The degree is a good investment in could end up boosting your retirement.Lisa F. Young
After thirty years in film and television, a downward spiral in the post-production industry left Judi Babcock struggling to find stable work. She decided it was time to make a bold but risky move.
"I had been thinking about going back to school for interior design for years. I had just turned 52 and I knew that it was now or never," she says.
Last month, she started a four-year program pursuing a degree in Interior Design at Kwantlen Polytechnic in Richmond, B.C. At 53, she is by far the oldest person in her class. "I am absolutely loving it," she says.
The financial pitfalls of returning to school at a time when most people are eyeing retirement are not lost on Ms. Babcock. "I knew that if I did not budget, I was going to come out of school at 57 with no money. And I don't have time to mess around."
Being partially employed for the last decade had eroded her savings, so to pay for tuition and support herself while in school, Ms. Babcock sold her downtown Vancouver condo. "It allows me to finish school without debt."
Once she has graduated and gains some experience, she plans to start her own interior design firm. "I am not interested in Freedom 55. I want to work in a great career for as long as I can."
Ted Rechtshaffen, president of financial planning company TriDelta Financial, says the good thing about making a major life decision like this is that, unlike a sudden job loss, you can plan for it.
"The bad thing is that going back to school means that not only are you not making money but you have to spend a lot on education. So it is a double hit," he says.
Anyone heading back into the classroom after being in the workforce needs to figure out how long they will have no income, their estimated annual spending budget, and how they plan to pay for it, Mr. Rechtshaffen says.
But detailed financial planning is even more critical for someone in their 50s, he says. "These are traditionally prime savings years for retirement." He calculates that for every year someone in their 50s is in school, they will need to work another two to make up for it.
Financial planner Rona Birenbaum says that, unless the student is in the enviable position of having built up a large nest egg, returning to school at a later stage in life will undoubtedly have one of two effects: "You will either have a lower income in retirement, or you will have to work longer to make up for this break that you are taking from earning and saving."
"One way to reduce the impact is by battening down the hatches in terms of spending while you are going to school," she says.
If you are a 50-something student who cannot afford to pay for your schooling and life expenses through savings or with help from a spouse, you might have to tap into your retirement stash.
Instead of cashing out your RRSPs, Ms. Birenbaum suggests people look at the Life Long Learning Plan (LLLP), a government program that allows you to withdraw money from your RRSPs, tax-free, to finance an education. You or your spouse can withdraw a maximum of $20,000, with an annual limit of $10,000, which must be repaid over ten years, typically beginning five years after the initial withdrawal. She warns, however, that if, down the road, you are unable to repay it, you will be taxed.
Withdrawing money from an RRSP is another option and, if you are not earning an income, you will also not pay taxes. But unlike with the LLLP, there is no incentive to repay it, she says. "I don't encourage trashing your RRSP, but if you have no choice, it is better to get it out tax-free as opposed to paying tax on it."
If you are planning to finance your student years with a new or expanded line of credit, Mr. Rechtshaffen suggests you approach the bank while you are still employed.
In terms of an investment portfolio, a student in their 50s cannot afford to take a big hit. "Heading into something like this and for the first few years after, you want to be a few notches more conservative than you would otherwise be," he says.
Mr. Rechtshaffen also believes this is a good time to check in on your insurance coverage. Traditional 50-somethings whose kids are grown and are winding down their career could decide they no longer need insurance as income replacement. "But you are no longer a traditional person, so you might need to rethink where you are in the financial life cycle."
York University finance professor Moshe Milevsky says people considering heading back into the classroom in their 50s should make sure they are studying something that is likely to increase their earning power.
If they are getting a degree with risky prospects, it could be a bad return on investment and hurt their retirement income. "This might be an expense they can ill afford."
On the other hand, if the degree is a good investment, it could end up boosting your retirement, Dr. Milevsky says.
"They will probably be able to earn more, work for longer in a more productive role and thus have a larger nest egg at retirement – even if this means taking on some debt."