Need advice - If we chose private school are we risking our retirement?

[MooseBucks]

I've run into a dilemma on how to proceed financially. We're strongly considering sending our children to private school with a price tag estimated at 6k total per year. I'm worried if we do this we won't be setting ourselves up for a good spot in our future due to the increased expenses. Private school would start next year and is the 6k total for when it is just the older one and then it gets increased to 7k when they both are in school due to financial aid.

My parents will cover the majority of the college costs for our children and if they decide to go somewhere more expensive we wouldn't increase our contribution above the 7k/yr total.

My wife and I are both 30 with 2 kids - 4 yrs old and 6 months.

Me -
- $70,000 salary
- $3,000 net/take-home pay per month
- 5% to 401(K) w/ 5% company match +2% additional from company yearly
- 50k Balance on 401K
- 3500 in HSA - Maximum contribution this year and continuing next year
- 4000 cash value in pension before company discontinued
- Rental property that breaks even on taxes but not including depreciation makes about ~3.4k/yr - Little to No equity in property - 30 yr mortgage @ 3.75

Wife -
- $26000 salary
- $1560 take home monthly
- 5k in IRA

Debt
- ~4k in no interest medical debt
- Credit Cards are paid off monthly

Rainy Day Fund
-~35k in savings account

Additional self employment income
-$15,000 yr

House
-20 yr mortgage @ 3.25% 180k balance with ~50k in equity
-16 yrs left
-If we continue to pay $300 extra a month it will be paid off in 12 yrs.

Cars
-Both paid off.

Life Insurance
Me - 1mm term policy + ~250k through work
Wife - 500k term policy

All in monthly expenses eat both of our salaries so all we have left over is the 15k self-employment income + 3.4k rental income.

Overall - Do you feel like we'd be putting our future at risk if we commit to paying 7k yearly for education for the next 18+ years? I'm torn because I feel like we are in a good position - never stressed about making ends meet currently and will be mortgage free at 42. Once the mortgage is paid off it will free up ~1500/month.

Thanks!

[Jluke]

You are in a very good position financially. Great Emergency Fund, term insurance, no debt. So please remember that as you read what I write below - it will seem very nit picky, but I think you can go to another level with your finances.

First, I think you need to start funding/maxing a ROTH IRA for at least one of you - I didn't see that listed and I didn't see any active retirement contributions for your wife.

Second, you will need to reduce/stop with the extra payments on the mortgage (sacrifice*). I know very odd advice coming from me if you've seen my situation.

*being that if you want to send the kids to private school that $3600 extra per year represents roughly half of the tuition. You can always lump sum any extra cash towards the mortgage (self employment income), but I believe your priorities are shifted to retirement and not the mortgage b/c of private school. Your mortgage terms are excellent use of leverage.

One school of thought is:
1. Contribute up to the company match in 401k (check)
2. Max a ROTH IRA (pending)
3. Fund a HSA (check)
4. pay down consumer debt (none)
5. contribute more to and/or max out your 401k (option for you)
6. fund a taxable investment account
7. pay extra to mortgage

Items 4-7 could be ordered differently (item 4 doesn't apply to you). Again private school driving that order.

[disneysteve]

You earn $111,000.
You said you are putting 5% of your 70K income into the 401k. That's $3,500.
You mention that your wife has an IRA. Do you mean that her balance is 5K or she is putting in 5K/year.

If she is contributing 5K, that means combined you guys are only saving 7.6% of income for retirement. That isn't enough. Your goal should be to get that up to 15% or $16,650. If you are getting the maximum 401k match, then open a Roth and fully fund that. You can also open a SEP-IRA and fund that from the self employment income. That should allow you to get to that 15% mark.

Once you've done all of that, take another look at the numbers and see where that leaves you. Come back and post at that point.

[MooseBucks]

You earn $111,000.
If she is contributing 5K, that means combined you guys are only saving 7.6% of income for retirement. That isn't enough. Your goal should be to get that up to 15% or $16,650. If you are getting the maximum 401k match, then open a Roth and fully fund that. You can also open a SEP-IRA and fund that from the self employment income. That should allow you to get to that 15% mark.

Should we be contributing 15% not including company match? Our plan this year is to fully max out Roth/Traditional IRAs. The issue is I didn't want to contribute until we did our taxes because our AGI needs to stay under 100k to keep daycare reimbursement from my work.

[feh]

Note - I didn't not pore over the numbers in your original post.

That being said, I agree with Steve above. You should be putting at least 15% of your gross income into retirement savings each year.

Rule of thumb - fund your retirement before private school/college for your kids.

You may want to let us know why you think private school is better than the public one available to you.

[rennigade]

Where do you live? Unless you're in the hood you probably do not need to send your kids to private school.

And like others said...you need to up your retirement savings game. Its waaaay too low.

[disneysteve]

Should we be contributing 15% not including company match?

our AGI needs to stay under 100k to keep daycare reimbursement from my work.

Yes, you should be contributing at least 15% of your gross income to retirement not including company match.

If you need to tweak your AGI, you can always contribute more to the 401k. You've got plenty of room there.

[Jluke]

Should we be contributing 15% not including company match? Our plan this year is to fully max out Roth/Traditional IRAs. The issue is I didn't want to contribute until we did our taxes because our AGI needs to stay under 100k to keep daycare reimbursement from my work.

Henry

How does contributing to ROTH/Traditional affect AGI? I believe that Traditional would lower AGI, if I understand that right and ROTH has 0 effect on your AGI.

are you going to pull 11k from the Rainy Day Fund or another source?

[MooseBucks]

Yes, you should be contributing at least 15% of your gross income to retirement not including company match.

If you need to tweak your AGI, you can always contribute more to the 401k. You've got plenty of room there.

I recently upped it to 7% but that doesn't start until this paycheck. Since we aren't having any trouble with our bills currently our plan going forward was to increase my 401k contribution by my raise each February which is usually 3%.

I also have the ability to contribute to a Roth 401K, should I be doing that instead of the Roth IRA?

How does contributing to ROTH/Traditional affect AGI? I believe that Traditional would lower AGI, if I understand that right and ROTH has 0 effect on your AGI.

are you going to pull 11k from the Rainy Day Fund or another source?

We have about 10k in savings that is not in our rainy day fund. We'll fund a traditional IRA by the amount we need to reduce our taxable income which should be less than 2k with the remainder going to a Roth IRA.

[LivingAlmostLarge]

I would bet you can afford private school even if you up your savings to 15%. But I didn't run the numbers. Off the cuff if you make $111k you only need to be saving around 17k/year for retirement.

[Jluke]

Me -
- $3,000 net/take-home pay per month

Wife -
- $1560 take home monthly

Based on the numbers provided above, combined they net $54720 per year (it might be off depending on pay frequency).... includes just a 5% contribution...

It's far from the 111k gross number being thrown around. Gross is good for some calculations; but the reality is much different between net and gross.

[Outdoorsygal]

Do what is best for your children

[TexasHusker]

Investing in the lives of your children is infinitely more important than a cozy retirement. Luckily you have the income to do both. I disagree that you need to save 15% for retirement. I would try to save 5% for future investment opportunities, and 5% retirement. That will work if the monies are invested wisely.

I would take that $35K and buy yet another rental property (a $150K house) after you have about $10K in an emergency fund. That $35K should be working for your future RIGHT NOW. Leverage it!

I was approximately in your shoes at 30, but proceeded to place WAY too much emphasis on 401K and neglected getting more real estate. Big mistake that I eventually corrected. A 401K probably can't fund a bountiful retirement - the only way for it to happen is breaking your neck to put lots of money into it - sacrificing today for tomorrow, and asking the 401K to yield returns which are simply unrealistic.

Real estate investing is a more effective way to a comfortable retirement (and financial independence BEFORE YOU'RE AN OLD MAN!), and OTHER PEOPLE are paying for it! You're on the right track - just keep accumulating that real estate - screw the 401K!

[disneysteve]

Do what is best for your children

I think one thing that is best for your children is making sure you aren't a burden to them in the future. I know too many people my age (50s) who are struggling today because they are supporting their own families and also supporting their parents who failed to plan for their later years.

[greenskeeper]

private school is overrated, plus your paying taxes for the public school AND tuition for the private school