A college education. Retirement. What do these major life events have in common?
One shared characteristic is that each comes with a price tag. Here’s another: If you have school-age kids, you might be facing the challenge of having to decide which goal to save for. They’re both important. So how do you make the choice?
Here are some suggestions that can help you reach a sensible solution.
* Eliminate excuses for not making a decision. Procrastination can be costly. For example, to accumulate $100,000 in five years, you’d have to deposit a little over $1,500 every month in an account that earns 4%. But with a ten-year time horizon, assuming the same return, you can build up $100,000 by socking away less than half that amount, or approximately $700 per month.
What you need to know: Estimate the total amount required for both goals, how much time you have, and how much cash you’ll need to set aside on a regular basis.
* Expand your resource horizon. Once you’ve computed the expense side of the equation, figure out how much you can afford to save. You may find that, with one pool of income and two goals, there’s not enough money to fully fund both goals.
But who says you have to pay for everything yourself? Turn an obstacle into an opportunity by searching out alternatives. For instance, while your income in retirement may be dependent in large part on your savings, there are plenty of options for paying
Where to look: Investigate the possibility of advanced placement credits while your child is still in high school. Other potential sources of help include scholarship prospects, federal work/study programs, and summer internships.
* Adopt a flexible approach. Broadly speaking, you have three alternatives for divvying up your available savings between the two goals. You can save for retirement only, save for college only, or opt to do both.
Yet within each alternative are creative strategies. As an illustration, you could start out by saving strictly for retirement, shift toward saving for college when your child reaches a certain age, then switch back after graduation.
Caution: Be careful of falling into the deadline trap. It’s likely your kids will attend college before you retire. Since the tuition deadline is closer, you might be tempted to reduce or eliminate retirement plan contributions in the early years of your savings plan in order to focus on education savings.
But consider this: A typical retirement will generally last longer and cost more than your child’s education. By putting college tuition first, you could end up with less than you need in your retirement nest egg. Instead, take your overall time horizon into account.
For assistance with the numbers, give us a call.David Bradsher, CPA