Trust Officer, Ronald Glenn, M.A., CFP, discusses the challenge many face with the dual goal of saving for retirement, while saving for college education expenses.
Baby boomers are the original sandwich generation – raising children while at the same time often caring for an aging parent or in-law. In this rather common chapter of life there are dual objectives and a high consumption of time and energy, while at the same time offering a strong sense of purpose and accomplishment if done well.
Another similar phenomenon occurs during the prime earning years of baby boomers and successive generations in the dual goal of saving for retirement while at the same time saving for college. Both are worthy goals with similar, desired outcomes – a comfortable life in the retirement years and children with sufficient education savings to leave college debt-free or with a modest amount of loans so as not to consume cash flow during their working life and prevent them from saving for their own retirement or purchasing a home. At first glance, this appears to be about as easy as finishing a marathon with a broken leg.
Know what your financial needs are
The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:
- How many years until you retire?
- Does your company offer an employer-sponsored retirement plan? Do you participate? If you know your balance, can you estimate what it will be at retirement?
- How much do you expect to receive in Social Security benefits? One way to get an estimate is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov.
- What standard of living do you hope to have in retirement?
- Do you or your spouse expect to work part-time in retirement?
- How many years until your child starts college?
- Will your child attend a public or private college? What is the expected cost in today’s dollars?
- Does your child have any special academic, athletic or artistic skills that could lead to a scholarship?
- Do you expect your child to qualify for financial aid?
Figure out what you can afford to put aside each month
After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. You’ll need to prepare a detailed family budget that lists all income and expenses. Once you’ve come up with a dollar amount, you’ll need to decide how to deploy funds for both goals.
Retirement takes priority
Even though college is an important goal, you should probably focus on retirement if you have limited discretionary funds. Since generous corporate pensions are mostly a thing of the past, the burden is primarily on you to fund your retirement. If you wait until your child is in college to start saving for retirement, you’ll miss out on years of potential tax-deferred growth and the compounding of your money. Your child can always attend college by taking out a loan but there’s no such thing as a retirement promissory note.
What if you can’t meet both goals
If the numbers don’t work and you cannot afford to educate your child or retire with an adequate income, you’ll probably have to make some sacrifices, such as:
- Defer retirement. The longer your work, the more money you’ll earn and the later you’ll need to begin taking from your retirement savings.
- Reduce your standard of living now or in retirement.
- Increase your earnings now. Consider increasing your hours at your current job, finding another job with better pay or taking a second job. A previously stay-at-home spouse can also return to the workforce.
- Invest more aggressively. If you are relatively young and in the early stages of saving for both goals, you may be able to assume more risk in your portfolio.
- Expect your child to contribute more money in college. Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
- Send your child to a less expensive school – lesser known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
- Think of other creative ways to reduce education costs. Your child could attend a local college and live at home, enroll in an accelerated program to graduate in 3 years instead of 4, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work and save money for college.
If you have questions or would like to learn more, please contact Midland Wealth Management.