Like many parents today, you probably feel like you have multiple financial goals you need to juggle at the same time. We understand this kind of financial pressure and want to help you make solid financial choices for you and your family. For example, one theme often comes up in discussion with the high earners with whom we work: most understand the importance of saving for their retirement but also hope to set money aside to help their children pay for college. How to do both?
In fact, an Ameriprise study found a third of parents with assets of at least $100,000 said they would delay their own retirements to help their kids fund their higher education. That’s a big number. You should first understand that you don’t have to choose between your own comfortable retirement and your child’s college fund. We want you to make informed decisions that will work out best for every member of your family and that’s what this blog is all about.
Balancing Retirement and College Saving in Four Simple Steps
How can you possibly save enough for retirement while still helping your children fund college? Ease your savings burden and meet your goals by considering these four simple steps:
1. Set Priorities
Unless you have an unlimited amount of money at your disposal, you will need to make some choices when you balance your important goals of saving for your own retirement and helping your children with school. To get started, you should consider your priorities. First, consider the fact that your children will have more flexibility with school funding options than you will have during retirement.
For example, your children can take out loans and consider beginning their college career at a cheaper school. Some children can even earn some college credit while they are in high school or save part of their earnings from summer or part-time jobs. During retirement, you will have fewer options, and nobody will offer you a loan to fund your retirement.
2. Get Time on Your Side
The earlier you begin saving, the more time you will have to watch your money grow. These are some steps you can take right now:
- If you have a 401(k) plan at work, you can help yourself by taking advantage of automatic payroll deductions and possible matching contributions from your employer.
- If you don’t have a savings plan at work, you can still have automatic investments withdrawn for an IRA.
- Every time you increase your salary, you should make at least a proportional increase in retirement savings.
Even if you balance your savings more on the side of retirement than college, you can always divert retirement savings to college if you have to. You could face tax consequences if you take money from some retirement accounts, but the growth of early contributions can easily make up for tax penalties.
3. Maximize Your Savings and Investment Opportunities
Few people ever regretted saving too much money for retirement. Even fewer regret starting a savings plan early instead of later. Closer to the time your child gets ready to think about colleges, you can always rebalance your portfolio if your retirement accounts are well funded.
Of course, you can consider funding such tax-advantage college accounts as a 529 plan, Coverdell ESA, or UTMA . For more information on these kinds of college accounts, read our recent blog post about college savings. After you’ve maximized tax-advantaged accounts, you could also consider regular investments that will provide you with the flexibility to use them in any way you choose without regard to tax consequences. Adequate funding and some diversity in the way you save can provide you with more security too.
4. Talk to Your Children About Their Future Plans
By the time your children begin high school, they should start to think about potential majors and which colleges interest them. While their ideas could change, you need to start estimating the costs involved with achieving their goals in order to allocate savings and provide guidance.
Don’t fear discussing money with your children. A recent study published on Science Daily found that children do pay attention to financial issues and having guidance from parents helped them avoid misconceptions and make better choices.
One topic you could begin with could include the financial consequences of college choices. Our blog on college financing options points out that you could save tens of thousands of dollars by having your student begin his or her higher education at a community college, maintain good grades, and then transfer to a university to complete their degree. Even after they enter college, many students change their minds about majors, so starting at a community college also minimizes the risk of wasting money on classes they won’t need later.
Mainly, you need to make your kids understand the responsibilities you expect them to shoulder to get their education. Depending upon your unique situation and your child, some of these responsibilities could include earning some college credit in high school with AP classes, taking loans to help with finances, and establishing their own savings account from summer jobs. You can also take this chance to talk about the outcomes of potential career paths vs. the likely cost. When kids understand the cost of their college choices, they’re likely to make better choices about their concentration and the school they choose.
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The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.