Vol. 7 - Using Retirement Funds for Kid's College
In this episode, we discuss if using your retirement funds is a good idea for paying for your children's education. We cover:
If taking money from retirement to fund education is a good idea.
College choice
Personal responsibility for educational funding
Tuition reimbursement
Lifestyle Inflation
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TRANSCRIPT:
Jason Hamilton (02:12): All right. Hello and welcome back to another podcast of Nurse Your Wealth. We're at number seven today back with myself, Jason Hamilton, Certified Financial Planner and to Naseema McElroy from financialllyintentional.com. So we're here today to talk about an interesting question that I bet tons of nurses are getting, especially the ones with kids that are trying to figure out how to get them through school and how to handle that. We're gonna talk a little bit about that today and hopefully you guys find it useful. Naseema, how are you doing?
Naseema McElroy (02:38): I'm doing great. Thank you. How are you?
Jason Hamilton (02:41): Doing well, getting ready for a busy week, but should be good. Excited and looking forward to that. So tell me a little bit about what you had emailed about with this whole paying for college thing. And we can just dive in from there if you like.
Naseema McElroy (02:53): So, I have one specific example, but this is something that I've heard multiple times and one of my colleagues was actually just telling me that the only option she had for paying for her son's college expenses was to draw out from her 401k. And so I told her if he should probably be working, going to school that he can afford and paying for his expenses himself because she can't get back those years she put to her retirement and she retired. But he could always, worst case scenario, it's not retirement. But she said to me that I'm a unicorn and other people don't think like that. So I wanted to address that here because I think it's important to talk about.
Jason Hamilton (03:40): There's a lot going on in this person's mindset, right? And it's probably pretty common where they think everyone else is different, right? When it comes to their finances and their situation's unique and you don't understand how it is and those type of things. And from what I've seen, there's some leadership that I think needs to be established sometimes in the household. And if you have to draw from your 401k or other retirement plan to pay for your kid's college, that's a problem. Unless you're sitting on more money, like if you're way ahead of the game, right? So let's say you're in your 30s or 40s and you're getting close to a million dollars already. Okay, you want to draw a little bit. But what you have to realize is you're not just going to take the money out and have all the money there. You are going to take it out.
Jason Hamilton (04:23): It's going to come at your top tax bracket, right? So you know with most nurses being at least probably in the 22% bracket for federal, and in states probably another 9 or 10 especially if in California, so you're talking 30% there, 31% plus a 10% penalty. Now we're over 40% there. And it just doesn't make any sense. But in reality, I think we're not looking at the root cause of the problem, which is the school choice. And everybody has choice. I don't really care what people say. Is this the only school you can get in? It's just not true. I mean it's just simply not true. Either they didn't apply to enough or there's some other things going on. Do you know any details of like how much the school costs, what school it could have been or really just anything about situation?
Naseema McElroy (05:04): I know that he's going to school in Hawaii and the costs let's say it's about, I believe like about $50,000 a year plus the cost of living in Hawaii.
Jason Hamilton (05:15): So this is just somebody who honestly like, they don't want to be successful financially. Straight up. Like I show love and compassion, the people that need it. But I think there's some people who just want to choose to make that decisions even though they know the repercussions are going to be horrible and they don't care 'cause they're just thinking about the moment and they're going to wake up 15/20 years from now, either with a bunch of student debt or not enough money in a 401k to retire and they're going to be working and stressed out. And feeling like the world was against them, when in reality they could have probably made better decisions because there's, I mean, what subject is this that you have to spend $50,000 a year to go to school for?
Naseema McElroy (05:54): He's going to Nursing school.
Jason Hamilton (05:55): Okay. And this is a four year program?
Naseema McElroy (05:57): Yes.
Jason Hamilton (05:57): Okay. So we're talking about $200,000 to get out of school. Probably make what? 60, 70, $80,000 the first year maybe. Maybe they'll be at a hundred within three to five years. Something like that. It just doesn't make any sense. So are there schools that are either local here or in other States that are in the continental US that you can get for less than $50,000.
Naseema McElroy (06:19): Of course. You can get a nursing degree through a community college.
Jason Hamilton (06:23): Okay. Why does this person feel that, Naseema, you are such a anomaly and you know their situation difference and you don't understand.
Naseema McElroy (06:33): I think it's just what they're surrounded with. And I think especially in a lot of schools, high school, there's a lot of pressure to go to the top schools or with nursing, sometimes it's harder to get into programs and so you kind of get in where you can get in. I think those are still really bad choices when it comes to finding education or deciding on the schools to go to.
Jason Hamilton (06:55): Yeah. Do you know how much this person has 401k and how old they are?
Naseema McElroy (06:59): That's, I don't know. Not enough, though. That's what I don't know.
Jason Hamilton (07:02): Okay. Let's talk about how we could help them. Okay. Because we came off pretty brutal. It's just straight up bad decision, just what it is. My concern is it might be too far at this point and then fall semester is coming and they're not looking at any other options and they're going to do this anyways. But let's talk to the people that are still thinking rationally, that are looking at options for their children right now and feeling like I may have to use my 401k so that my kid can go to school. So where would I start with that person? I think you mentioned a good point is, Oh, you can borrow for school, but you can't borrow for retirement. You can't turn 65 and say, Hey, I need to take a loan to make sure that I'm making it 'til 95 or even longer these days and life expectancy is continuing to go up.
Jason Hamilton (07:42): It's one of the biggest subjects I hear talking about in retirement planning spaces. People are underestimating when they're going to pass away. We see a lot of people saying, well, I'm going to take social security at 62 because my friend died by 70 but maybe their parents lived until their eighties and nineties but they lost one person and they saw one situation, so instead of making a good financial choice, they're making it based on fear or really just inconsistent data and this is kind of what similar to what I'm seeing here is like, no, you don't have to take money out of your 401k to go to school. If you can't pay for the school, then that tells me you probably shouldn't be going there. Number one. And two, it's like I understand some people may need to take a little bit of a loan, but a $50,000 a year school for an undergrad, it's just not reasonable if you can afford it. They say, I think the number if you're going to take loans is try to keep it under 50% of your first year salary if you're going to do that 'cause I understand some people may take a little bits, but in reality they probably don't. But Hey, you know, if you're going to, if you keep it under half of your first year salary, if you live like a student the first year or two, you could probably pay that stuff off in like two years and get yourself set up. But if you're going to take $200,000 to get a job that you hope with over time you might be making a hundred in three to five years. I mean it's going to take you 15/20 years to pay that off. And I'm just not seeing the logic there. Am I missing something? Like is there logic that I'm missing in there?
Naseema McElroy (09:05): No.
Jason Hamilton (09:06): Yeah. So I struggle with that a little bit. So being a nurse and knowing the options, where would you recommend that they go to school to start and then what way do you know how to get out of this situation and transition to something more positive for them?
Naseema McElroy (09:19): I always recommend people take the cheapest route when it comes to funding or finding a program. So like I said, there's community college programs where you can get your associate's degree in nursing. I would do that. And then, find a nursing job, then have your nursing job pay for your bachelor's degree, get your bachelor's in nursing and then pursue your, any other advanced degrees through that. And while you're in school, be able to fund your education through paying for it by having a bond. Your education shouldn't be more than $20,000 total out of community college. And so, I think it's totally doable, but that's the route that I would suggest people who are interested going into nursing take or people who are encouraging their kids to go into nursing. I think that the have to stop calling for the pressure that says that we have to go to these expensive schools because ultimately at the end of the day, they're not doing the analysis of what this education is going to cost versus how much they're going to be getting paid once they enter the forecourt.
Jason Hamilton (10:24): Yeah, I think that's a really good point. I just think there's, and especially in a field like nursing, if you went to a top school versus a decent school, that was half the price, is it really gonna make that much of a difference getting into the field from what you've seen?
Naseema McElroy (10:38): No. I'll make the same rate as a person making that has an associate's degree.
Jason Hamilton (10:43): Yeah. You know, these are some decisions that are young mothers. Like again, we see this all the time, right? In the first generation nursing, like if they're a mom and their kids going into college at this point, they're probably in the 30s or 40s right? There's so many that this was the first professional they've had in their household and they probably came from lower income backgrounds. So there wasn't any money that was left behind or anything like that. They're kind of first generation wealthy, which is 85% plus of this country. Right? I mean the majority of people in this country are building wealth from a first generation perspective. And so, there's, a financial literacy aspect is usually missing in those households. And even if somebody did do well financially, typically by the third generation, that money's gone because again, there's not a lot of financial literacy in the household.
Jason Hamilton (11:30): So I think that's what we really want to talk about today. And so this mother, or if you are a parent, they're thinking about using your 401k. What I want you to think about is what's more important is it to get your kid into the school of their dreams today and let them go live a fantasy life in Hawaii. And you not having enough for retirement. So then you continue this generational curse of not having money because you're making bad decisions early on. Or is it smarter to show some good leadership and direct your child and lead them on a path that is going to set them up well financially because you're going to end up at the same place basically, you know, is what I'm hearing it from these degrees. But if you can end up out of school with no debt or just a minimal minimal amount that you can pay off in the amount of a year or two versus taking the money out of your mom's 401k and if you're the child, listen to this, by the way.
Jason Hamilton (12:20): You should be ashamed. You should be ashamed that you're going to take money from your parent's 401k to pay for your school because you're so selfish that you can't go to a school that you can afford. That to me is ridiculous because if you can get into Hawaii, what is it? Probably University of Hawaii is my guess. A school like that. That's a very high level school. It takes good grace to get in there, which I know that you can get into another school locally here that is more affordable, more reasonable, and that won't cause your mom to completely ruin her retirement. So I'm going to call the person who was accepting this money for your education from your mom, and you're going to let your mom get to her retirement without enough money, have to worry stress, and maybe potentially rely on you to take care of her in the future so that you can go live this dream life in Hawaii that you can't afford. That's where I'm at, and I mean my stomach is turning a little bit from this child being so selfish that they're going to make their mom take money out of their 401k because they don't want to go to school locally here. That's how I feel about it.
Naseema McElroy (13:14): Well, hopefully they're not doing it intentionally, but I think all too often as parents, we set expectations that we're going to do these things for our children and that's what they just know. And so maybe they're not intentionally being selfish, but as a parent I feel like she shared this now that you know better. So strive to do better. And I think a lot of people are just really trying to keep up with the Joneses and not really understanding financial literacy and what it really takes to build wealth.
Jason Hamilton (13:47): Yeah, I agree with that. And coming out of school in debt is probably one of the worst things you can do, right? I mean our country, I think it's over 1.7 maybe 1.8 trillion dollars in just federal student loan debt and that is just destroying this whole next generation. And I've not seen a case yet where it wasn't preventable. Right? People are making bad choices in their schools. They're making bad choices in their majors and they're not setting themselves up for success in future. And then they want to blame the government, have the government come and forgive all their loans and that's just not right. 'Cause There had been plenty of people that have paid off their loans, work their butts off, sacrifice for years. If they did take loans or work the whole time they're in school so they can graduate debt free or go to school a little bit longer, taking fewer classes so they can work part time during that time.
Jason Hamilton (14:39): Or like you said, work the first two years, get your associates, get into a hospital, then have them fund the next years. People just aren't really being strategic and to put your phone on candle light for that, I would say that's a horrible idea and I would never recommend that. There's not one time where I would recommend that. So hopefully someone hears this and gets the point on this and can understand that wealth building takes time. You have to make a decisions all throughout your life and if you started and you're saving and you built up some money in your 401k, the best thing you can do is leave it there so that you can get compound interest and let that money grow for you over time. The worst thing you could do is take it out, pay taxes, pay a penalty, and really only see just about a little bit over half of what you took out to pay for the school.
Jason Hamilton (15:24): And it's just, I can't find a time where that makes sense to me, you know, really at all. So hopefully we've got the point across and someone will see this and make a good choice starting today, show some leadership and lead their child to a place so that they can be successful financially and longterm and not end up in a bunch of student loan debt.
Naseema McElroy (15:39): I agree.
Jason Hamilton (15:41): Anything else you want to add to that?
Naseema McElroy (15:43): No, I think that's great.
Jason Hamilton (15:45): Okay, so that's what we got for today. Quick, easy question and see you guys next week and hopefully enjoyed this. If you did enjoy this, leave us a comment. If you hated it, leave us a comment as well. Let us know what you thought. We're happy for to get any sort of feedback. We want to try to help you out, help you make good decisions. And we see families just destroying themselves internally just like this.
Jason Hamilton (16:03): And that's the reason why they're not building this generational wealth is because they make bad decisions early on that affect them for decades and that's what we're talking about here. So let's make some good choices. Let's show some good leadership in our households and that's really do the best we can to keep our money and not give it away to a bank or other institution because you feel that you deserve it and you want to keep up with somebody else when in reality you just need to put your head down, focus, get your work done and get into the workforce easiest and the simplest way, it's the lowest cost possible. I think that's how we see it. Sound good?
Naseema McElroy (16:33): Sounds good.
Jason Hamilton (16:33): All right, let's wrap up for today guys. Have a good one to talk to later.
Hey there I’m Naseema
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