Taking stock


Published: Monday, May 1, 2006 at 6:01 a.m.
Last Modified: Sunday, April 30, 2006 at 11:22 p.m.

Q:

Here's our dilemma. Our son will be going to college in September 2007, and our daughter will enter college the following year. Both are looking forward to attending college away from home. I need advice on how to pay for tuition, room, board, cars and other things young adults need.
I'm 56 years old and have $111,000 in my company-sponsored 401(k) plus $11,000 in a Roth Individual Retirement Account. My wife, who is 58, has $34,000 in her company 401(k) and $4,200 in her IRA. Our home, which we bought for $99,000, is worth $267,000, has a small $52,000 mortgage. Together, my wife and I make just over $73,000 and have the usual debts. We also own 4,173 shares of Sprint and 3,005 shares of AT&T, which we inherited (plus $12,000 in cash) two years ago from her parents.
We figure the college costs for both will be about $20,000 per child, per year, or a total of $160,000 if they complete the degrees in four years. Two years ago, we invested $12,000 in a 529 plan, but it's worth a lot less today than what we invested.
So here's our question. Should we sell AT&T or Sprint to pay for their college expenses? Or should we sell half of each position and borrow from my 401(k) to make up the difference?
D.E., Waterloo, Iowa

A:

I'll give it to you straight. Your wife's folks blessed you with two stocks worth nearly $200,000. Believe me when I say that you and she will need every penny of that money and enormously more when you hang up your tools. From my catbird seat, it's clear to me that both of you may have to pinch pennies so hard that Abe will yell "ouch." Unless Sprint (S) and AT&T (T) appreciate quite nicely over the next dozen years and unless you contribute to your 401(k) and IRAs, you will be up the retirement creek in a leaky boat.
When you clear off your work desks in 10 years, you will need at least $85,000 a year to maintain your current lifestyle, and to generate that income you need $1.7 million of assets earning 5 percent. You're a long way from there.
And don't depend on your kids for help because they will have higher priorities on which to spend their money. Most parents who have put their kids first are terribly disappointed when in their time of need, the kids put their parents near the bottom of the list. Believe me; I hear these sob stories two or three times a month.
Sadly, most Bachelor of Science and Bachelor of Arts degrees today aren't worth a bucket of night soil. And it beats the blazes out of me why so many parents are so anxious to pay through their noses for such useless education.
Have a come-to-Jesus talk with your kids. For the first two years, they can attend Hawkeye Community College in Waterloo and live and study at home. They can find part-time jobs and work while attending Hawkeye full time. If they do well during the first two years, perhaps they can earn scholarships.
Or they can join the armed services, which offer fully paid four-year college programs. They can apply for a Pew Scholarship or a Stafford Loan. They can investigate the thousands of boutique scholarships (between $250 to $1,000 a year) offered by myriad religious, social, business, literary or management organizations or special corporate interest groups. It takes time to ferret them out and complete the paperwork. If the kids really want to go to college rather than drink party beer and paint themselves red and blue at football games, tell them to do the investigative scholarship research at the public library.
Probably the best way to educate those kids is to put them in the labor force for four to five years and have them save every nickel, dime and dollar they can. Most kids are too immature at 18, 19 or 20 to handle the responsibility of attending college away from home. Four or five years working like a coolie for crumbs at Costco or wrapping Whoppers at Burger King should make a college education very dear to them. If not, then they were never college material and ought to get a permanent job at the sawmill.
Now if you chose to take the chicken way out, and pay for their beer parties, then I recommend that you keep your Sprint and your AT&T and reinvest the dividends rather than spend them. Maintain your 401(k) plans and contribute the maximum dollars you can each year. Keep your IRAs and add to them every year, too. Then cash out of that ridiculous 529 plan, most of which have lousy performance and seem primarily designed to make money for the broker, not the investor. Allow your investments to grow, hopefully at 7 percent a year so that your 401(k)s and IRAs now valued at $160,000 could, with annual contributions, grow to $460,000 in 10 to 12 years.
Meanwhile, your AT&T is worth $81,000, and pays a 5 percent dividend. If you reinvest the dividend and it grows at 7 percent a year, it could be worth $290,000 in 10 to 12 years. Your Sprint is worth $118,000 and pays a 10-cent dividend. If you reinvest the dividend and it compounds at 7 percent, it should grow in value to $275,000 in a dozen years. That will give you about $930,000, which should easily produce $46,000 in income. Then plug in Social Security and you're about $15,000 short.
Now because you're dotty enough to pay their college costs, I suggest you refinance your home (not a home equity loan) at 6.5 percent and take out $160,000, which is the full college cost for both kids. Ladder that money in certificates of deposit and use it as you need it. This method allows you to use the lesser of two evils to provide for your kids' college costs.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.

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