ll just take over the mortgage payments and the grocery bills.BarksBar Original Pet Seat Cover for Cars – Black, WaterProof & Hammock Convertible (Standard, Black)

It will be nice to have them around to help out with watching the kids, assuming they’re interested in that.  But the house will suddenly feel a lot smaller, and there will be the inevitable power struggles and in-law struggles that come with multi-generation households.  Meals out will become a lot more expensive, as will vacation since you’ll be getting extra hotel rooms and tickets.  This is not a terrible arrangement, with many advantages such as your children getting to really know their grandparents, the ability to share some of the household chores (assuming your parents don’t decide it is your turn to take care of everything), and an easy transition when they become old enough to need a lot more help with things.  It is actually very common in Asian countries, especially in areas where housing prices are astronomical, and was the standard in the US for many families when most people were farmers.

Still, you had better start thinking in terms of how you will handle having a full household, both in managing expenses and living arrangements.  In the next post, I’ll go into some steps to take to get ready, starting with having a frank conversation with your parents about their finances.

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Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Would you Rather Have a Million Dollars, or a New Car Every Three Years?


Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over $1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that $1 million will turn into $2 million by the time you are 62, $4 million by the time you are 69, and a cool $8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost $30,000 will be worth about $15,000 in four years.  This means that the car will lose an average of $3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you $10,000 (because he wants to make a profit from the sale of your used car to someone else).

 

              

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The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for $30,000 after four years when it was worth $15,000.  Even if it drops in value to $7500 over the next four years, you’ll still only be losing $1,875 per year.  This means that you will save $1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is It Possible to Save for College?


About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.