Will Education Costs Kill Your Retirement Plans? This Financial Advisory Firm Explains
Worried about how to save for retirement and help your child pay for college? You’re not alone. According to the latest Sallie Mae survey, 43 percent of college expenses are covered by family income. After almost 50 years of helping families prepare for their futures, Linscomb & Williams has learned that whether you’re a few years or a few decades from retirement, the prospect of paying for your child’s education in addition to saving for your retirement years can be daunting. So, let’s take a look at some recent trends in education costs, how they can impact your retirement plan and what a financial advisory firm can do to help you be better prepared.
Trends in Education Costs
From 1988-1989, the cost of a public, four-year college was $3,360 per year. Add to that room and board, and you were spending about $9,480 per year for an education. By 2008, those numbers increased to $7,560 and $16,460, respectively. And in 2019? Tuition alone for a public university averages $10,230, and with room and board, your expenses jump to $21,370. That’s not to mention private universities, which can cost even more, nearly doubling in cost in the last decade.
However, while public education costs in the past decade have increased by about 30 percent, according to data from the U.S. Census, the median American household income only increased by about 24 percent.
Simply put, American incomes are behind when it comes to paying for steeply rising education costs, which makes planning for your student’s education and your retirement all the more important.
Retirement or Education: Which Comes First?
As a parent, you probably want to give your child the world. That’s why families cover nearly half of education expenses in the U.S., and why 21 percent of families borrow money, either in loans or from their personal savings or retirement fund, to help with college payments. While the
motivation to help children is admirable, borrowing can be dangerous.
Pulling education funds from your retirement account can hurt you in more ways than one. Taking money out of your 401k before the age of 59-½, for example, can result in a 10 percent tax penalty. You’ll also have to consider the potential for a higher regular income tax bill during the year you withdraw. Additionally, taking out money can have a compounding effect, lessening the growth potential of your retirement fund by a significant amount.
Putting your child’s education before your retirement needs may sound like a good idea in the short run, but later on, it may put even more stress on your family as your loved ones watch you struggle financially in retirement. You may even require financial assistance from your children as they start their own families, which can put a strain on both you and your children.
Saving for Both in 4 Steps
It is possible to save for both your retirement years and your children’s education. Here’s how:
Step #1: Hire a Financial Advisor
If your roof was leaking and construction is not your expertise, you’d hire a professional to fix it, right?
The same can be said about financial planning. Just the thought of payments, budgeting and investing can quickly become overwhelming, especially if you aren’t experienced with financial decisions. A financial advisor can help you by making a strategic financial plan that tackles your specific goals, which may include paying for college.
When choosing a financial advisory firm to work with, make sure you look for a fiduciary advisor who has a legal obligation to put your best interests first. Unfortunately, there are a lot of salespeople who pose as financial advisors and will readily sell you a financial product that benefits them, but may be less than optimal for you. So make sure you do your homework, ask the right questions and get the answers in writing.
Step #2: Save for Retirement First
Before looking at your college funding options, make sure you’re making the most of your retirement plan. If your employer offers a match program, you should be putting in at least enough to get the full match amount – after all, it’s basically free money! A financial advisor can help you decide the account best suited toward your plans, be it your employer’s 401k, a Roth IRA or another investment plan. It is important to develop an efficient savings plan that can make the kind of difference your family deserves.
Step #3: Start a College Savings Fund
When creating a comprehensive financial plan, an advisor should also take into account your goals. He or she can help you look at your budget and see what funds are left over for goals such as college savings. An advisor can also help you prioritize, making sure your family has enough money to cover regular expenses, accumulate an emergency fund in case of job loss, illness or other unforeseeable financial hardships, and then, consider which kind of savings plan is best for your lifestyle.
The most popular ways to save for an education are 529 plans, which are offered by your state’s government. There are two types of 529 plans: Prepaid tuition plans and education savings plans.
For prepaid plans, participating colleges allow parents to pay in advance for credits at today’s prices, allowing them to pay less overall if tuition prices continue to soar. However, prepaid plans are generally accepted only by public universities within your state. Credits may not be readily transferrable to other schools out of state.
Education savings plans have a broader scope and act like a 401k investment plan, helping you save money for future college tuitions and fees. These plans are flexible since the funds accumulated can be expended on virtually all accredited universities in the U.S. and also by some educational institutions in other countries. All 50 states offer at least one type of 529 Plan, so be sure to look at what your home state has to offer to see if it fits your needs. Look for a financial advisor who is well-established in the state in which you live, as he or she should be aware of any local programs you may be able to take advantage of that you’re not.
Step #4: Talk With Your Student
Families are becoming more and more open about college expenses. In fact, Sallie Mae reports that 51 percent of families decide how they’ll pay for college together, and in 18 percent of families, the student is the decision maker when it comes to education payments.
As your children approach the college application process, talk with them about your existing investments, savings and budget. Discuss colleges based on both academic programs and costs, especially when it comes to private universities. Together, you can make the best decision for your family, and help your child understand the key financial decisions they’ll have to make as a new, college-attending adult. Many times, careful selection of universities in the application process can make a major difference in the cost burden for the family. It is perfectly acceptable to have a frank conversation with your children about the level of financial commitment you can make toward higher education. It is not dissimilar to helping with the purchase of a first car. Most parents do not say, “Whatever you like, we’ll get it for you.”
A financial advisory firm may also be able to help here. Linscomb & Williams has been helping families prepare for their futures since the 1970s, and therefore, has helped not only many parents, but also many of their children. And even some of their grandchildren. Talk with your financial advisor about how to best educate your children about money and whether he or she is willing to talk with your children as well.