Tuesday, August 22, 2006

Quiz: Retirement vs College Fund?

Two financial pros discuss the "the pitfalls that most people suffer by saving for their child’s college education instead of their own retirement." Very interesting reading....

With school-age children and concerns about my so-called retirement fund, I read the following story pitch about the retirement vs college fund tug-of-war (below) with interest.

The text was sent to me by a representative for John Davis, President of private-sector retirement plans at Nationwide Financial and with Matthew Riebel, President of Nationwide Retirement Solutions.

Here's their text about this financial tug-of-war:

"Parents are typically selfless, always putting their children first. Retirement is one place where parents can’t afford not to be selfish.

When faced with the question of what should take precedence ― saving for your own retirement or for your child’s education, most parents would put their child’s needs first, but what they fail to realize is that postponing saving for retirement until after ‘little Jenny’ graduates from Harvard could have very serious implications down the line. Sometimes it takes a hard look at the numbers to put everything into perspective.

While you’re no longer in school or being tested, the following is one of the most important questions you need to answer – and while your grade doesn’t depend on it, your financial future does.

Question: Which parent is smarter and will be better prepared for the future?

Parent A, who consistently saved for retirement from child’s birth

Parent B who waited until after child graduated from college

Parent C who put retirement savings on hold for 10 years immediately before and during child’s college education

Correct Answer: Parent A.

For example a 30-year-old parent who began saving for their retirement when their first child was born, could have saved more than $750,000 if they had invested about 6 percent of their salary in a 401(k) and received a 3 percent employer match with a modest annual return of 7 percent.

Conversely, a person who began saving after sending their child to college would have only saved a little over $185 thousand at retirement. That’s 300 percent less money to live off of during the golden years. This calculation assumes the parent retires at 67 and had a starting salary of $35,000, which increased 3 percent each year until retirement.

Many parents feel compelled to support their children while they are at college and starting their first job. While this instinct is only natural, it is crucial to put your interests first.

If a person started saving for retirement and then put that savings on hold for a period of 10 years or so, before and during their child’s college education, they would save over $550,000 for retirement. While this is not as impressive a nest egg as in the first scenario it is quite an improvement over the person who began saving for retirement after their child graduated.

The following are tips from Nationwide Financial on how parents can save for both retirement and college:

1. Sit down with your child and discuss what you can and are willing to pay for in the way of tuition and other expenses.

2. Help your child research additional means of funding college expenses.

3. Apply for Scholarships and financial aid when appropriate. According to the College Board, there are more than 2,300 sources of college funding, totaling nearly $3 billion in available aid. Take the time to do the research. There are far fewer resources for retirement funding.

4. Encourage your child to contribute to his/her education by taking a part-time job

5. Look into dual-enrollment programs. Many states offer dual enrollment programs, which can help a student accelerate his or her educational goals, by enabling high school students to earn college credits during high school.

6. Student loans may make more sense than putting retirement savings on hold. With current interest rates on education loans of about 3.5 percent a child’s education can be financed with a low monthly payment.

7. Take advantage of products that can help pay for a child's) education without damaging your own financial future. For instance, a loan from your life insurance policy might help finance college expenses without risking your retirement savings, since you might need less coverage, as your children enter college.

Additional tips for saving for both retirement and college:

1. Start early and take advantage of the power of compounding. The sooner you start, the closer you are to reaching your goals. Today, many parents feel they can’t afford to save, but it’s surprising how little it takes to start building a nest egg.

2. Make it automatic. It’s easier to save money when you pay yourself first.

3. Invest extra money. If you receive unexpected income from a bonus, tax refund or inheritance, save a portion of that money for college.

4. Ask for relatives for help. Instead of having family members buy gifts for birthdays and holidays, ask them to contribute money to a college savings plan."


MoneyDummy said...

I LOVE this post. I've recently begun to listen to Dave Ramsey and understand why he puts saving for retirement in the spot he puts it in. This post reaffirmed that for me, so thanks!

Sally Parrott Ashbrook said...

Great post. As a child of parents who haven't handled money so well, I can assure you I'd rather know my parents can afford retirement than know they could pay for me to go to college. I say that even after having paid for college myself. It's just that important.

Frugal Duchess: Sharon Harvey Rosenberg said...

Thanks for your comments.
It's a tough issue.

I'm thinking hard about this quiz.
I appreciate your feedback.

prlinkbiz said...

I always pick answer D: put my money towards becoming financially independent and teach my kids to do the same. I know of three people who invested in real estate to put themselves through college, and fully intend to help my kids learn to first manage money- so they can afford the things they want in life for themselves.

Frugal Duchess: Sharon Harvey Rosenberg said...

Selling real estate to finance tuition is an innovative idea.

I once met a lawyer who financed law school by flipping property in South Beach. She purchased buildings when the Miami real estate market was really cheap. She cashed out for lots.
Thanks so much for your comments and ideas.

mapgirl said...

Great post. It's so true. I would rather that my parents saved for retirement instead of college for me. Right now, I worry about three retirements, mine and my parents. I'd rather worry about just one. ;-)

Frugal Duchess: Sharon Harvey Rosenberg said...


Thanks so much for your thoughts.
I have to get moving on my retirement fund, which took a major hit when I cashed out to bankroll my freelance writing career.

Meanwhile, I have three school-age kids and I'm thinking about college costs also.

Tiredbuthappy said...

Yeah, this is quite the dilemna. I'm walking this tightrope as well. A realistic look at our situation reveals that we should really be putting every spare dime into my spouse's retirement accounts (I have more saved and I'm younger). But that doesn't seem like a balanced approach. So we prioritize retirement savings, but also put a little aside for college.

I have been much less panicked about college ever since I decided that I would be at peace with myself if I managed to pay for half of my son's college out of savings. For the rest, we'll juggle scholarships, his savings, and of course, student loans.

Saving for half of one college ticket is much less daunting than saving for a full ticket. It also helps that I probably will not have more kids.

Frugal Duchess: Sharon Harvey Rosenberg said...

tired but happy: you raise good points. I like your 50 percent solution. My oldest child is 14 and I'm concerned. It's a tight rope, for sure