Meet the Smiths.
Bob is 34 years old. He’s been married to Susan for 10 years with 2 children. Samantha is 9 (born in 1999) and Johnny is 7 (born 2001).
How much is it going to cost Bob and Susan to meet 2 basic financial obligations – sending their two children to private university and providing a retirement nest-egg that will enable them to enjoy the lifestyle that they are accustomed to?
Let’s assume that each child starts college at age 18 and graduates in 4 years (though many take 5 years!) Tuition is $30,000 TODAY, with room and board coming in at $10,000. Inflation – conservative at 3% per year – will raise the annual total to nearly $51,000 by the time Samantha enters university in 2017.
This is what Bob and Susan Smith will be paying in tuition during the 6 years from 2017 through 2015:
2017: 50,835
2018: 52,381
2019: 107,948 (heeeere’s Johnny, starting college)
2020: 111,232
2021: 57,307 (Happy Graduation, Samantha. Now get a job.)
2022: 59,050
Their all-in price for sending 2 children through school? $320,000 in 2008 dollars, and a whopping $438,753 by 2022 (thanks to inflation) — when he’s finished. Ouch. But remember – that calculation is based on tuition rising by 3% a year. If inflation runs closer to 6%, he should plan on shelling out just a little over $602,000.
Retirement planning
And what about retirement? Let’s say that Bob works until he’s 65 and plans on being retired for 25 years (i.e.: living until 90). If the Smiths wants a retirement income of $100,000 per year in 2008 dollars, what will they need to retire?
At 3% inflation the Smiths will need an income of $250,000 a year to equal today’s salary of $100,000 when they calls it quits in 2039. To pull this off they will have to put away $3,196,000 – assuming a return on investment of 9%.
If inflation were 6% and their returns remain stable at 9%, they’ll need an impressive $10,600,000 to build up the reserves needed to payout the equivalent of 100,000 per year in today’s terms.