College Fund vs. Retirement Fund
Saving for your child's future ... or yours: Which takes priority?
Q: I am worried about saving money for retirement while planning expenses for my children's college years. Is there a way to do both?
-- Beth Hanson, Anaheim, California
A: If you're faced with the thorny dilemma of put
ting money aside for your children to attend the college of their choice or saving for your own retirement — you are not alone! Before making a decision, here are a few things you should know:
What do college and retirement cost?
- College costs go up every year, and typically rise faster than inflation. For example, the cost of attending San Diego State University today is about $13,000 per year (fees, room, board), $16,000 at UCSD, and $40,000 for the University of San Diego. There will, of course, be other expenses: books, transportation, clothes,
- Calculating your financial needs in retirement is a bit more complex. One way to do this is to determine your current cost-of-living (housing, utilities, medical, transportation, food, recreation, debt payment, other) and compare this with your estimated retirement income. The difference is what you will need to eliminate from your lifestyle or "downsize" when you stop working. Another way of estimating your retirement needs is to apply the 70-to-80-percent rule, which says, retirees will need between 70 and 80 percent of their current income to maintain their current lifestyle in retirement.
How do you save for college?
- By starting as early as possible.
- Even a modest commitment, such as putting aside $100 each month for 18 years, can yield $48,000 (assuming an 8 percent return).
- For the college fund, you don't need to put aside the full amount. Grants and loans will be available to your child in most cases and these can be used to supplement your savings. Additionally — and this is important — your child should also be able to make a contribution, by living at home, working part-time, creating and adhering to a college budget, and spreading out the time to get a degree. [Note: 27 percent of young adults in their 20s lived at home in the 1980s; today that figure approaches 60 percent.)
- Use 529 Savings Plans (federal tax free, no income or age restrictions) and take advantage of tax credits (Hope Credit and Lifetime Learning Credit), which can be as good as grants during the years you actually pay college tuition.
- Speak with a qualified financial advisor.
How do you save for retirement?
- By starting as early as possible.
- Speak with a qualified financial advisor and adopt an investment strategy that fits your age and lifestyle.
- Establish a dynamic savings strategy that utilizes a broad range of investment instruments over time (e.g., defined benefit pensions, mutual funds, employer match options, IRAs, 401(k)s, annuities). The younger you start saving, generally the more aggressive your savings strategy can and should be. If you decide to start with a 401(k), make automatic payments (e.g., 10 percent of your gross income), and keep your debt low and
- As you move through the decades and approach retirement age, more conservatism in your investments is highly recommended. But, don't plan on living off Social Security during your "golden years."
- Plan on working longer. In a recent national survey, 79 percent of pre-retirees state they plan on working and earning during their "retirement" years. Most of those will work part-time, both to maintain their lifestyle and to stay engaged in their communities.
Returning to the college fund vs. retirement fund dilemma, why not do both? If that isn't possible due to your age and other family factors, then focus on your own retirement needs first, and offer your kids a lot of moral support as they plan their careers and assume the responsibilities of adulthood.