Helping your children pay for college is a noble goal, but it shouldn’t take full priority over saving for retirement.
Retirement Tip of the Week: If you want to create a fund for your children’s future education, that’s great, but learn how to balance saving for college with saving for your own retirement – you can’t take a loan for the latter.
Americans already have a lot to handle when it comes to their money – such as saving for a future goal versus spending in the present, juggling the rising costs of groceries and gas with taking a little but long overdue family trip, and so on. There are also countless other big ticket items to save for, such as a new home, starting a business or adoption costs. It’s hard to give priority to just one.
And choosing one goal over another isn’t exactly the best strategy either, at least if it means forgoing saving for the other completely. If retirement isn’t for another 30 years but your child will likely be starting college in 15, you may think all of the money you have available to save for a goal should go toward the education account, but that’s not necessarily true.
Compound interest can have a huge effect on how much money a person enters retirement with, and the key is to start saving early. Even if it’s just $100 every month going toward retirement while you push money toward other goals, it’s significantly better than $0 as those dollars will grow, as well as the interest or investment returns they earn over time.
It’s also important to remember that a student can take out loans for college. An individual cannot do the same for retirement. When you get to retirement, you’re likely only relying on whatever you’ve saved in your 401(k) or IRA, Social Security and a pension – if you’re lucky.
As you prepare for your child’s college costs, think about what type of school you can afford to save for (state universities are much less expensive than private universities, for example) and what other resources you might tap into. You can’t count on external factors as policies change, tuitions rise and people who said they wanted to contribute to your child’s education may not be able to do so when the time comes, but at least you can get an idea of what you’ll be working with later.
Families can start 529 plans, which are investment accounts earmarked for education. Some firms, such as Ascensus, let families share a link with others, who can contribute directly to this account for birthdays and holidays.
It may be too early to tell right now if your child will get any scholarships or grants, but depending on their age, interests and how their grades are, you can start searching for opportunities for financial assistance. For example, student athletes don’t just get scholarships for basketball and football – there’s also golf, fencing and gymnastics. Parents can search the web for potential scholarships, or ask financial-aid offices in high schools and colleges. The Department of Labor also has a searchable database of more than 8,000 scholarships, fellowships and grants.
And if a student loan is necessary when it’s time to apply for colleges, talk to your child about the responsibility that brings. Discuss college choices, the costs, the impact of the interest rate when payments begin and what plan you both have to pay it off in a timely manner. Many Americans are struggling with student loans decades after they’ve graduated, so the student should have a strategy for paying off the loan going into the process. Be wary of cosigning a loan though.
Meanwhile, keep putting money away for retirement and take advantage of your own resources. If your employer offers a match, try to meet it so that you’re getting “free money” in your retirement account. If you’re not having money automatically invested in a 401(k) or an IRA right now, set up automatic payments so you’re not wrestling with what to do with that money after it enters your bank account.
And remember adjustments are a part of life – you might have to halt contributions to any of your goals here and there if unexpected events pop up – but keep the big picture in mind. Here are a few more ways to maximize your retirement savings at any age.