College vs. cottage

Norma’s kids skipped college, and the family is richer as a result. The college money went to buy a summer cottage, which has quadrupled in value. She notes that the average college graduate earns $600,000 more in a lifetime than the average high school graduate.

Say we had invested $20,000 (the cost in the mid-80s of a state university education) in the stock market for 45 years, until their retirement age. Would they have that $600,000 to cushion their golden years? No, they’d have $1,604,000 using the conservative figure that over time, stock investments level out at about 10% a year, even factoring in the wild ride of the 90s.

Of course, her children have good jobs they enjoy so they didn’t pay the typical penalty for entering the workforce with only a high school education.

About Joanne


  1. Bruce Cleaver says:

    Note also that the extra income (accruing from a college education) could also be invested with lucrative returns. It isn’t clear a priori that an extra $20K invested at the start of a 45-year period returns greater yields than an extra $600K invested throughout the entire 45-year period.

  2. Jim Thomason says:

    That’s a good point. But let me add a few in support of the post:

    1. Tuition costs a LOT more now than it did in the 80’s.
    2. Even with this, the figure she mentioned was for state universities. Private schools were, and are, MUCH more expensive.
    3. A (big) percentage of the discrepancy in earnings is not due to the value of the education, but due to the self-selection involved. Intelligent and/or motivated kids are likely to become college graduates, while less intelligent and/or motivated kids are unlikely to do so.

  3. PJ/Maryland says:

    There are a lot of ways to play with these numbers, but really Bruce comes closer to the truth than Norma’s post at Collecting My Thoughts.

    FWIW, I did an Excel sheet to simply compare the results Norma mentions. At age 19, 20, 21, and 22, I put $5k in an account that yields 10% per year. Adding no more money, I get just under $1.4 million at age 65. This would be higher if I added the money at the beginning of the year, and there are other fiddling changes, but there’s the ballpark result of the savings of not going to a state college.

    Problem is, as Bruce says, you can also invest the extra income you earn with a college degree. If that 600k total is evenly spread over a career, you’re earning $14k extra each year (from age 23 to age 65). So at the end of your second working year (age 24), you’ve already got $29.4k in the bank vs your high-school-only friend who only has $28k.

    At the end of your 65th year, you’ve put $602k in your account, and it’s worth just under $8.3 million, vs $1.4 million in your high-school-only friend’s account.

    A more realistic accounting might put most of the extra income into later life. If the extra income kicks in at age 40, then at 23k per year you’d make $598k more as a college grad than a HS-only one. The compounding has less time to work, but the college grad still ends up with $2.5 million at age 65.

    I also tried a more realistic approach. In addition to saving the costs of college, someone who goes to work right out of HS will earn income for 4 more years. So, I used the following arbitrary numbers: HS grad earns $20k per year starting at age 19, increasing at 5% per year, until age 40, when his income growth stops (at $55,719). College grad pays $5k per year from age 19-22, then earns $25k at age 23, increasing at 7% until age 40, when income growth stops (at $78,970). Then I figure living expenses of $12k per year, and all the rest goes into the savings account, paying 10%.

    At age 28, the HSer has almost $200k in the bank, while the college grad is still in the hole for $7k. (Debts also accrue at 10%.) At this point, the HSer is making $31k per year, the college grad $35k.

    At age 40, when I arbitrarily stop income growth, the HSer has $1.2 million in the bank to the college grad’s $830k. Incomes are $55.7k and 79k, respectively.

    At age 65, the college grad has still not quite caught up with the HS-only grad: he’s got $15.6 million in his account, vs the HSer’s 17.6 million. Total income earned for the HSer was 2.1 million, for the college grad 2.8 million.

    In the unlikely event that anyone wants to see this spreadsheet, drop me an email.

    And yes, I have work to do that I’m putting off…

  4. PJ/Maryland says:

    Getting away from the numbers (phew!), there’s probably some value to a college education that doesn’t show up in the income stats. You know, an appreciation for literature, the arts, and the Democratic party…

    Also, I’ve seen people w/o degrees in the computer field who can have a hard time changing jobs. This is partly just HR gatekeeping (Non-College Grads Need Not Apply!), but there’s also a question of mental flexibility. Of course, anyone in the computer field should be keeping his/her skills up to date with additional courses anyway.

    And none of this should be construed to mean that I think reluctant 19 yos should be forced to attend college.

  5. PJ, are you sure you’re not really my husband posting under a name I don’t know? He gave me the same spiel when we got married and started planning for retirement.

    Yes, we did both at the same time – two career professionals, I was 35 & he was 40, both had been saving but in different ways (I had real estate and he had stock). We’re saving for retirement (first retirement’s planned for 57 & 63, respectively), to put our daughter through college (good ol’ 529, need to save $250k for her), and considering what we want our second careers to be (not for the money, but so I can keep from killing him if we’re both in the same house 24/7). We figure we need to save $2.6M.

    Funny, I was looking at our estate planning and insurance the other day, and I realized that my husband is worth a LOT more dead than alive – so long as he kicks it while on a company business trip traveling on a U.S. airline, ticket purchased via American Express. No, I won’t go there….

  6. This only goes to prove one important thing: save early. Going broke to pay for college makes sense if you’re getting a lucrative degree. If not, work and save–and go to a community college part time if you want to.

    If only I had followed my advice….

  7. jeff wright says:

    Yes, but….the kicker in this formula is the woman writing that the kids will EVENTUALLY get the dough from the cottage, which has, by the way, only appreciated $150K, with no guarantee that’ll go a whole lot higher. It’s a cottage! Why didn’t she put the money in the market? Her own math exercise makes it seem much better.

    I’m underwhelmed by this story. Given lengthening life spans and the common practice in this country of generations living apart and for kids waiting for forebears’ death to get the goodies, those kids may well have to wait until they’re in their 60s to get maybe $200K in today’s dollars. Wow. That works out to $5K per year over 40 working years. It sounds like the kids are in their 20s. So they’re making what their college-educated peers are making NOW. Let’s check ’em in 20 years when the college kids are moving into senior management positions or maybe still have a job.

    Could be some lean years for those kids waiting around for the bonus. So-called prime earning years, child-rearing years, all of those years when income demands are greatest. And then what happens to the grandkids? Guess they won’t be able to go to college if mom and dad aren’t making enough money.

    Rationalization, it’s wonderful.

  8. PJ, you’ve forgotten about taxes. A college grad may gross $14K more per year, but that’s not the net difference.

    I don’t think it would change your numbers too much, but I’m too lazy to set up the spread sheet right now.

  9. PJ/Maryland says:

    PJ, are you sure you’re not really my husband posting under a name I don’t know?

    Umm, pretty sure, Claire. But if you give me your bank account numbers, I’ll be glad to fake it long enough to make some wire transfers…

    PJ, you’ve forgotten about taxes. A college grad may gross $14K more per year, but that’s not the net difference.

    Steve, I debated about including taxes somehow but it has all sorts of effects. Presumably the higher-earning college grad would pay a bit more in taxes, and so have less to sock away in savings. But, some of the savings income would also be taxed (it wouldn’t all fit in an IRA).

    There are other factors, too. A college grad might reasonably be expected to earn better rates on his savings because he (might) understands finances better. Alternately, the college grad (with his higher income) may run with a wealthier crowd, and so spend more maintaining his lifestyle than the high school grad.

    (And let’s face it, the idea that a 19 or 23 year old is saving thousands for retirement is pretty ludicrous.)

  10. Cute, PJ. My momma didn’t raise no fool….

    Also, you’re right about the 20-somethings and savings. My company released some statistics recently, and one showed that the under-35 crowd was definitely NOT taking advantage of the company’s 401k savings. And they upped the limits in the last couple of years, too. I think it’s up to 16% now? Plus, most companies match contributions for the first 2% or so – FREE MONEY! So why don’t the kids take advantage of the opportunity to save? Beats me! Add to that an employee stock purchase plan, where you can buy a percentage equivalent of your salary for less than market price, by payroll deduction and over 9 months or so.

    I guess the young ones still don’t consider themselves as mortal, and assume that old age will take care of itself… By the by, I don’t know anyone over 40 who even considers Social Security in their retirement calculations, assuming that it will be bankrupt before we get to retirement age.

  11. Claire;

    What’s sad is that for 401(k) matching funds, you can actually just put the money in, get the matching funds, then withdraw it, pay the penalty and still end up ahead. Or just pull out the seed money and just keep the matching funds minus the penalties and tax. I just don’t understand why people who are making good money don’t at least get the match. 100% return day one! 130% if you consider the tax hit. Even odder, some of these people are married engineers without children. They’re sure as heck not blowing that money on partying or fast cars.

  12. I guess they think it’s more important to get those fancy doohickeys and go skiing in Colorado in February and scuba diving in the Caymans in July, and so on. Instant gratification seems to be one of the predominant characteristics of the young of whatever generation.

    Guess they never heard the story of the ant and the grasshopper, huh? Not PC enough?

  13. Claire and company: I’m one of those engineers who doesn’t sign up for the 3% matching. What’s the point? The extra money won’t make me live any longer or die any better. A bigger nest egg would just mean more years rotting in a nursing home. I can already afford more material junk than I need. Having to think about that 3% would mean making room in my brain for accountancy and the tax code. An all around loss, if you ask me.

  14. The big problem seems to be the fact that College/University is so expensive. I currently live in the UK where University fees are $1,800 a year and that is considered high in Europe. In many countries it’s completely free.

  15. I did save thousands in my early 20’s, but then I lost most of it when the stock market crashed. And I won’t be able collect any of the social security I was taxed for. Such is life.

  16. “I guess the young ones still don’t consider themselves as mortal, and assume that old age will take care of itself… ”

    Well, unless our friends on the left impose National Health Care or find some other way to create decades-long medical technology stagnation, there’s a chance that a cure for old age will appear by the time today’s young ones reach that age.

    Abolish the FDA, and our chances get even better…

    Also, why do I keep seeing the assumption that it’s up to the parents whether their kids go to college or not, and that it’s the parents job to pay for it to boot? If college is a winning investment, it’s worth it for the individual to go into debt himself to make that investment, not to mention the fact that the parental duty has ended before any question of paying for college typically presents itself.