How Much Do You Need To Save for Retirement?

OLYMPUS DIGITAL CAMERASaving for retirement seems like a daunting task.  It is a combination of preparing for something that is a long ways away and a seemingly insurmountable task.  Both of these aspects keep people from saving like they need to if they want to have a comfortable retirement because people in general focus on the near-term wants and needs and give up when a task seems too difficult.  So people put it off, rationalize by saying that they would rather “live for today” or that somehow they’ll be alright when the time comes, and the years tick by until people find themselves ready to leave a job or being laid off in their fifties without prospects for finding a comparable job, but not having the savings needed to see them through retirement.  People then, who have always been able to provide for themselves, end up scrimping by on Social Security and aid from kind people or burdening adult children who are finding themselves needing to continue to support their own adult children.  The senior discount should not be your retirement plan.

It does not need to be this way, however.  A good rule-of-thumb for how much you’ll need for retirement is to take 75% of your current spending and multiply by 25.  For example, if you have a $60,000 per year job, pay $10,000 per year in taxes and health insurance,leaving a take-home pay of $50,000, you would need to have  0.75*$50,000*25 = $937,500 in savings by the time you retire to have a good chance of continuing your current lifestyle without depleting your savings before you die.  I would advise you have double that amount saved since it reduces your chances of outliving your money further and allows you to continue to invest about two-thirds of your savings in stocks when you retire, thereby increasing your retirement income and allowing you to thrive in retirement rather than just get by.  While it may seem impossible to save up millions of dollars to take you through 20 years or more of retirement, it can be easily done with a combination of starting early, saving regularly, and using common stocks to increase your return.

For example, someone starting out at 20 years old who puts just $300 per month, or just $3600 per year, away into a 401k or personal IRA and invests it entirely in stocks (in a set of low-cost mutual funds that are well diversified) should expect to get a return of about 8% after inflation over a 45 year working career.  Plugging this information into a financial calculator starting today, one gets:

Age Contribution Interest Balance
20 $0.00 $0.00 $0.00
21 $3,600.00 $288.00 $3,888.00
22 $3,600.00 $599.04 $8,087.04
23 $3,600.00 $934.96 $12,622.00
24 $3,600.00 $1,297.76 $17,519.76
25 $3,600.00 $1,689.58 $22,809.34
26 $3,600.00 $2,112.75 $28,522.09
27 $3,600.00 $2,569.77 $34,691.86
28 $3,600.00 $3,063.35 $41,355.21
29 $3,600.00 $3,596.42 $48,551.63
30 $3,600.00 $4,172.13 $56,323.76
31 $3,600.00 $4,793.90 $64,717.66
32 $3,600.00 $5,465.41 $73,783.07
33 $3,600.00 $6,190.65 $83,573.72
34 $3,600.00 $6,973.90 $94,147.62
35 $3,600.00 $7,819.81 $105,567.43
36 $3,600.00 $8,733.39 $117,900.82
37 $3,600.00 $9,720.07 $131,220.89
38 $3,600.00 $10,785.67 $145,606.56
39 $3,600.00 $11,936.52 $161,143.08
40 $3,600.00 $13,179.45 $177,922.53
41 $3,600.00 $14,521.80 $196,044.33
42 $3,600.00 $15,971.55 $215,615.88
43 $3,600.00 $17,537.27 $236,753.15
44 $3,600.00 $19,228.25 $259,581.40
45 $3,600.00 $21,054.51 $284,235.91
46 $3,600.00 $23,026.87 $310,862.78
47 $3,600.00 $25,157.02 $339,619.80
48 $3,600.00 $27,457.58 $370,677.38
49 $3,600.00 $29,942.19 $404,219.57
50 $3,600.00 $32,625.57 $440,445.14
51 $3,600.00 $35,523.61 $479,568.75
52 $3,600.00 $38,653.50 $521,822.25
53 $3,600.00 $42,033.78 $567,456.03
54 $3,600.00 $45,684.48 $616,740.51
55 $3,600.00 $49,627.24 $669,967.75
56 $3,600.00 $53,885.42 $727,453.17
57 $3,600.00 $58,484.25 $789,537.42
58 $3,600.00 $63,450.99 $856,588.41
59 $3,600.00 $68,815.07 $929,003.48
60 $3,600.00 $74,608.28 $1,007,211.76
61 $3,600.00 $80,864.94 $1,091,676.70
62 $3,600.00 $87,622.14 $1,182,898.84
63 $3,600.00 $94,919.91 $1,281,418.75
64 $3,600.00 $102,801.50 $1,387,820.25
65 $3,600.00 $111,313.62 $1,502,733.87

So with only $300 per month invested without ever increasing contributions and without adding anything for a company match, our retiree will have about $1.5 M in savings when entering retirement.  Add a little more and include a company match, and you could easily have $3M or more if you start putting money away in your 401K or IRA right when you start working.  Note that the balances grow very slowly during the first few years, but then grow very rapidly near the end once your money starts to compound, making interest from interest.

This chart can also be used to evaluate how you are doing right now versus where you need to be.  Just find your age and compare the balance shown against what you currently have saved.  If you are 40 years old, you should have around $200,000 saved if you want to have around $1.5 M at retirement and provide a yearly income of about $60,000 for expenses.  If you are 55, you’d need to have about $700,000 saved to be on track.  If you have less than this, it is time to start ramping up your contributions to reach your goals.  Once you get on track, or maybe ahead of the game a bit, you can ramp things back down because you’ll know your retirement is secure.  Then again, it isn’t a bad idea to be substantially ahead of the game so that you can take less risk with your investments when you are approaching retirement.  Shifting from stocks into bonds and interest-paying securities will reduce your risk of a market meltdown when you are 64 affecting your retirement date, but you will not get the kind of returns projected in this table from interest alone.

If you know there is no way you can save as much as needed, you can also look at the chart to see how much longer you may need to work beyond 65.  If you currently have $100,000 saved, you have the retirement savings of a 35-year-old.  If you are currently 40, you can reach $1.5 M in savings by putting $300 per month away into mutual funds by the age of 70.   If that sounds like a non-starter for you, it is time to look at your spending priorities in your life and find ways to increase your retirement savings.  Everyone has excuses, but just because you have good excuses for not saving for retirement doesn’t mean you’ll be just fine if you don’t.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The American Dream is There for All

If you are living in the United States of America, no matter your zip code, you have an opportunity that people in many other parts of the world would give anything to have.  You have the ability to have ample food, clean water, and comfortable shelter.    You have the ability to earn $15 per hour, $25 per hour, or even $100 per hour.  You have the ability to send your children through college.  You have the opportunity to retire with dignity.

It may not look that way if you are living in a housing project in a neighborhood covered in graffiti and trash, but the opportunity is there for you just as it is for an American child living in the suburbs.  There is nothing institutional standing in your way.  Is there racism?  Sure, but most hiring managers and college admissions officers will give an advantage to minority applicants.  Will it be harder for someone coming from the projects than for someone coming from the family of a CEO?  Certainly, but that does not mean that the doors are closed.

The thing to understand, however, is that nothing is given to anyone (with the exception of a few children of ultra-rich parents, but there are maybe 1000 of these in the US).  If you want to make $25 per hour, you need to do something that is worth $25 per hour to someone else.  If you want to have a nice home, you need to earn that nice home by working hard and paying off the mortgage.  If you want your children to go to college, they need to do the work to learn the material during grade school and high school so that they can graduate from college.  The American Dream is about opportunity, not outcomes.

That is the difference between America and places like Vietnam and India.  If you were unfortunate enough to be born in a country like India and were not born into a high caste, or were born in Vietnam and weren’t born into the home of a party member, you have no opportunity to improve your life, no matter how hard you work.  In America, people can go from poverty to middle class or even poverty to wealthy and do so every day.  These people work hard to provide for the needs of other people, and in doing so are rewarded with wealth.  The ones who realize the American Dream are the ones who find ways to better themselves and who spend most of their time giving of their talents to other people.  The ones who stay still are the ones who concentrate on their own needs and wants.

The first steps out of the housing projects and towards the American Dream are fairly simple.  These few simple steps will take you to the point where you are self-sufficient, which you’ll find will bring pride into your life. These are:

1. Use your opportunities for an education wisely. People who have basic skills like reading, writing, and mathematics do better than those who do not. Use your time in school to learn. Do your homework and turn it in on time. Read all that you can.

2.  Get a simple job and do it well.  Show up on time, dressed neatly.  Smile at the customers and be pleasant with customers and coworkers.  Work efficiently and provide your employer more in value than he is paying you.  Be trustworthy by doing what you say you will.  Find things that need to be done and do them.

3.  Get away from people who are holding you down and find people who will lift you up.  There are always people who will tell you that there is no hope in a housing project.  Get away from the projects and out into the real world.  Find a good church and find people you admire in that church.  Follow their example and maybe even ask them to mentor you.

Beyond simple self-sufficiency, there are some other steps you can take to thrive and move into the middle class.  These are:

1.  Improve your skills.  The secret to a higher paying job is having the skills needed to do things that are worth $25-$50 per hour or more.  A college education in the right fields is one way to do this.  There are also a lot of trade schools that can teach you skills that result in a higher paycheck.  You can also find a craftsman and ask to learn from them.

2.  Learn to manage people.  There is only so much you can do by yourself.  If you can learn to lead a team, you can get a lot more done.  This results in higher pay for you.  Watch the managers around you and learn what you do.  Also, many companies have management training opportunities.  There are also numerous books on the soft-skills of management (people skills and organizational skills).

3.  Start your own business.  The ultimate opportunity is the ability to start your own business.  This takes a lot of time and effort – expect to be working 100 hour weeks fairly regularly for at least the first few years, but it can be very rewarding.  Once again, it is a good idea to find someone who has succeeded at starting a business to mentor your.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Are Blue-Chip Companies Good Investments when Approaching Retirement?


Dear SmallIvy,

I am 59 years old and believe that I need to “catch” up some to have a comfortable retirement. I have been contributing $23,000/year to retirement account at work through AIG Valic(only option. I have a variable annuity income lock investment with them. Periodically I will contribute to a separate 401 K regular and Roth IRA investment vehicle through another company. I do not have a financial advisor or accountant. My question is, I am leaning to putting new investments in large, solid “blue chip” dividend producing companies such as Johnson and Johnson, Proctor and Gamble, Baxter,Dover with plans to diversify into energy companies and REITS. Is this a sound strategy or can you offer some suggestions. Thank you for any help.

Thanks, Benny


Dear Benny,

You are right that blue chip stocks are a good investment when you’re looking for more stability.  These are big companies with many different product lines.  They have the ability to wait out bad times and buy out competitors before they become a major threat.  They also pay a good dividend.  This means that if you get into a period where stock prices are going nowhere you’ll still have income from the company. which is important when you’re retired and need to pay expenses whether the economy is growing or not.  An ideal situation for a retiree is to have enough dividends and interest payments coming in to pay for expenses so that you don’t need to sell shares of stock for cash.  You just write checks or use a debit card to pay for things from the account and then magically the cash in the account is replenished by dividends and interest payments that come in.

That said, even big companies run into trouble.  Shareholders in General Motors and General Electric, giant companies that looked unstoppable, saw sudden drops in the price of their stocks during the 2008 credit market collapse due to the large numbers of loans these companies had made.  They are safer than young companies, but there is always the chance that a single company stock could lose 90% of its value or more very rapidly, so you need to spread your investments out and not have any more invested in one company than you could afford to lose.  Mutual funds are a good way to do this, and there are mutual funds that invest in income producing assets (I’ve held the Duff and Phelps Income fund (DNP) for about 25 years now) and also ETFs and Index Funds that favor large companies (like the Vanguard S&P500 Fund and the corresponding ETF).  If you go with the individual stock route, I would have at least 10 different stocks in your portfolio – 20 would be better.

Energy is getting killed right now with oil prices declining.  I invested in Cameco (CCJ), a large Canadian Uranium producer, as a way to both invest in the energy market and have a hedge against inflation (uranium prices, like all commodities, will increase in price if there is inflation) a few years ago with bad results so far.  I’ve also taken up positions in Oasis Petroleum (OAS) and Enesco (ESV), but I think I may have bought in too late for the current rally and am sitting on losing positions right now.  I’ll reevaluate these soon and decide if I should stay pat, invest more, or sell out.  I like energy long-term as an inflation hedge, so I’ll probably stay invested.  That’s the beauty of long-term investing – it makes decisions a lot easier.  Energy companies also tend to pay large dividends since they generate so much cash, so holding isn’t a bad thing.

I always like REITs as another way to generate income, as an inflation hedge, and as a non-correlated asset to stocks.  These will not generate the returns of stocks over long periods of time, but the returns are very respectable when compared with bonds.  Some of these can be volatile, however, so buying a handfull of them, keeping them as a relatively small portion of your portfolio, and buying them in a mutual fund of REITs instead of picking individual REITs are considerations you should make.

Let me finally say that there is nothing like cash when you are retired.  If you have a year or two worth of cash assets (money market funds or CDs) you can wait out dips in the market.  You can even have 3-5 year’s worth stored up if you want to be more cautious.

Thanks for reading and best of luck.



Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice; it gives information on investing, personal finance, and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Playing Catch-Up With Retirement Investing

Dear SmallIvy,

Hi, thank you for this blog. I am 53 and have always “lived for today” and seriously regret it. The only debt I have is a mortgage which will be paid off in February of 2014. I am very interested in the market but know NOTHING about it. I don’t even have a savings account but my mother’s estate is in probate and will be settled by June 2014. I don’t know how much I will inherit but just say the available cash is $10,000, where should I invest? Also, could you give me an idea of how to recoup years of financial gain that are lost? Thanks in advance.



Dear Lynne,

I’m sad to hear you say that you regret “living for the day” because there is certainly something to be said for doing so to some degree.  There are things you can only do (or at least do right) when you are young.  I certainly don’t advocate squirreling every dollar away and waiting for retirement to start living.  I just advise taking care of necessities and making little sacrifices (like eating in fairly often or buying used cars instead of new) appropriate to your life that will allow you to take advantage of the power of investing and compounding.

That said it is definitely a lot easier to invest and grow wealth when you are young than when you are old because time reduces risk and doing really well in investing involves putting money into more risky things but doing so for long periods of time to reduce your risk.  It is easy for someone who is 20 to fund their retirement by simply putting a few hundred dollars away each month into a 401k and investing it in stock mutual funds.  It is much more difficult for someone who is in their 50’s because they need to put a lot more away and be more cautious with investments, but there is still the potential to retire a millionaire with some discipline.  For some one in their 60’s, there is almost no chance without a huge income and the willingness to live like a college student for a few years.

As far as where to invest, with your need to preserve what you have while still trying to grow wealth, combined with your lack of knowledge about investing, the only way to go is mutual funds.  Individual stocks would be too risky and require you to gain too much knowledge to know how to pick stocks.  With mutual funds the secret is to buy funds with low fees and costs (less than 0.5% of assets), which means index funds.  The best funds are those that are “plain vanilla,” such as large cap funds or small cap funds, rather than exotic funds with some sophisticated trading strategy.  You would also want to include income stocks and bonds in your portfolio to help dampen the fluctuations in value that an all-stock portfolio would produce.  Again, there are bond and income mutual funds.

Finally, the biggest and best tool you have right now is the ability to generate an income through work.  If you can increase your income through job promotions, working paid extra hours, possibly working a second job for a period of time or during holidays, and maybe finding a side business that can generate some income you still have time to save up enough to have a comfortable retirement.  This is if you combine increasing your income with cutting your expenses because you will never be able to out earn your ability to spend.  Paying off your mortgage is a good first step since now you can direct that money into savings and investments so long as you don’t add new expenses to replace your mortgage payment.  If you never spent time living like a broke twenty-something, maybe this is the time to do so for a period.  It will beat living in poverty during the long years of retirement.



Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What is the Best Way to Invest Graduation Money

Dear SmallIvy,

My daughter – she is 18 has received about $2500 for graduation money. What is the best way to invest it? She is all set for college – have 529 and she works part-time making $7 an hour. Takes home depending on hours she is given $50 to $200 per week. Appreciate any thoughts. Thanks!

Thanks, Reina


Dear Reina,

It’s great that your daughter has such a great gift to help her start her adult life.  It is also great that she’s thinking about investing it so that it will last rather than spending it on frivolous things.  Here are some suggestions of things that she could do with the money:

1.  Use it as the start of an emergency fund.  An emergency fund is 9,000-$15,000 that you keep around to pay for things like emergency car repairs and unexpected medical bills.  It is money that keeps you from pulling out the credit card and going into debt at 18% interest whenever life throws you a curve.  It is also money that you can use if you lose your job while looking for another one.  It should be replenished as fast as possible when you need to dip into it – before you go on vacations or even go out to eat – because it really needs to be there when you need it.

With $2500, she could buy shares of an ETF such as the SPDRs (S&P500 fund, pronounced “spiders”) or the DIAs (Dow Jones Industrial average tracking fund, pronounced “Diamonds”).  To buy the ETF you would need to go through a broker.  With $500 more to add to the $2500, she could buy index mutual funds such as an S&P500 fund through Vanguard or another fund company.  During college the value of her ETF or fund could go up of down depending on what the market and the economy does – four to five years is a short amount of time for investing in stocks – but by investing in mutual funds she has a chance of growing the value to $4000-$6000 in 5-10 years.  She could then sell the fund around the time she starts work and put the cash in a bank account as a starter emergency fund, add to it over time from her salary, and then have a fully funded emergency fund that would give her a good measure of financial security within a year or so.  If the fund doesn’t do well and perhaps sinks in value (worst cases scenario would be that it was worth maybe $1000 after five years, which would only happen if we had a very serious economic decline like the Great Depression; this is very unlikely statistically) she would just hold onto the funds and build up an emergency fund from her salary.  When the fund recovered enough after a few years, she could then sell and top off her emergency fund.

2. Invest it in a mutual fund or ETF as a starter portfolio.  In this case she would invest in an ETF or a mutual fund as before but just plan to leave it invested for a long period of time.  With a mutual fund, when she started working she could then add to the position with regular contributions from her paycheck, for example, adding $300 per month.  With an ETF it would not be cost effective to invest $300 at a time.  Instead, she could just save up each month in a savings account until she had enough to buy a second ETF or more shares of the same ETF.  She would do this each time she had enough money saved up to make the brokerage fees she’d pay when she bought the ETF a reasonable percentage of the amount she was investing.

 3. Use the money to start an IRA.  Since she is working, she could invest as much of the $2500 in an IRA as she earns in wages during the year.  If she puts the money in an IRA and then invests it in a mutual fund or ETF in the IRA, she would go a long way towards funding her retirement before she even goes to college.  If she could earn 10% annualized between the age of 18 and 70, which is very possible invested in stocks, she would have $355,107 when she retired at 70 years old just from that first investment.  If she could work a few summer jobs in college while staying at home during the summer to avoid rent and food costs, she could invest a few thousand more in an IRA and easily be set to be a millionaire before she retires.

4. Invest in a business.  Many people who buy individual stocks try to beat the markets by trading, where they buy a stock, hold if for a few months, then sell for a small profit.  This is a losers game and I would not recommend it.  Instead, one option is to buy an individual stock with the money but do so as if she were buying a stake in a business as a venture investor.  She would want to find a company that has a great product, a stellar management team, and plenty of room to grow and expand over the next ten to twenty years.  She would then buy in with the idea of holding through think and thin, giving time for the company to grow and reach its potential.  There is certainly a risk of losing the money by doing this (maybe one in 100 stock picks will go belly-up entirely, while maybe half will just sit there for years and not grow), but $2500 is a small amount of money compared to her future earnings and it could grow into enough money to make a good down payment on a house in ten years or so if she picks the right stock.

As with investing in mutual funds, she could also set aside some money from her salary when she starts working and buy shares in other companies with good long-term prospects each time she has $1,500-$3,000 saved.  She should start to put some money in mutual funds as well as her portfolio grows to protect the wealth she gains.  By doing so she would build up a portfolio and eventually reach financial independence.



Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Simple Way to Pay for College without Student Loans

If you’re in a family of four and making $40,000 per year, chances are good that your children will get grants that will not need to be repaid.  Those making $60,000 or $80,000 per year, however, or who will be making that sort of money by the time their children are ready to attend college, will have more difficulty qualifying for such grants.  Many families in this middle class income bracket, however, and even many in the $100,000-$250,000 income range, never manage to save enough to even pay for the first semester, leaving them at the start of the Freshman year figuring out how to pay for things.  Often, student loans are seen as the only answer.

Student loans may be more insidious than a car loan because at least with a car loan you start to pay right away.  With student loans the balance just grows and grows while your student is off taking classes and living a life beyond her financial means, thanks to the credit available from the loans.  It is only after graduation that the reality sets in.  Suddenly she has a $80,000 loan balance and perhaps a $800 per month loan payment but only makes $2000 take-home at her first job.  She want to get a car and a home, but that student loan is swallowing up the income she needs to do so.

Student loans don’t need to be the norm, however, with just a little planning and foresight by the parents, combined with perhaps a little sweat equity from the students while they are in college.  Here is a simple plan to avoid student loans.

1.  Get a 15-year mortgage.

Instead of getting a 30-year mortgage on your home, opt for the 15-year.  That way when you’re a few years out from your oldest going to college, you’ll be paying off your mortgage, leaving the money you were paying free to direct towards college savings.  With a $1000 per month mortgage payment and three years to save, you could have $36,000 saved up by the time the first child enters the dorms.

2.  Put away $2000 for each child in an educational IRA each year if you can.

You can put away $2000 in an educational IRA for each child each year.  Start this when they are born and direct it into mutual funds and you’ll have maybe $40,000-$60,000 saved by the time they are 18.  And that money will be tax-free as long as the money is used for college expenses.

3.  Look into a 529 plan and have gifts from relatives go into this plan.

State 529 plans are a way to save even more money for college, but they have less flexibility on investment choices and how you can use the money than do educational IRAs,  Still, once you’ve fully funded the educational IRA, they are a great way to save up more.  Other relatives can also contribute, so think about putting some birthday money from aunts and uncles in when the kids are young instead of buying more toys to clutter the room.  Grandparents may also want to contribute.

4.  Save, save, save during the last four years before college.

Once the children enter high school, it will only be a blink of the eye before they are looking at colleges.  Be sure to direct whatever money you have into saving for tuition and room and board.  By this point you don’t really have enough time for investing in stocks, so bank CDs and maybe some bond funds would be your best choices for the money.

5.  Choose a school that fits your financial situation.  This might mean community college for a couple of years.

If you’ve been following this blog for a while and have a million dollars in the bank when the kids are ready for college, you might consider taking a couple hundred thousand dollars and send your children to their dream college with the $50,000 per year price tag.  (Then again, you may not.  See: Would You Rather Go to an Ivy League School, or Have $184,000?)  If you haven’t, you need to get realistic about what you can afford.  Certainly a state school will cut costs dramatically.  Even better, look at community colleges for the first year or two to knock out the basic courses.  Tuition will be a lot less and you can save on room and board by having them live at home.  This also allows them to mature a bit more before being out on their own.

6.  Look at summer jobs and part-time jobs during school.

Summer is a great time to earn a few thousand dollars to help pay expenses during the next school year.  It is also valuable experience, particularly if it is in the field the student is pursuing.  Looking at jobs at the school that have flexibility during finals time and other crunch times are also a good way to earn money to put towards expenses.

7.  Work with your state legislators to stop allowing student loans at state colleges.

One of the reasons that college costs so much is that people are using college loans to pay for schools they could not afford otherwise.  This allows schools to pay essentially retired faculty who don’t teach or contribute to the school, build lavish student centers and workout facilities, and have immaculate grounds.  Colleges could cost a lot less and really should.  One way to bring down the costs is to encourage your state legislators to pass legislation limiting of eliminating the use of student loans for state schools.  This would force colleges to cut costs and bring them back in line with what a middle class family can afford.

Contact me at, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Want to Get the Kids Out of the House? Maybe Start Them with a Starter Portfolio.

Ask SmallIvy

Many families expect to continue to support their adult children through college and often beyond.  The norm is to pay for their tuition, rent, utilities, food, cell phone, and even some entertainment expenses through college.  Ideally that would all end with graduation, with perhaps a brief visit home before starting off for a new job and a life of independence.  The new norm, however, is getting to be to continue that support until your son or daughter is 30 or even older.

The issue is that many college students are graduating with enough student loan debt to amount to a car or rent payment each month.  This makes it difficult for them to start an entry-level job and pay for both their loan payments and their living expenses while they gain the experience needed to get enough money to be fully self-sufficient.  They are also much happier living at home in a spacious home with free meals, particularly if their mom still does their laundry, while they are gaining that experience than they would be in a cramped efficiency apartment.

My parents did things somewhat differently for my sister and I than the norm, and it seemed to work well (if your definition of “working well” is to launch your kids out on their own after college).  From the time we were about 14 my parents started depositing money in a brokerage account for each of us and worked with us to pick investments and manage the accounts.  They were able to do this tax-free because their contributions were always under the gift tax allowance (currently something like $28,000 for a married couple to each son or daughter per year).  By doing this for a number of years they were able to build up a sizeable starter portfolio for my sister and I before we went to college.

Once at college, instead of calling Mom and Dad each time I had a bill, I would just use cash from interest and dividends on the investments or sell shares of stock as needed.  Because I was living very modestly and on scholarship, I was actually able to cover most of my bills from just the interest and dividends I was receiving from the investments.  I therefore had a reasonable portfolio to help pay for graduate school expenses after I completed my undergraduate degree.  With the portfolio, thrifty choices on schools (I went to UC Berkeley, where I got in-state tuition paid for by the grant for my graduate work instead of Stanford where I would see tuition bills of $20,000 per year), and some side jobs along the way, I was able to make it through school loan-free and still have enough in the portfolio to serve as a good emergency fund after graduation.

This worked out very well for my sister and I, but things could have gone really badly.  Since the money was put into a custodial account, once we turned 18 the portfolio was ours and our parents had no legal say on what we did with the money.  One of us could have blown the money on parties and junk, leaving us without the money needed to go to college.    It probably would have served us right to then need to drop out of college and get a regular job to earn the money to go back, but it still would have been a disappointment for our parents to see their hard-earned savings wasted.  Of course, there are also students who spend six or seven years in college on loans and never get a degree.  They then have both loans to pay back, often with help from their parents who may be consignees on the loans, and no degree to show for the money.

There are many advantages to using this method of college/early life funding rather than paying for expenses as they occur:

1)  You can help your son or daughter learn how to manage a portfolio of investments while still under your roof.

2) When your students go out on their own and start earning money from their portfolio, they will (possibly) be paying taxes at a lower rate than you since their total income will be a lot lower, so it may be better for them to be earning the money in their portfolio than for you to earn money in your own portfolio and then send the money to them for expenses.

3) When it is your student’s money, they will usually tend to want to save it rather than spend it, so they may be more thrifty with their college choices and spending while at college.

4) It will force you to save the needed money for their college before they go rather than hoping you’ll find the money somehow when they get there.

5) It allows you to tell them they’re on their own and that the choices they make are now theirs without worrying about them not having the money for rent the first month and ending up on the street.  There is security in having enough money to have a few unfortunate events without becoming destitute.

6) If they work a job in college, they may be able to fully fund an IRA with their wages since they’ll have the money needed for living expenses from the portfolio.

Still, giving them all of the money when they are 18 may not be the best option.  While legally adults, people make some pretty bone-headed decisions when they are 18-23 or so.  It is good to be able to give them a second chance if they screw up early but then learn their lesson and mature.  A second plan would therefore be to give part of the money when they head off to college, but then give the rest of the money as they mature and prove they can handle the wealth.  For example, maybe give enough for them for living expenses for the first two years of college before they turn 18, then continue to give them money through the gift tax exemption for the next four years after their sophomore year if they prove that they can handle to money and are making good progress in college.  This unfortunately will make it less likely that they will be able to pay for most expenses using just interest, but it does help protect the parents from spendthrift students (and gold-digging relationships).

Now one final “disadvantage” of starting your children with a portfolio is that it may well hurt their chances of getting financial aid.  Really, though, this should not be seen as a disadvantage at all.  Why is it that middle and upper-middle class families who have plenty of money to spend on cable packages, kitchen upgrades, Caribbean cruises, and big data packages for their phones need to go begging for charity when it comes to college?  Maybe it is time for families to put first-things-first and not accept public charity when they can pay their own way through better choices.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.