Investing – Building a Bridge to Somewhere

 

I have always liked the idea of bridge building when it came to developing a well-thought-out investment plan. The near side of the bridge represents where we are today, the far side is our point of arrival — we’ve made it to our destination and we are smiling.

A common investment goal is saving for children’s education. We first need to understand how far, how deep and how wide does our bridge (money) need to span and design/engineer accordingly. We also need to think about the fundamental tension between saving for education and retirement goals.

Case Study

Let’s do a little case study and let’s say that we are financial advisors with two clients: Rachel (“Rach”) and Joe, aged 42. Joe and Rach live in Minneapolis and have two children, Josie – seven and Josh – five. Both parents want the kids to go to the University of Minnesota (U of M) and plan to pay for roughly 75% of room, board, tuition, and fees. Josh and Josie will have to pitch in for the other 25% through a combination of work-study, summer jobs, internships or student loans. Rach owns a successful media relations company and takes a $350,000 salary and Joe is an architect with an annual salary of $185,000.

Investment Strategy or Stuff?

We want to help Joe and Rach with an investment strategy first, before diving down to the tactics or “stuff.” to Many people start with the “stuff” or materials that the investment bridge is made of rather than understanding how far, how deep, how wide the bridge needs to be engineered for. There is sales and media information overload on the “stuff” of investments (think retirement account, life insurance cash value, stocks, bonds, mutual funds, ETFs, derivatives) rather than the “strategy” of investments (think bridge building analysis and engineering).

Coming back to our case study, we need to build an investment strategy that builds two bridges: Four years of U of M instate student $27,469 per year fees, room and board at 75% ($20,602) for Josie in 11 and Josh 13 years. [Cost source: collegedata.com:  https://www.collegedata.com/en/college-profile/991?tab=profile-money-tab ] 

Put another way, our investment “destination” is $20,602 in today’s dollars, per year per child. We need to build to a investment bridge that leads to our destination. But and this is an important but…we need to take into account factors like inflation, taxes, rates of investment return, our risk tolerance for investments, along with how much lump sum and/or monthly savings capital Rach and Joe can commit. These are the essential conditions to understand when building investment bridges and plans — whether for education or some other purpose.

For Joe and Rach, let’s assume that rate of inflation for the U of M is 7.3% https://www.ohe.state.mn.us/dPg.cfm?pageID=812/

We want to figure out from where we are today Building in assumptions for inflation, tax and investment return rates, tolerance for risk and capital is far more important than picking “the stuff” (e.g., type of investment product and/or place). Using an online calculator can then be very helpful in at least getting a feel if you are in the “ballpark” or not when it comes to goal achievement. Check out our investment

Over the years, I’ve counseled hundreds of clients and financial advisors about investing and have found crystallizing the investment destination and strategy come first.