Decoding Risk to Optimize College Savings
The Johnsons, earning $450,000 annually, have $2.1 million in retirement accounts but are concerned about allocating sufficient funds for their children's college education without jeopardizing their retirement. They are unsure how much risk to take in their college savings accounts given their existing portfolio and time horizon. The cost of college is rising, and they need a strategy to determine appropriate investment risk levels for these college funds.
By using the Unlevered Beta Calculator, we can assess the inherent risk of potential college savings investments independent of debt. Analyzing specific ETFs and stocks reveals that some carry significantly higher unlevered betas (e.g., 1.2 versus 0.7). Understanding this allows the Johnsons to rebalance their portfolio, potentially shifting $50,000 from higher-risk assets to those with lower unlevered betas to better align with their risk tolerance and goals.
The Unlevered Beta Calculator requires inputs such as the company's or fund's beta, debt-to-equity ratio, and tax rate. The resulting unlevered beta provides a clearer picture of the investment's fundamental risk. By comparing unlevered betas, the Johnsons can make more informed investment decisions.
$60,000 potential increase in college savings by optimizing risk-adjusted returns over 10 years. It also allows them to keep their retirement on track, improving their confidence in achieving their financial goals.
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