Career Education Financial Planning
Using VeriPlan as a Mid-Career Education Financial Planning Tool
VeriPlan can easily be used to analyze whether it is worth returning to school to improve one’s earnings capacity. The following example explains the steps to take to analyze the value of obtaining additional education to further one’s career by using VeriPlan as and education financial planning software tool.
Mid-Career Education Projection Modeling Assumptions
Assume that you currently earn $50,000 per year and expect your real income to increase annually throughout your normal working years at .5% greater than the rate of consumer price inflation. You have already made various required and optional entries on the VeriPlan’s yellow-tabbed and orange-tabbed worksheets and have developed a lifecycle financial plan. Your current plan uses $50,000 as your employment income and .5% as your relative earned income growth rate on the yellow-tabbed ‘2-Your Earned Income’ worksheet. After reviewing your current financial plan, you would like to explore ways to improve you long-term outlook for better earned income, higher savings and greater long-term financial asset growth.
Currently, you have a bachelor’s degree and a strong work ethic, but those who are managers in your profession all seem to have graduate masters degrees in several specialties that are particularly valued by your industry. You are considering whether it is worth going to graduate school to obtain a masters degree requiring a two-year course of study. If it makes sense to do so financially, you intend to enter graduate school in one year after working at your current salary for one more year.
Graduate school tuition currently costs $40,000 per year. You expect that these educational expenses will continue rise at 2.5% above the rate of inflation from now until you complete your studies. While in graduate school, you do not intend to work, so you will not earn any salary. Furthermore, you intend to maintain the same level of ordinary living expenses and the same real ordinary expense growth rate that you already have in your current plan.
When you complete your masters degree, you expect that you will be able to earn $75,000 annually. Furthermore, you also believe that your real income would increase annually throughout your normal working years up to age 65 at a slightly higher 1.0% real growth rate relative to inflation. Clearly, the potential for both higher annual earnings and a higher real earnings growth rate are appealing, but is it worth the two year income loss and the significant cost of paying tuition while in school?
(Note that in this example, we are assuming that your current employer would not provide any financial assistance and that you would not work for your employer, while you return to school. However, if your employer were to provide some assistance with tuition expenses and/or to employ you on a part-time basis while you were attending school, the education financial planning modeling instructions below could easily be modified to reflect the value of this employer tuition assistance and your part-time earned income.)
How to model these factors in VeriPlan so that you could evaluate the alternatives
Step 1 — Revise projected lifetime earnings
Enter your new lifetime earnings projection:
- a) Change your current annual employment earnings from $50,000 to $75,000 in Section 2 of the yellow-tabbed ‘2-Your Earned Income’ worksheet.
- b) Change your current real dollar earned income growth rate from .5% to 1.0% in Section 4 of the yellow-tabbed ‘2-Your Earned Income’ worksheet.
Now, VeriPlan will automatically project annual earned income of $75,000 for each year up until whatever retirement age you have specified.
Step 2 — Model first year earned income at your current salary
Offset your projected earnings during the first year, while you continue to work at $50,000 for one more year prior to returning to school.
- a) Enter negative $25,000 into the expense adjustments Column D for Year #1.
- b) Enter a real relative growth rate of 1.0% as a positive number in Column E for Year #1.
(Note that Step 2 would not be necessary, if you were going back to school in the near future instead of a year in the future, but it does illustrate the modeling flexibility of VeriPlan, as an education financial planning software tool.)
Step 3 — Remove any projected earnings while in school for two years
Fully offset your projected earnings, while you are in school during years #2 and #3, and you are not employed:
- a) Enter negative $75,000 into the expense adjustments Column D for Year #2 and #3.
- b) Enter a real relative growth rate of 1.0% as a positive percentage number in Column E for Year #2 and #3.
These Step 3 adjustments would reduce your salary by $75,000 down to $0 during Year #2 and #3. (Note: Because the real growth rates are the same, your adjustment would precisely offset your projected salary for Year #2 and #3.)
Step 4 — Add in the projected two-year cost of tuition
Enter the cost of graduate school tuition:
- a) Enter positive $40,000 in the major planned expense Column A for Year #2 and #3.
- b) Enter a real relative growth rate of 2.5% as a positive percentage number in Column B for Year #2 and #3.
These tuition expense adjustments will automatically draw down your projected cash, bond, and equity assets on an after-tax basis. If your educational expenses exceed your projected financial assets, VeriPlan will automatically set up loan to reflect this. Note also that your ordinary living expenses would already have been reflected in your baseline model. If you expected your living expenses to change while in school, you could also make appropriate adjustments.
Step 5 — Compare your baseline “keep working at $50k” versus this new “go back to college for mid-career education” scenario
Evaluate your new lifetime projection to see whether it might be worth returning to school under these education financial planning assumptions.
- a) Evaluate the green-tabbed ’12-Financial Assets DATA’ worksheet and compare the projected value of your financial asset portfolio at the same future benchmark ages.
- b) Test the uncertainty of your projection, by varying your estimated annual earned income and your estimated real income growth rate. Vary any other projection settings in VeriPlan that you find useful to consider in your decision.
If it makes sense to you, send in your graduate school admissions applications and buy the required bean-bag chair.
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