Life is full of competing financial planning priorities. Most are pretty easily resolved with some minor tweaks. Few tradeoffs ever require the complete obliteration of the competing goal. But is that true of college planning and retirement planning? When it’s not possible to save for both, one has to be sacrificed. Here are 10 reasons to save for retirement before your children’s college education.
1) 60 is the new 40
Many Americans stay in their regular full-time careers past 70. Maybe because the average life expectancy is getting close to 90. So, 60 is like the new 40.
Retiring at 65 and living to 90 means investments must fund 25 years of income.
Now, let’s say you need $100,000 to maintain your current lifestyle. To make that happen, the balance of your savings and investments needs to be about $1.8 million at retirement, assuming they produce an average annual return of 3 percent.
But those withdrawals will deplete your account all the way to zero by your 90th birthday. Surprise!
Inflation may take it sooner. Either your withdrawals will have to get bigger (you’ll make it to 90 but your money won’t), or you’ll have to adjust your lifestyle – lower.
So, unless you want your college-educated children to support you at the end of your long life, save for retirement before their college educations.
Now, that doesn’t mean you have to go all Ebenezer Scrooge on them. It just means you need to be creative.
2) Expand 529 Account Contributions
Look for ways to expand contributions to your children’s 529 accounts.
Ask your parents to open accounts in their names, and to contribute to the ones you set up.
For holidays and birthdays, ask family and friends to contribute to your kids’ 529 accounts instead of sending traditional gifts.
3) Factor Social Security Into Your Plan
You can collect Social Security at age 62. But the payment will be reduced by about a third of what it will be if you wait until full retirement age. But there’s a benefit (no pun intended) for waiting even further.
The longer you put off Social Security, the more it grows. Waiting until 70 to take benefits will increase them by nearly a third.
Including Social Security in your financial planning may enable you to move more money to your kids college savings plans.
4) Peak Earnings Years
If you have your first college-bound baby when you are 27, then he or she will head to college at about the start of your peak earnings years (your mid 40s).
This may provide ample liquidity to save for retirement and pay some of your kids’ education expenses.
And remember, your child may still qualify for some need-based financial aid.
5) Retirement has Many Savings Options
Retirement planning has more tax advantaged options than education planning. And one (the Roth IRA) has several financial planning benefits, including paying for college.
So, take advantage of as many retirement planning options as possible, including your 401(k) and a Traditional IRA.
6) Student Loans are not the Enemy
This is an important one! Your kids can borrow money for college. But there is no reasonable argument for borrowing money to fund your retirement.
And if you make objective retirement planning choices, you may be able to help your kids pay off their student loans.
7) Take advantage of Employer Matching
One of the most advantageous aspects of your 401(k) is employer matching. If they offer matching, take it. It’s like free money.
Missing this opportunity in lieu of funding a college savings account is especially foolhardy.
8) There’s no Financial aid for Retirement
The federal government does not offer financial aid for retirement (note: Social Security is not aid).
The good news is that there is federal student aid. There are also of state, local, and private scholarship opportunities.
More importantly, the money in your retirement accounts is not considered when determining need-based financial aid. Money in typical college savings accounts is.
9) Use windfalls Strategically
You may receive bonuses, tax refunds or other unexpected windfalls every now and then. Use them strategically when considering where to invest them.
Your circumstances and careful planning will determine if those bonanzas should go to retirement or education.
10) You have Longer to Save for Retirement
You should start saving for retirement as soon as you start working, especially if that happens before you start making babies.
Save all you can for your retirement until that first little one comes along. Then, save something for education. But keep saving for retirement. Even if it’s just a little.
The investor’s best friend is time. This is because your investments earn a return. That gets added to your balance. That balance earns a return. This compounding of returns can have a multiplying effect over the long haul.
And we can show you how it works. Call us at (800) 235-8396. We’re available Monday through Friday, 7:30am to 8:00pm (CT).