Our youngest daughter is 24 and in graduate school preparing to take the medical school entrance exam. She hopes to start medical school within two years. She was a nationally ranked swimmer and an outstanding student, with much of her undergraduate education paid for by her athletic scholarship. We funded her graduate studies, and she wanted us to help fund medical school as well.
I am retired and my wife is an employed physician. She is 56 years old and wants to retire. We have about $700,000 in our brokerage account, $1.8 million in our retirement account, and our daughter’s 529 plan has a balance of $100,000. We religiously use financial software to track our finances. We are debt-free and pay all credit card balances in full every month. We are also active savers.
We don’t want our daughter to be saddled with a huge amount of debt when she finishes medical school. What are your thoughts on determining when my wife can retire and how to evaluate that decision? Also, would it be wise to pay the full cost of medical school for our daughter? Thank you for considering our letter.
parents
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You’ve heard the instruction: “Put your own oxygen mask on before you put it on your kids.” I have another maxim, this one related to cars, to keep in mind when planning for retirement: “Objects in the mirror may be closer than they appear.” In other words, plan for emergencies, have a cushion for medical and housing costs, and know that the two biggest enemies in retirement—besides illness, of course—are inflation and the taxman. The money you have in 2026 won’t be as much in 2036. When you start withdrawing your retirement savings, try to do so in a way that doesn’t put you into a higher tax bracket.
You’ve given yourself two major challenges: funding your daughter’s medical school, and providing for your wife’s early retirement. If your wife retires before age 65, she will need to pay for private health insurance. Premiums and deductibles in the Affordable Care Act (Obamacare) marketplace are extremely volatile as the current administration has introduced strict eligibility requirements and the enhanced premium tax credit is about to expire. If you and your wife are under 65, you will have to build a bridge to Medicare in your estimate. After considering these questions, along with your expenses, you will have a better idea of when your wife will be ready to retire.
As you know, medical school is expensive, with public schools averaging up to $65,000 per year and private schools averaging over $70,000 per year. So, over the course of your daughter’s four years of study, tuition could total $260,000 to $280,000, not including rent (if she doesn’t live with you), books, and other related expenses. Of course, there are other funding options, such as loans, grants, and scholarships—but roughly speaking, these numbers are exactly the type you want to cover. A cursory look at your savings totaling $2.6 million reveals that you have both the opportunity and the privilege to fund your daughter’s continuing education.
But this will cost you unrealized gains over the next 20 years. If you take (broadly speaking) $50,000 out of your brokerage account each year so that you don’t have to pay taxes like you would on a withdrawal from a traditional 401(k) or IRA, then the $200,000 you might be spending on your daughter’s medical school will actually cost you more. Assuming an average annual return of 8%, the opportunity cost of such expenditures in forgone stock market returns over 20 years is approximately $570,000. At a 10% annual return, that $200,000 would be close to $1 million. (Warning: This is an ongoing return; also, the cost of medical school is a recurring expense, not a one-time expense.)
Therefore, you can split the difference with your daughter. Pay for half of her medical school expenses and let her take out a loan for the other half. You have a great relationship with your daughter and you are very proud of her work ethic, intelligence, and drive. It may be worth it to you to see your daughter enter adult life debt-free. Of course, at some point, she (I think) needs to start going through the challenges of mortgage, personal loan, and credit card debt. To her credit, her talent and drive have kept her from student loan debt so far.
Can your wife retire in five years? The lack of information about your wife’s salary, pension or retirement accounts, Social Security benefits, mortgage payments, etc. makes it difficult to play the role of a CPA (nor would I want to). That is, even if you give your daughter enough money to pay for medical school, you can afford to live a comfortable retirement. If you withdraw 4% from your retirement account each year, you will earn $100,000 per year. You have a $100,000 529 plan; obviously, you should click on that account first.
While in hospital, your daughter’s income will likely be low, perhaps in the low five figures, but after that her income should drop to around six figures. It’s all about having fun.
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