The Parent Trap: College Vs. Retirement
Charles Schwab Co.
As parents, we may have different attitudes and motivations, and experience
different constraints and conflicting priorities when it comes to saving and
investing for our long-term financial future. For many of us, however, the
tension is nowhere greater than between two of life’s biggest financial
goals—sending the kids to college versus funding our own secure
retirement.
Illustrating the point, a survey commissioned by Schwab found that while
nine out of 10 parents believe a college education is essential to their
children's future success, the soaring costs of college leave many doubting
whether they’ll have adequate funds to cover the expense. At the same
time, most parents ranked other financial priorities ahead of saving for
college. Saving for a home purchase or home improvement was parents' first
priority, followed by saving for retirement and emergencies. Actually,
saving for college ranked fourth out of six options, beating out saving for
a vacation and buying a new car.
Maybe it was easier 30 years ago when more people had kids in their 20s and
retirement spending and college spending were far more separated
chronologically. Today, it seems, parents tend to put off having children
until later in life—even into their 40s. This means they’ll be writing
tuition checks at a time when retirement isn’t that far off. Add to this
the soaring costs of college and the fact that in the “good old days”
more folks could at least rely on a company pension to take care of most of
their retirement spending and it’s not hard to see how the responsibility
for self-funding both goals simultaneously can seem overwhelming.
You might be tempted to cut back on the money you invest for retirement to
save for the earlier goal of your kids’ college. But you should explore
other options first. One approach might be to set your target on two-thirds
or one-half of the projected costs of college and offer your kids a
“matching grant” of $2 or $1 for every $1 they come up with. There are
any number of ways your students can come up with their share: study hard
and get good grades now to qualify for scholarships and financial aid, work
part-time or take out (and be responsible for paying back) student loans.
Asking a college student to work and/or take out loans may not seem
attractive now (especially for the student). Ultimately, however, you
aren’t doing your children any favors if you put them through school only
to become financially dependent on them down the road. After all, while
financial aid is available for college, you'll have a hard time getting
loans or scholarships to fund your retirement later on. And you may prefer
to have your child work part-time between the ages of 18 and 22 rather than
working part-time yourself during retirement to make ends meet.
Ideally, you don’t want to sacrifice one goal for the other. Try to
balance the two so you don’t shortchange your future or your children’s.
Here are some additional ideas to help you achieve your goals for retirement
and your children’s college education:
Take the sting out of college costs and save
more for retirement
- Run the numbers to see which universities your family can afford.
Compare the costs of attending public vs. private institutions and
consider the possibilities for financial aid. The College
Board is a good place to get information on college costs and how to
pay for them.
- Save money by sending your child to junior college for one or two
years, after which they can transfer to a four-year institution. If you
live near a good university, you might save on room and board by having
your child live at home and commute to school.
- Help your student get his or her grade point average high enough to be
eligible for more scholarships and financial aid.
- Spend less and save more (an unpopular but effective choice).
- Work more years before you retire.
If your child isn’t eligible for grants or scholarships, he or she can
still apply for student loans at low interest rates. Interest paid on a
student loan is tax deductible—up to $2,500 per year—depending on income
level. You may be eligible for other tax breaks too, such as the Hope or
Lifetime Learning credits.
Consider a whole-portfolio approach to investing
A whole-portfolio approach takes into account all your taxable and
tax-advantaged investment accounts. You can always earmark certain portions
of your portfolio for certain things. But putting it all together in one
portfolio provides a big-picture view of your overall asset allocation. That
way you can manage the total risk you’re taking on at any given time.
Incorporate your various goals—education and retirement, for
example—into the big picture as you plan for future spending needs. You
may find the pie is big enough for both, or that you need to adjust one goal
or another.
Make the most of tax-advantaged investment
accounts
For retirement, tax-advantaged accounts include those offered by
employers—401(k), 403(b) and 457 plans, for example—as well as
traditional IRAs and Roth IRAs.
Tax-advantaged college accounts include:
- 529 college savings plans. These plans are a popular choice
because they offer the account owner control and flexibility, combined
with special income tax and estate benefits.
- Coverdell Education Savings Accounts. Formerly called Education
IRAs, a Coverdell ESA allows you to put $2,000 away each year per child
(if eligible), and you can usually invest the money however you like.
What’s more, distributions are tax free when used for qualified
elementary and secondary education, as well as qualified college
education expenses.
- Custodial accounts. Funds in a custodial account must be used
for the benefit of the minor child. When the child reaches adulthood
(usually age 18), it’s their money and they can spend it however they
like, which may not be the same as what you would choose for them.
Keep in mind that 529 plans and Education Savings Accounts are not
considered assets of the child, so are more financial-aid friendly (standard
formulas count 35% of the child’s assets but only 5.6% of the parents’
assets). Custodial accounts are considered an asset of the child.
Be a disciplined investor
Too much optimism in the wake of a bull market can prove costly. But
too much pessimism in the wake of a downturn can also cause you to miss out
when the market rebounds. It’s better to maintain an even keel through all
kinds of markets—and that requires discipline.
That’s why it's so important to quantify your various goals—including
college and retirement—and figure out how much money you can put toward
each. Then, establish a sound savings and investment plan you can follow
over the long haul no matter what the markets throw your way in the short
term.
Reasonable estimates of how much you may be able to earn on your investments
can help you create a more realistic plan. And
don’t be reluctant to get some help if you need it.
This information is not intended to be a substitute
for specific individualized tax, legal or investment planning advice. Where
specific advice is necessary or appropriate, Schwab recommends consultation
with a qualified tax advisor, CPA, or financial planner.
The information presented does not consider your particular investment
objectives or financial situation and does not make personalized
recommendations. This information should not be construed as an offer to
sell or a solicitation of an offer to buy any security. The investment
strategies and the securities shown may not be suitable for you. We believe
the information provided is reliable, but Charles Schwab & Co., Inc.
("Schwab") and its affiliates do not guarantee its accuracy,
timeliness, or completeness. Any opinions expressed herein are subject to
change without notice.
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