Raising children can be a very rewarding experience, but it can also be emotionally and financially complicated. The question many parents ask as their children grow into teenagers is, “how can I fund my child’s college education and save for my retirement?” This question can send even the most responsible parent into a panic – especially since more and more people are becoming parents at a later age and college tuition and retirement continue to grow more expensive.
Sometimes, parental instinct can take over and parents may consider directing all of their available savings into a college fund for their child. But before you make this kind of decision, know that there are several options to consider that make it possible to save for both education and retirement. With a financial plan to guide you, a balanced savings plan and a rational mindset, you can save for both financial goals.
Funding your child’s college education and your own retirement is generally not an either/or decision. Parents simply need to prioritize and determine what percentage of their income they can comfortably allocate to each. If you haven’t already taken this step, look at your monthly income and determine how much you can put into savings on a monthly basis. Once you know what’s available, decide what percentage will be allocated for college savings and to your retirement account. If you start this process while your children are very young, you may not have to adjust it as often as families who start a bit later, but it’s appropriate to re-visit (and possibly re-prioritize) your savings goals each year.
Keep in mind that your child can borrow money for his or her college education with low-interest student loans, but you can’t borrow money for retirement. You child has a lifetime to build credit, pay down debt and save for his or her own retirement.
The trick in funding both savings goals is to start as early as possible, and save what you can during a period of many years. Here are just two examples of investment tools to consider:
529 Savings Plan: Nearly every state offers at least one 529 savings plan – which is a savings plan operated by a state or educational institution designed to help families save money for future college costs.
Coverdell Education Savings Account (ESA): This is a tax-advantaged investment account designed to encourage savings to pay for education expenses. ESAs are also funded with after tax dollars. The investment grows tax-deferred, and distributions for qualifying educational expenses come out tax free. These accounts do have lower maximum contribution limits. From 2002 to 2012, $2,000 was the maximum contribution per year per child.
Note that earnings on nonqualified withdrawals from a 529 savings plan or an ESA are taxed as ordinary income and subject to a penalty.
Writing down your plan might help you prioritize your financial goals, track your progress and serve as a roadmap when you face tough decisions. Every family will have different priorities and values – and that’s okay. Your ability to achieve a financially secure retirement ultimately benefits both you and your children in the long-run.
When your child prepares to enter college, take time to talk with him or her about what you will and won't help with financially. It’s okay to expect your child to contribute to the cost of education through part-time work options and student loans.
There is one last component to consider when saving for both your own financial future and the educational needs of your children. It can be difficult if you find yourself having to restrain your generosity or, on the other hand, not being able to give as much as you hoped when your child goes to college. To avoid some of this emotional distress, set boundaries with your children and other family members if they request financial help. Lending and borrowing within your family can lead to financial and emotional issues, so before you act, consider all the options and make sure you’re in a financially solid position to help.
Whether you’re just beginning your career, starting a family or if you’re nearing the time you’ll send your kids to college, consider working with a financial professional.
Jose Vicente, Jr. CFP®, CLTC is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner ™ with Ameriprise Financial Services, Inc. in Saddle Brook, NJ. He specializes in fee-based financial planning and asset management strategies and has been in practice for 7 years. To contact him: http://www.ameripriseadvisors.com/jose.x.vicente 201-221-2700 ext. 2705. Ameriprise Financial Services, Inc. 250 Pehle Ave. Suite 500 Saddle Brook, NJ 07663. Advisor is licensed/registered to do business with U.S. residents only in the states of NJ, GA, NY, FL, SC, VA, PA, CT, DC. Ameriprise Financial and its representatives do not provide tax or legal advice. Consult your tax advisor or attorney regarding specific tax issues. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. © 2012 Ameriprise Financial, Inc. All rights reserved. File #149075