Start saving for retirement in your twenties, if you can

The power of compounding is a reason to start saving for retirement as early as possible.

J.P. Morgan offers an illustration of “the importance of saving sooner than later”.

Their example consists of three people who experience the same annual return on their retirement funds:

• Susan, who invests $5,000 per year only from ages 25 to 35 (10 years)
• Bill, who also invests $5,000 per year, but from ages 35 to 65 (30 years)
• And Chris, who also invests $5,000 per year, but from ages 25 to 65 (40 years)

Intuitively, it makes sense that Chris would end up with the most money. But the amount he has saved is astronomically largely than the amounts saved by Susan or Bill.

Interestingly, Susan, who saved for just 10 years, has more wealth than Bill, who saved for 30 years.

That discrepancy is explained by compound interest.

You see, all of the investment returns that Susan earned in her 10 years of saving is snowballing — big time. It’s to the point that Bill can’t catch up, even if he saves for an additional 20 years.

 

…
Saving for just 10 years now works out better than saving for 30 years later. 

Saving “$5,000 per year only from ages 25 to 35 (10 years)” will generate a larger retirement nest egg than saving “$5,000 per year, but from ages 35 to 65 (30 years)”.

It’s often hard for 20-somethings to save.

Many young college graduates are unable to start saving in their twenties because they are pursuing graduate degrees.  Others may be woefully underemployed or working in low-paying internships, understandable in light of the fact that we are experiencing worst unemployment rates for college graduates in 50 years.  Some are struggling to support families.  Other 20-somethings may simply be squandering their paychecks by living the high life of frequent traveling and expensive dinners with friends.

ADDED:  Burdensome student loan payments prevent many recent college graduates from putting money away for retirement.

Business Insider recommends that “Every 25-Year-Old In America Should See This Chart”.  Considering that decisions about how they will be spending their twenties are often made at a younger age, I think every 18-year old in America should also see this chart.  Realistically though, all this is much more clear in hindsight.

Sam Ro, “Every 25-Year-Old In America Should See This Chart”, Business Insider, Mar 21, 2014.

Related:  A quick way to calculate how much you’ll need for retirement (Cost of College)

ICYMI — Weekly roundup March 29, 2014

THIS PAST WEEK ON COST OF COLLEGE:

Some “need-based” financial aid is based on academic merit

Are grades or test scores more important in predicting college success?

Colleges seek rich applicants to subsidize low-income students

The ‘high-stakes parenting arms race’

Don’t make the mistake of thinking a Direct PLUS Loan can be transferred from the parent to the child

‘Direct PLUS Loan made to a parent cannot be transferred to the child’

Don’t make the mistake of thinking a Direct PLUS Loan can be transferred from the parent to the child.

As a parent borrower, can I transfer my loan to my child?

No, a Direct PLUS Loan made to a parent cannot be transferred to the child. You, the parent, are responsible for repaying the loan.

Parents may be lulled into taking on excessive student debt, believing that this obligation can later be easily transferred to their children.  A verbal promise by a student to take over his parent’s debt after he graduates is easy to make at the beginning of the college experience.  But that promise can become hard to keep later on, especially when job prospects don’t pan out or when a student struggles to get his degree.

Parent PLUS loans are ”both remarkably easy to get and nearly impossible to get out from under“.  With good credit, a parent can take out a PLUS Loan up to the total cost of attendance.  That can easily exceed $50,000 each year.

A side agreement can be made to shift the PLUS Loan payment obligation from parent to child, but the government still views the parent as ultimately responsible.

Unlike most other debt, federal student loans can rarely be discharged in bankruptcy.

When can my federal student loans be forgiven, canceled, or discharged?

You must repay your loans even if you don’t complete your education, can’t find a job related to your program of study, or are unhappy with the education you paid for with your loan. However, certain circumstances might lead to your loans being forgiven, canceled, or discharged.

Death or Total and Permanent Disability are two circumstances that allow for loan forgiveness.

Be careful.  It can be challenging to pay off college loans during your retirement years.

Related:  Qualifying for a parent Direct PLUS loan (Cost of College)

Is it futile to try to slow down the ‘high-stakes parenting arms race’?

Wilma Bowers, president of an affluent Virginia suburban high school PTA, is on a quixotic crusade to get parents to slow down the ‘high-stakes parenting arms race’.

Bowers knows it’s a high-stakes parenting arms race in McLean and communities like it. The obsession with grades and college résumés can overwhelm everything. She wants people to back off — and is trying to get them to, with film screenings, workshops, lectures and meetings with clergy and mental health professionals.

In a twist on the NIMBY “Not in my Backyard” concept, many parents agree that although not every kid is destined for Harvard, they’re reluctant to be the first ones to ease off with their own children.

Many fellow parents think that disarming sounds good, in theory. The problem is, they’re reluctant to try it with their own kid.

Parents should encourage “authentic success” instead of pushing for perfection at any cost.

There are 3,000 colleges out there, Allison said as she ran through a presentation of nearly 100 slides. The guiding principles for parents, she told them, should be: Students should be doing something they love; they should be able to support themselves; and they should give something back. That’s authentic success.

Fearful parents

Despite this uplifting advice, I predict that affluent parents will continue to push their children to achieve at the highest levels.  They do not think of themselves as average, so they are unlikely to settle for average outcomes for their children.  And they are fearful their children will be left behind in the ongoing economic rat race.

Brigid Schulte, “In McLean, a crusade to get people to back off in the parenting arms race”, Washington Post, March 23, 2014.

Colleges seek wealthy students to pay for diversity and more HDTVs

Colleges engage in “massive price discrimination” as a way to achieve diversity.

… universities try to charge what the traffic will bear, engaging in massive price discrimination, favoring some students (poorer ones, extremely bright ones, those with preferred skin colors) more than others (more affluent, less bright kids, those whose skin color is less desirable).

A big part of enrollment management is finding enough wealthy applicants who will be able to subsidize their fellow students.  Here’s a success story.

MIDDLETOWN, CT—After carefully scrutinizing the application of high school senior Erica Allson, admissions officers at Wesleyan University confirmed Monday that the 18-year-old was the ideal candidate to subsidize the tuition and fees of three lower-income students. “Erica is truly a perfect fit for us: Not only does she show sufficient academic potential, but her parents are two highly successful professionals capable of paying the school’s annual $47,000 in tuition plus $13,000 in room and board in their entirety,” assistant admissions director Stacey Wright said, adding that she was left in awe after reading Allson’s near flawless income disclosure form. “With the money she’ll bring to campus, we can easily admit several less-well-off students, which will help us project our desired image as a highly progressive and inclusive institution, plus we’ll still have some extra left over to add HDTVs to the dining hall and install a rock-climbing wall in the freshman dorms. It’s all about striking the right balance with our student body.” At press time, administrators confirmed that they had also just admitted a social activist whose contributions to the community would offset the reputations of three football recruits.

In case it isn’t sufficiently obvious, this fictional news story comes from The Onion.

Glenn Reynolds has it right:

… One of the weirdest things about the past few years is the way The Onion has gone from a parody site to hard-news. . . .

Related:  College costs – sticker price vs. net price (Cost of College)

Do colleges care more about test scores or grades?

The ongoing discussion about the relative importance of grades or test scores in predicting college success continues with a recent report from the National Association for College Admission Counseling (NACAC) titled Defining Promise: Optional Standardized Testing Policies in American College and University Admissions.

The report found that high school GPA was more important than test scores in predicting college success.

The National Association for College Admission Counseling (NACAC) finds that there is virtually no difference in college graduation rates among students who did and did not submit standardized test scores. It’s a student’s high school GPA that can play a role in college success.

How important are test scores?

I am skeptical of studies showing that test scores do not play a very important role in college grades.  In some cases selection bias skews results.  At least one study that pulled out SAT scores as an independent variable concluded they are, in fact, a key factor.

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Boston University values high grades over high test scores.

Yesterday I posted a Net Price Calculation showing that in disbursing need-based aid BU awarded more grant money to higher-achieving applicants.  Today’s table* shows that SAT scores don’t seem to help or hurt award amounts.  Grades are more important.

The College Board reports how BU rates the relative importance of  these factors in deciding admission:

Very Important

• Rigor of secondary school record

Important

• Academic GPA
• Application Essay
• Class Rank
• Recommendations
• Standardized Test Scores

All students in this NPC illustration took most courses at the “Honors/AP/IB” level.

I keep hearing that grades trump SAT scores in the college admissions game.  Apparently it’s true in the case of Boston University.

* In these examples, total earned income was $80,000/year.

 Kate Rogers, “GPA vs. SAT Scores: Which is More Important?”, FOXBusiness, March 03, 2014.

Need-based college financial aid often based on ‘student’s academic merit’

When some colleges award financial aid, ‘even “need-based” grants aren’t based solely on need: The size of the grants also depends on a student’s academic merit’.

While families do not usually know the details of how financial aid is disbursed, colleges have access to comprehensive, detailed information about applicants in what amounts to “a massive information imbalance”.

Most colleges offer “vague and superficial” disclosures about how they allocate their financial-aid dollars, said Mark Kantrowitz, a financial-aid expert with Edvisors, which publishes websites about paying for college. “They don’t give details about the actual formulas they use.”

Schools use “financial aid leveraging” to attract stronger students.

While universities don’t want to disclose the details, they have become increasingly strategic in recent years about how they use their aid and which students get it. Aid isn’t just given to students in need, it’s also used now for what schools call “financial aid leveraging” — often to entice high-scoring students who will help a school’s ranking or to give a small, feel-good discount to attract out-of-state students who will still end up paying a higher price.

Boston University is unusually candid about its strategy of using need-based financial aid to attract stronger applicants.

If you are an incoming student, your application for a need-based BU grant award will be considered based on several factors. These include calculated financial eligibility, academic achievement, and the availability of funds for your program of study.

BU publishes informative student profiles showing average aid awards.  I ran some simplified* Net Price Calculations that further illustrate how their financial aid works.  Given the same financial need, the stronger student is would receive more need-based financial aid.

The Straight-A Student is estimated to receive $35,500 in grants and scholarships, compared to only $12,00 for the Solid B Student.  Remember, this is need-based financial aid.  Merit scholarships may be awarded in addition to these amounts.

* In these examples, total earned income was $80,000/year.

Marian Wang,  “How Exactly Do Colleges Allocate Their Financial Aid? They Won’t Say”, ProPublica, Feb. 25, 2014

Related:  Psst – one of Duke’s so-called merit scholarships is actually need-based (Cost of College)

Is money the most important factor in being ready for college?

Money certainly is important.

…
Because whatever your academic credentials are, it’s good to be rich.

Reading time compared to TV time

Many of us assume that Americans spend more time watching TV than reading, and here are some graphics that show the numbers within various age groups.

These charts show what percent of the population is engaged in the stated activity at that particular time.

Older people read more.  Fewer than 2% of 18-24 year-olds are reading for pleasure at any hour of the day.

 However, young people are presumably doing more school-related reading.

Americans of all ages watch a lot of  TV.

The source is the U.S. Bureau of Labor Statistics American Time Use Survey (2012).   More charts on other activities can be seen at Chris Walker’s website.

Related:  Asian-American students spend significantly more time on homework (Cost of College)

Same-sex marriage laws mean less college financial aid for some students

The federal government’s recent recognition of same-sex marriage could lead to children of these couples receiving less college financial aid.  And it doesn’t matter if they are married or not.

The 2014 Free Application for Federal Student Aid or Fafsa—which calculates income, assets and family size—now collects financial information about parents “regardless of marital status or gender.” Since the Supreme Court ruled that Section 3 of the Defense of Marriage Act was unconstitutional, same-sex couples must report their marital status if they were married in a state where same-sex unions are legal but reside in a state where they are not, or even if they were married in a foreign country. If the student is one half of a same-sex marriage, he or she may also be considered to have independent financial means. “It’s a recognition of diverse family structures,” says Greg McBride, chief financial analyst with Bankrate.com.

The key factor for all parents is whether they live in the same home as their children.  Whether they are married or just cohabitating, both parents must report their financial information.

There are other new twists in this year’s application: If a student’s parents are unmarried but are living together, they’re now treated as though they were married. “This includes both divorced and never-married parents,” says Mark Kantrowitz, publisher of Edvisors.com , a network of websites about planning and paying for college. “And living apart means maintaining separate residences. Different floors of the same house don’t count.” Fafsa also requires applicants to answer questions about the parent they lived with most during the past 12 months and include a stepparent’s income. In all cases, both partners’ income and assets must be reported on the Fafsa, and all children are counted in household size….

… if the parents of the student seeking aid are unmarried and living separately, only one parent is responsible for completing the Fafsa.

In some cases this new ruling could increase chances of receiving financing aid. 

… However, in some circumstances, the recognition of two gay parents would increase a dependent student’s aid eligibility. (A dependent student’s need may marginally increase with the addition of a second parent because it increases the size of the household. If that increased need exceeds the amount by which the second parent’s income reduces the student’s need, he or she could be eligible for more aid.)

Related:  Divorced or absent fathers are let off the hook in paying for their kids’ college (Cost of College)