Saving for Retirement or College?
I am a fairly new parent, with a 2-year old son. For anyone that is or has been in this situation, you know that there are many challenges that come along with raising a family, money being a major one. It seems like your finances are being pulled in all directions, from normal living expenses (which seem to be constantly rising), to childcare and other kid-related expenses, and at the same time still trying to come up with enough extra to put away each month. One of the biggest adjustments I’ve had to make with the transition into parenthood was how to best utilize our discretionary income (amount left-over after taxes and normal expenses). There are two things I know must be planned for, retirement and college. Tackling one of these is tough, let alone both at the same time.
Without a doubt, there are some families that will have the resources to do both without much of a problem; however, I would guess that they are in the minority. For the rest of us, there will be difficulties in sufficiently planning for both events.
I did a quick calculation based on my situation to estimate what the total costs would be to send my son to an in-state, 4-year public college. There are many sites with calculators, the one I chose was:
http://apps.collegeboard.com/fincalc/college_cost.jsp
The national average in today’s dollars is $12,841 annually. This amount covers tuition and fees, books and supplies, room and board, etc. Using a 5% inflation rate, with 16 years until college, I’m looking at a total cost of $120,814. This is assuming he finishes school in four years (if he’s like me, it will take longer) and assumes I will have no other children (unlikely). The reality is that most families will qualify for some financial aid, but even so, the amount needed to fund a child’s higher education is daunting.
So, the question is: If you can really only afford to put money away for one or the other, which one do you choose?
I, like a lot of parents, want to do everything I can to make sure my child has the best opportunity to succeed in life. Plus, college expenses will come before I need any retirement money, so it would seem that my focus should be on college first, then retirement. The answer that makes sense to me though is the opposite. Here’s why I think your retirement should come first:
1. There are many ways to fund a child’s education; such as: scholarships, financial aid, student loans, etc. My son may even have to work before and during college; I did. You won’t have this kind of flexibility with retirement.
2. It takes a significant nest egg to fund the type of retirement that most couples desire. This means you have to save and save now. You can’t get a loan for retirement.
3. You may be in a better financial position to help out when the time comes. Typically, the beginning years of raising a family will be the most financially challenging (at least I hope so). Families may choose to have only one parent working, and those that are will probably be at the beginning of their careers. This is also the time that many families move into their first home.
In my situation, we are taking a combination approach. We are funding our retirements with regular contributions to our 401(k) plans and using unexpected money that we have left-over from tax refunds, bonuses, etc. to start stashing into college savings accounts. We are also fortunate to have parents that contribute a little each year for my son’s education. So while this plan may be inadequate for the total cost of college, at least there is some money going to work now. More importantly, we have a solid plan to meet our retirement goals.
There is also the possibility that he will choose another path altogether. He may have the ability to start a successful business, join the military or just decide to work for a couple of years after high school. I know people that saved for a couple of years, went to a community college, and then transferred to a 4-year school with very little help from their parents. My brother went to work for an employer that offered some tuition assistance, so he just worked full time and took a little longer to finish school. He and I both agreed that our accomplishments meant more when we were paying for it.
Of course, being like many dads, there is that hope that he will excel at a sport and go on to become a highly-paid athlete. You can bet I’m working on that one…his golf swing is already better than mine.
Kevin Jaegers, Senior Investment Advisor
