Saving for retirement and your child's education

Anthony Sandonato, The Daily Record Newswire

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you balance these two goals? The reality is, saving for your retirement and your child's education at the same time can be a challenge. However, the good news is that you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are

The first step is to determine what your financial needs are for each goal.

For retirement, the following questions should be addressed: 1) How many years until you retire? 2) Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what is your balance? Can you estimate what your balance will be when you retire? 3) How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.) 4) What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be content to stay in one place and live more simply? 5) Do you or your spouse expect to work part-time in retirement?

For college savings, you should ask yourself the following questions: 1) How many years until your child starts college? 2) Will your child attend a public or private college? What is the expected cost? 3) Do you have more than one child for whom you will be saving for? 4) Does your child have any special academic, athletic or artistic skills that could lead to a scholarship? 5) Do you expect your child to qualify for financial aid?

Many online calculators are available to help you predict your retirement income needs and your child's college funding needs. You should determine what you can afford to put aside each month.

Implement a plan

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you will need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind that the amount you can afford may change from time to time as your circumstances change. Once you arrive at a dollar amount, you will need to decide how to allocate your funds.

It is important to emphasize that retirement takes priority. Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you will miss out on years of 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 is no such thing as a retirement loan!

If possible, save for your retirement and your child's college at the same time. Ideally, you will want to try to pursue both goals at the same time. The more money you can save 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, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years.

If you are unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you are pursuing both goals at the same time does not necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

If the numbers say that you cannot afford to educate your child or retire with the lifestyle you expected, you will need to make some sacrifices. Here are some things you can consider: 1) Defer retirement: The longer you work, the more money you will earn and the later you will need to dip into your retirement savings. 2) Work part-time during retirement. 3) 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. 4) 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. 5) 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). 6) Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college. 7) Send your child to a less expensive school: You may have dreamed that your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Do not 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. 8) 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 for 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 college.

Balancing retirement planning and college education savings can be extremely challenging. By having a proactive, long-range plan in place, steps can be taken to successfully achieve both goals.

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Anthony G. Sandonato, CPA/ABV, CVA, Esq., is a partner in the Rochester office of Mengel, Metzger Barr. He can be reached at (585) 423-1860 or by email at asandonato@mmb-co.com.

Published: Mon, Feb 09, 2015

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