College is expensive and today’s parents are learning they need to save early and often to cover the costs. As a result, many of them are faced with the challenge of saving for a comfortable retirement while also helping their child go to college.
The good news is, these long-term financial goals are not mutually exclusive. With a little bit of planning and strategic choice-making, you can contribute to your kids’ future without sacrificing your own long-term plans.
Determine Your Financial Needs
To put a plan in place, you must first decide what your financial needs are for each goal. Much of this is predicated on how you envision your retirement lifestyle. After all, how do you know how much you can put toward your child’s future if you don’t know how much you need for your own? Here are some important steps to understand what kind of retirement you want:
Five tips when planning for college and retirement:
- Pick your dates – This goes for both retirement and when you think your child will start college. Regarding retirement, do you love your work? You might consider working longer. Is stress getting in the way of enjoying life? You might push this date earlier. Consider whether paying for your child’s education will affect that timing. If you contribute more toward their education, does that impact when you can afford to retire?
- Track your budget – If you don’t track your expenses, now’s the time to start. Get a realistic understanding of what you spend every month, which will help you understand what you’ll need in retirement. A general rule of thumb: in retirement, you will need approximately 80% of your current income to cover your usual living expenses. As you think about what you need in retirement, you will want to factor in the cost of sending your child to college. Some good questions to ask yourself include:
- How many children do you have?
- How do you want to pay for their education? Will you cover all of it, or will they take out loans to cover some of it?
- Will they attend public or private school? If it’s the former, is it in-state or out-of-state?
- Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
- Is your family eligible for financial aid?
These are all questions you should be considering, but if you don’t know what you’re currently spending, how do you know what you can spend in the future?
- Know your cash flow – Calculate what will come in and what will go out each month. Find out about Social Security and pensions – when and how much they will pay. When looking at different ways to pay for your child’s education, keep in mind that you will most likely earn more later in life, which may impact when and how you want to start saving for their education. As your child grows, so should your salary as well as your saving capabilities. This may be important when thinking about planning for the entire family.
- See the big picture – Look at all your investment accounts together. Understand exactly how much you have, both in tax-advantaged and taxable investment accounts. This will help you develop financial goals, measure progress over time, and stay disciplined. Don’t forget, you should also track any college savings plans in your overall financial picture. You should be aware of the tax impacts these accounts have when looking at your whole financial picture. Savings plans such as traditional IRAs Coverdell ESAs are tax-deferred, while plans such as the Roth IRA are tax-exempt. If you decide to go with a 529, you can withdraw tax-free, as long as the funds are used for education-related expenses. For more information, read ‘How to Pay for Your Kids’ College’ on the tax drawbacks and benefits of each savings account.
- Don’t be overwhelmed – There is a huge amount of information on college, finance, and retirement out there. Avail yourself of what interests you, but don’t let it overwhelm you to the point that you act rashly – or don’t act at all. If you’re unsure of where you can start, speak with a financial advisor who can help you sift through the information, as well as review and analyze your finances and formulate a plan to help you achieve your long-term financial goals.
So, what is more important—your child’s education and future or your own security at retirement? There’s no doubt that a lot of emotion gets wrapped up in that question, which often leads people to come to the wrong conclusion. Recently, many parents are deciding that college savings should come first. As a result, they’re dipping into their retirement savings to cover the costs.
We highly recommend against this. Retirement is a necessity. If you do not adequately prepare for this stage in your life, you might become a financial burden to your child. In this situation, all of your hard work to financially support your children through college will be counteracted by the fact they now might need to financially support you.
Saving for both your child’s education and your retirement are equally important. What is feasible for your retirement should help drive how much you can help your children for college. If you prioritize helping your children, then you should understand what you’re giving up to do so.
Personal Capital Education Planning Guide Series
- How to Pay for Kids’ College
- When to Start Saving for College
- When Does a 529 Make Sense?
- Three Options When You Have Extra 529 Funds
- Case Study: Funding College While Saving for Retirement