Let’s take a few minutes today to discuss one of the greatest budgeting tasks facing families across the world today. Often college and retirement occur all to close to one another for many people. Over the last fifty years more college educated people have entered the workforce than ever before, making higher education an even bigger ingredient to a successful future lifestyle.
Many families today will tell you they have little or no funding set aside for their retirement, let alone children’s education. A good number of these people have the resources to save, however the task is so daunting they claim defeat before even starting. A state university in the United States such as the University of Kentucky could cost upwards of $35,000 USD per year for tuition, room, and board in 2025 assuming a conservative 6% inflation rate. How many of you paid less that that for your first home? While the situation is indeed frightening, an early start and the right research will help make your children’s dreams a reality and not totally derail your financial future.
Many families will have to choose between savings for college and saving for retirement. It is a choice they make and there are no concrete right or wrong answers. Will you delay retirement to pay for your child? Should your child have to pay all or some of their own way for you to retire on time? That choice is personal, and values differ everywhere. Begin your approach with this conversation.
There are numerous savings vehicles that can be used to save for higher education. Selecting the right option for you is important, but not nearly as important as simply getting started. Borrowing money for college can make the entire experience cost over twice as much as saving ahead of time. Stop procrastinating and set something aside. When this first step has been made, you are committed enough to begin exploring your options.
1) College Savings Plans – These are terrific in that countries often allow such plan to accumulate large sums of money, and often growth is tax-free (sometimes restricted to certain levels) when used for higher education. Downside factors are that if the child chooses not to go to college, you will pay taxes and penalties.
2) Children’s Savings Accounts – These accounts which are for children, yet usually controlled by a parent or guardian have few restrictions besides the fact that at some age, often age 18 or 21 it becomes the child’s money. The benefits over saving in your name may be having this money taxed at the child’s rate. However, that benefit might be out weighed when Junior decides on a Corvette in lieu of Harvard or University College London.
3) Mom & Dad’s Money – This methodology assumes you save the money unrestricted in your name to keep full control, and simply deal with the tax implications.
Making the proper decision here depends on four factors:
1) How much money do you make?
2) How much money do you have?
3) How well do you know your children?
4) How important is college savings vs. your own retirement.
If you can answer at least a few of these questions you can arrive at a conclusion. For instance a family with a young child might utilize a child’s savings account for the first few years. Once they begin to know their student and their income they can decide whether to continue this approach or begin using a more restrictive savings vehicle. Just take a few minutes to match your life with the options available to you where you live. The right decision could make your savings plan very prosperous.
If you live in a country where the government offers financial aid or school’s offer scholarships, be sure to calculate what you might be expected to pay. Understand that doing this early will only give you an estimate based on your projections, but it will help you understand just what your liability may be. In the United States this is called the Expected Family Contribution (EFC). Knowing how much you are expected to pay will often influence how much you save.
Of course this is all in addition to your retirement savings. Many countries offer retirement programs with tax benefits similar to college plans. This usually takes less analysis because while college is a possibility, it is nearly a certainty that you will retire at some point.
In both instances, it is important to manage the way you invest. The longer your time horizon, the more risk you can usually take in order to achieve your upside potential. Be mindful, that you will likely want to take less risk with your college savings sooner than you might take less risk with your retirement savings. (Assuming college comes before retirement). The last thing you want is a significant exposure to stock investments and a correction in global markets right when its time for your child to head off to the university.
Use this opportunity not as a time to get discouraged, but a time to get prepared. Whether your children or perhaps even grandchildren are 16 months old or 16 years old the time to save was yesterday. Take the information you have, build a budget, and start saving for both higher education and your retirement. Getting the finances under control and on track now will help ensure that come Freshman year your worries are about Parent’s Weekend and what your child does without a curfew, not about making the tuition payment and derailing your retirement dreams.