Today many are faced with the challenge of balancing savings for retirement and education. We think we have to choose between supporting our kids in college and setting money aside for a comfortable retirement, as the time to send your children off to college usually happens at the same time that focusing on retirement planning is crucial. According to an article from The Motley Fool, “Should You Save for College or Retirement?”, a balance can be struck to navigate saving for both .
First, it is important to understand the costs associated with retirement and college. College education is sadly getting less and less affordable, “Since 1978, the cost of attending college has increased by an astounding 1,225%” (The Motley Fool). During the 2016-2017 school year, tuition and fees ranged from $9,650 for in-state university tuition to $33,480 for private institutions, according to the College Board. Analysts are estimating that with a conservative 5% annual increase, by 2037 a four-year degree will cost almost $500,000!
Looking at retirement, in 2016, a couple needed almost $750,000 in order to cover expenses including healthcare costs. This breaks down to about $2000 a month of “income”. To put this in perspective, for someone who was 35 in 2017 and earned $75,000 a year, they would need $3.3 million when they retired to have the same income (on an inflation-adjusted basis).
So, what is suggested concerning striking a balance? There are several things to mull over.
To begin you will want to create savings timeline. Time is your friend with long-term savings, compounding returns on investments can have highly beneficial effects on your savings if you get started sooner than later. While it can be tempting to begin putting away money for your child’s education as soon as they are born, you will want to consider paying down debts first, like the ones with a more immediate effect on finances and credit health. These are medical bills, student loans, and credit card balances, amongst other things. Additionally, make sure you have extra funds available in an emergency fund.
There are a few ways to save where college is concerned. Most are aware of the 529 plans to save for education expenses (see our blog in October discussing recent changes). These plans allow contributions to grow tax-deferred and withdrawals for qualifying education expenses are tax-free. Other options to consider are encouraging your child to earn core credits at a community college before attending a different school, living at home, and work-study programs. All of these can help cut costs.
Where retirement is concerned, it is not always as simple as saving for retirement before your child(ren)’s college fund. If you are prioritizing saving for tuition, there are ways to catch up on retirement savings or things to do at the same time. The first is 401(k) matching, if your employer matches your contributions, take advantage. Once you are 50 you can make additional contributions known as catch-up contributions. If you were focused on your children’s education, at 50 you can begin to recover the missed savings.
Another strategy you and your spouse can employ is staggering your retirement. This allows you to keep health insurance and delay Social Security and 401(k) withdrawals. Additionally, you can look into funding alternatives, a financial planner can help with this. There are many options, like investment property, a side job, or even moving to a more affordable location.
Working together with an experienced estate planning attorney and a financial planner can help you ensure the most success for college and retirement planning.
For more information on retirement and education funding planning, and other estate planning topics,
Reference: The Motley Fool (August 6, 2017), “Should You Save for College or Retirement?”