Save for college or save for retirement?
October 22, 2010
by Bob Hampton | MoneyRates Guest Contributor
This article is part of a MoneyRates.com series, 10 steps to a comfortable retirement.
Families with children often find themselves in a difficult position: Should they be saving for retirement or should they be saving for college? This has become especially critical as the recent market losses have reduced the value of any college or retirement savings. Although it is tempting to say that a family should save for one or the other objective, this is probably not realistic.
Maximize tax-advantaged account contributions
So what should they do? The first step is to take full advantage of any retirement savings plans at the parents' workplace. Since employee contributions are deducted from your paycheck, this is a very painless way to build up retirement savings.
The second step is to establish a 529 plan for the kids. One of the big advantages to these plans is their flexibility: the parents control the savings within the plan. If your child is able to get a scholarship, the savings in the 529 plan can be used for another family member or withdrawn (with taxes and penalties on the earnings) and used for the parents' retirements.
Apportioning your savings
There are no hard-and-fast rules for splitting the household savings between meeting retirement and education goals. One way to approach the problem is to decide as a family that a percentage of the household income -- say 10 percent -- will be allocated between retirement savings and a 529 plan.
Since retirement will last a lot longer than four or five years of college, it will be necessary to allot more of the monthly savings to retirement. For instance, you may decide that each month, 75 percent of the household savings will be allocated to retirement savings, with the rest going toward education savings.
Concentrate on mortgage debt: another approach
Another approach would be to plan on paying down your mortgage early, so that there won't be any house payment when the kids enter college. After the mortgage is paid off, the monthly payment could be used for education expenses. This strategy is especially feasible for a family with young children today.
Setting expectations for your children
In addition to the savings side of the equation, the children need to have a clear understanding of their end of the bargain. They need to keep their grades up, participate in extracurricular activities and those other things that admissions officers like to see on college applications.
Parents need to be clear about the extent of their financial support. Just because your child wants to go a prestigious (and expensive) school does not mean you should impoverish yourselves in retirement to make it happen.
Discuss this with your children so that they can form reasonable expectations of the help, if any, you can provide. Armed with this knowledge, the family can start the process of finding the right school, in terms of both academic fit and cost, that will work best for preparing the child for the future.
Read more financial advice from our series, 10 steps to a comfortable retirement.
About the Author:
Bob Hampton, CPA/PFS, ChFC, is the president of Impart Financial, LLC, a financial planning practice based in Fort Worth, TX. He has worked with hundreds of clients over the last 30 years helping them get their financial lives in order.