May 2001

 

Save for Retirement and Your Children's College Education
Jamie Thompson, thompsonja@missouri.edu

Your choices could be: a) make sure you have enough to retire comfortably and give the kids what’s left over; b) set up college savings plans for the children and hope that by the time you’re watching Golden Girls reruns you’ve sold a screenplay to Spielberg; c) cut out all vacations and trips to Starbucks for the rest of your life and save like a maniac; d) rationalize that if you don’t know what to do, it means you should do nothing.

As hard as it is to put yourself ahead of your children, you will feel even worse at retirement if you don’t. Your children will attend college if they want to, with the help of financial aid. In saving for your retirement, begin as early as you can. If you are in your 20s, time is definitely on your side. Not only will you have more years for interest to compound, but you can invest more aggressively for higher returns, because you have time to weather market fluctuations. Participate in your company’s 401(k) and contribute the maximum allowed by the IRS. If you have money left over, consider $2,000 a year into one of the IRAs.

If you are in your 30s, you are more likely to have more debt and a more complicated financial picture—marriage, children, a home and a mortgage. At this stage, you may want to whittle down debt and take the first steps toward creating wealth. Supplement your retirement savings and emergency savings accounts with a taxable investment account.

In your 40s, your time is getting shorter. There are greater financial obligation—making more but feeling poorer. Now is the time to take a hard look at where you are spending your money and cut expenses. Focus on a percentage of your income going towards investments of some kind.

If you have not saved enough for retirement by the time you are in your 50s, you will need to consider seriously about postponing it, scaling back you lifestyle, and taking a part-time job once you do retire. If possible, you should wait until age 65 or 70 to start collecting Social Security. Although you can start receiving benefits at age 62, by waiting until age 70—when you must start collecting—you could increase your monthly payment substantially.

So many parents today are running scared about the potential cost of their children’s education. College doesn’t cost $33,000 a year at most schools, and it’s not likely to cost $125,000 a year when your kids are ready. Almost half of all full-time undergraduates attending four-year institutions pay less than $4,000 a year in tuition and fees, and about 70% pay tuition charges of less than $8,000, according to the College Board, a not-for-profit association that administers the Scholastic Aptitude Test (SAT) and does research on college-cost issues. Only 9% attend institutions that charge $20,000 or more per year.

Since the 1970s, financial aid has exploded to meet the needs of aspiring students. For the 1999-2000 school year, some $68 billion in financial aid (grants, loans, and work-study aid) was handed out—an increase of 88% from a decade ago. The majority (58%) of federal financial aid was awarded to those who demonstrated need, based on the cost of the college attended and family income.

The sooner you start saving the better—but don’t panic! As you read, there are things that you can do. By the way, the answer to the question is NOT b, c, or d.

Source: Adapted from Family Money, March/April 2001.