Saving for Retirement and a Child’s Education at the Same Time
You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child's education at the same time can be a challenge. But take heart — you may be able to reach both goals if you make some smart choices now.
Know what your financial needs are.
Answering the following questions can help you get started:
- How many years until you retire?
- Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what's your balance? Can you estimate what your balance will be when you retire?
- How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available at ssa.gov. You can also view your Social Security Statement online, which contains a detailed record of your earnings, as well as estimates of retirement, survivor's, and disability benefits.)
- What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
- Do you or your spouse expect to work part-time in retirement?
- How many years until your child starts college?
- Will your child attend a public or private college? What's the expected cost?
- Do you have more than one child whom you'll be saving for?
- Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
- Do you expect your child to qualify for financial aid?
You can also use our financial calculators to help you predict your retirement income needs and your child's college funding needs.
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Figure out what you can afford to put aside each month.
After you know what your financial needs are, determine what you can afford to put aside each month. To do so, you'll need to prepare a detailed family budget that lists all of your income and expenses. Once you've come up with a dollar amount, you'll need to decide how to divvy up your funds.
Retirement takes priority.
Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. If you wait until your child is in college to start saving, you'll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there's no such thing as a retirement loan!
If possible, save for your retirement and your child's college at the same time.
Ideally, you'll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child's college fund, you might be surprised at how much you can accumulate over many years. If you're unsure about how to allocate your funds between retirement and college, a professional financial planner can help you determine the best allocation for you, and help you select appropriate investments for each goal.
What if the numbers say you can’t meet both goals?
If the numbers say that you can't afford to educate your child or retire with the lifestyle you expected, you'll probably have to make some sacrifices. Here are some suggestions:
- Defer retirement: The longer you work, the more money you'll earn and the later you'll need to dip into your retirement savings.
- Work part-time during retirement to make the retirement savings you do have last longer.
- Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
- Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
- Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
- Expect your child to contribute more money to college, by taking out student loans or working part-time to earn money for college.
- Send your child to a less expensive school: Don't feel guilty — a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
- Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead of four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for tuition.
Can retirement accounts be used to save for college?
Yes. Should they be? That depends on your family's circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child's college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to.
With IRAs, you can withdraw money penalty free for college expenses, even if you're under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you'll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases) even if the money is used for college expenses. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)
Get professional guidance to help you make the best choices for your family and circumstances, so you can all live as well possible.
There’s a lot to consider when it comes to saving for retirement and education, with a variety of important personal goals at stake and potentially high emotions in the mix. On top of that, there are many details and options to be aware of when making any financial investment. A financial advisor can provide you with the unbiased financial expertise and insights required to make sound investment decisions that will offer the most potential for meeting all of your various goals, so you can plan well for the future for both yourself and your children.
At Weiss, Hale and Zahansky Strategic Wealth Advisors we use our proprietary Plan Well, Invest Well, Live Well™ strategic process to help our clients create a financial plan that’s personally designed to best balance all of their various goals. Learn more about our process and contact us if you’re ready to create the strategic financial plan that will best serve your and your family.
Presented by Principal/Managing Partner Laurence Hale, AAMS, CRPS®. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.
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