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Juggling the Costs of Retirement vs. College

Juggling the Costs of Retirement vs. College

Parents today are faced with the need to save for their retirement and the future education of their children. But this double responsibility may feel overwhelming—which could jeopardize both goals if inertia is the result.

For one thing, a private college can set you back a whopping $170,000 per child these days, with costs set to increase in the future. Add that to your own retirement saving needs, and you could have a real dilemma.

Traditional wisdom says you should fund the retirement account first, and that advice is right for a host of reasons, says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation. “There’s no one you can rely on for retirement but yourself,” she says.

Nonetheless, sorting out these two competing priorities can be a big financial task. But with some smart financial planning, it’s possible to do your duty as a parent and still keep your own long-term security a top priority. It’s all about making reasonable, informed decisions in a complex environment, Carrie notes.

The logic of retirement

You must keep focused on your retirement savings, even as college looms, and there are plenty of incentives to do so.

If you can contribute to a retirement account like a 401(k) and receive matching contributions from your employer, that’s “free” money that you probably won’t want to refuse. For example, if you earn $100,000 a year and your company matches 50% on the first 6% you contribute (a common arrangement), then if you save at least up to the full match, you’d sock away $9,000 a year for retirement ($6,000 of your own plus a $3,000 company match). You would also be reducing your taxable income.

Receiving an employer’s full 401(k) match is often considered the baseline for smart retirement savings, but you could potentially save even more in tax-advantaged accounts:

  • In 2015, you can save up to $18,000 ($24,000 if you’re 50 or older) in a 401(k) plan, not counting your employer’s contributions.
  • You can also contribute up to $5,500 ($6,500 if you’re 50 or older) in a traditional or Roth IRA. Both offer tax-free growth and may include more investment options than an employer-sponsored plan.

But what ultimately matters when you’re juggling saving for retirement with other priorities is ensuring that you’ll have as much money as you’ll need in retirement. Use the Schwab retirement calculator to see where you stand and whether any adjustments might be in order.

When it comes to financing retirement, there are typically three potential sources of income—Social Security, company pensions (if you’re lucky enough to have one) and personal savings. If you haven’t saved enough, your options—such as moving in with your children or other relatives—may be slim and likely unappealing to everyone concerned.

College funding options

Of course it would be ideal to have all four years covered by the time your child starts freshman year. But if you can’t pay the full tab, you and your children still have plenty of choices.

  • Student earnings: Kids can pay some college expenses themselves by working during the summers and part-time during school. This not only takes the edge off college costs, it gives kids work experience and potential job references, Carrie says.
  • Loans: Students can take out low-cost government loans, which come with increasingly flexible repayment plans. Indeed, one repayment plan allows graduates to pay just a portion of their discretionary income. The less they make, the less they pay. With this income-based repayment plan, any debt that’s left unpaid after 25 years of on-time payments could be forgiven by the federal government (if the student qualifies). Private loans are also available, but students should pay careful attention to the terms and conditions, as some may require immediate payments.
  • Grants: Financial aid cobbles together federal, state and college-based grants and loans for students with demonstrated economic need. You may not know all the options under that umbrella. For example, many private colleges—including Harvard, Yale, Georgetown and Duke—have programs in place to meet 100% of need for even middle-income families.
  • Scholarships: Academic and athletic scholarships can also play a role. Thousands of students receive full-ride or partial-pay scholarships every year. Scholarships are available that reward everything from good citizenship to a specialized skill. Searching for these scholarships can be as easy as filling out a questionnaire on one of the many scholarship search sites available.
  • Family gifts: You’re normally restricted to a $14,000 gift per year to any individual without generating a taxable event. However, there’s an exception for paying college bills directly to a school, says Carrie. Anyone who is willing and able to pick up the tab can pay 100% of a child’s college costs to the institution directly, without any reduction in the ability to make additional tax-free bequests later. This gives grandparents, aunts and uncles—or anyone, for that matter—the opportunity to make a difference in their family member’s future. It’s also a smart estate planning tactic.
  • Academic adjustments: To cut costs, students can take AP tests in high school that offer college credit if passed; attend an in-state public university; or complete the first two years at a community college before transferring to a four-year university.
  • Pay-as-you-go plan: College costs can also be paid through ongoing income, with many colleges offering monthly payment plans for parents.

Save early and often

The earlier you start, the better, of course. Ideally, you can set up a college account when your child is still in diapers, Carrie says. That gives compound interest a chance to multiply your savings and make financing college just a little easier. But on the flip side, it’s never too late to start. Every little bit will help.

Chart: When saving for college, time is your ally

You have several college savings options. One possibility is to set up monthly contributions to a 529 plan, which is a specific type of tax-favored college savings account. Most 529 plans allow regular contributions of as little as $25 to $50 a month. If you have friends and relatives who want to help, they can contribute, too—perhaps in lieu of birthday or holiday gifts.

As with any investment, it’s possible to lose money by investing in a 529 plan. Additionally, by investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state’s plan (be sure to check, as not all states offer tax breaks).

A few more strategies to consider here: It can ease anxiety (and aid your financial planning) if you decide to save a fixed amount, say $100,000 per child. This also gives you a framework for setting expectations with your future grad. You might also decide to help with a certain percentage of college debt after graduation, which buys you more time.

As you can see, with so many ways to pay for college, it’s possible to strike a balance in your own life between college and retirement. After all, saving for retirement should never be placed on the back burner.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

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