Financial Planning Priorities: Retirement vs. College
Retirement Planning is often the key objective when someone seeks the help of a financial planner. Their main objective is figuring out how much money they need to save and invest in order to live a comfortable lifestyle throughout their retirement.
In addition, many people are concerned about college savings plans because sending their child to college typically occurs well before they are ready to retire from their career. Often when a child is born, emotions run high and inevitably the discussion turns to saving for college since the projections for what it will cost by the time this baby moves into a freshman dormitory seem astronomical. In fact, one college calculator I use to forecast the cost of college 18 years from now estimates $70,000 annually for an in-state public school for tuition, room, and board. Double that amount when considering a private school. It’s no wonder that parents and grandparents begin worrying about saving for college as soon as a child is born!
As much as we want to start saving for a child’s education, I must caution you to only begin doing so after you are certain that your own retirement savings are in good shape. People are living much longer, there are questions about the future of Social Security and we’re seeing a great reduction in pensions and other defined benefit plans available to retirees. The importance of saving as much as we can for our own retirement has to be our top priority.
Consider this: loans are always readily available to support a college education, but they most certainly aren’t for retirement. Before you start tucking away money for a child’s education, answer this, “Are you already doing enough and saving enough for your own retirement? Are you contributing the maximum amount each year to your retirement plan provided by your employer? Are you contributing each year to a Roth IRA for both you and your spouse, if you are eligible? Have you consulted a financial advisor to help you determine if you are on track to have enough money in retirement to live the type of lifestyle you would like to lead?” If the answer to any of these questions is no, then you may want to seriously consider whether saving significant amounts of money for college is the best use of your resources right now. If you come up short with your retirement savings, you may not have many options to make up for what you didn’t save when you had the chance.
In addition to choosing to save money for college rather than for retirement, the other mistake some parents make is depleting their retirement funds in order to pay for college. Since many retirement plans and IRAs will let you take money out to pay for college without any penalty, people do this, not thinking about the long term effects it can have on their retirement. If you are already struggling to save enough for a comfortable retirement, taking a big chunk out of that savings may leave your nest egg woefully malnourished.
Now, let’s assume you are on track for retirement and have extra money that you can begin to set aside for college. Congratulations! There are several different options available to you. One of the most popular ways to save for higher education is 529 Plans, named after Section 529 of the Internal Revenue Code, which established potential tax advantages for qualified college savings plans, including tax-deferred growth and exclusion from income tax purposes when used for qualified higher education expenses. Nearly every state has a 529 Plan featuring different benefits and advantages. For example, if you live in Virginia and contribute to the Virginia 529 Plan, you can deduct $4,000 per account per year from your Virginia state taxes.
Some states (including Virginia) offer a variety of pre-paid tuition options through which you can buy future semesters for your child at today’s tuition rates. Keep in mind that you are buying tuition for state schools in your current state, not out of state or private colleges. If your child, someday, chooses an out of state or private college, the money you paid into the prepaid option will still be available to you, but it will certainly not cover all the expenses. Think carefully about this option before choosing it. Other 529 Plan options can include investing in different mutual fund families (these will vary by state) or even FDIC-insured options for more conservative investors.
One downside to 529 Plans is that if the money is not used for higher education purposes, a penalty can be assessed when the money is withdrawn. Thankfully, there are plenty of different educational services that qualify for higher education and beneficiaries can be changed to other family members, so that you don’t lose the benefit of what you’ve saved if your child does not end up going to college after all.
There are other ways to save for college such as Coverdell Savings Accounts, in which the money can be used for any type of education including primary and secondary schools. Additionally, some Custodial Accounts and Life Insurance products can be used. Make sure you research these options because they may have much lower contribution limits, tax consequences, or even create a negative impact on your FAFSA financial aid applications.
Please note that investors interested in investing in a 529 College Savings Plan or mutual fund should consider carefully the investment objectives, risks, charges and expenses before investing. The official program offering statement or prospectus, which includes this and other important information, is available from an investment professional and should be read carefully before investing. The investment return and principal value of an investment will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than original value.
There are plenty of options available to you as you consider your child’s or grandchild’s future education. Just make sure that saving for Junior’s college isn’t done to the detriment of your ability to save for your golden years.
Rich Roth is a Financial Advisor with Stifel, Nicolaus & Company, Incorporated and also hosts “Investment Game Planning 101” Saturday mornings at 9 a.m. on WLNI-FM. Rich also teaches continuing education classes “Investing for Retirement” and “Investing Basics” at Central Virginia Community College.