It’s a dilemma that every parent faces at some point during the wealth management process. You know retirement is a major goal, and you recognize the need to accumulate retirement assets. However, you also want to provide the best for your child. That begs the question: which should be your top savings priority, college or retirement?
The truth is you don’t have to pick one or the other. Both are important goals, and you can plan for each of them simultaneously. They aren’t mutually exclusive. Yes, you do need to accumulate a substantial amount of assets to fund a comfortable and enjoyable retirement. But that doesn’t mean you can’t also contribute to your child’s education.
The key is to develop a detailed, customized plan specific to your needs and objectives. A plan eliminates uncertainty around both retirement and education, and it provides a roadmap for how to reach your goals.
At Total Wealth Planning, we customize our planning for every client we serve, but with a consistent process. Below are a few tips from our planning experience to help you fund both your retirement and your child’s education.
Identify Your End Points
You wouldn’t start a road trip without first identifying your destination. The same should be true of any financial goal. To develop a strategy, you have to know where you want the plan to take you. Retirement and college planning aren’t exceptions to this rule.
With retirement, it’s helpful to create a retirement vision statement, which is a written document of what you want your retirement to look like. Write down the trips you’d like to take, the hobbies you want to pursue, and even the legacy you want to leave for your loved ones.
Your retirement vision statement can help you create a projection of your expenses after you retire. You can then use that number to estimate the income you will need to live comfortably in retirement.
Once you know your required income, you can factor in cash flow from sources like Social Security and pensions before calculating the amount of savings you need to have to meet your expenses. Your savings goal is your destination in the retirement planning journey.
You’ll want to perform the same analysis on college costs. Start by having a conversation with your child about their educational goals. Where do they see their self? At a high-level private school? At a moderately priced public school? Trade school?
Also, discuss lifestyle choices related to college. Do they plan on going away or living at home? Could they work while attending school or will they need to focus all their energy on academics? What changes could they make now to qualify for scholarships, grants, and other forms of aid?
Once you have a clear picture of your child’s educational goals, start developing cost estimates. At Total Wealth Planning, we help our clients determine costs for everything from tuition to room and board to books and much more. We also account for educational inflation, which is often greater than overall inflation. This cost estimate serves as your college savings target.
Develop a Savings Strategy
After you’ve identified your goals, the next step is to develop a savings strategy for both goals. You can back into the amount you’ll need to save each year by considering your savings targets and the number of years you have until the goal needs to be met.
Of course, it’s also important to consider investment growth. In the case of retirement, you may have many years or even several decades before you plan on leaving the working world. Even a modest amount of growth compounded over an extended period can significantly boost your savings.
For college, you may have a much shorter time horizon, especially if your child is already in high school. However, it’s still possible to achieve some growth in a short timeframe. You’ll want to carefully build an allocation that balances growth potential with risk minimization.
You may find that you need to save more than you can afford to put away. If so, that’s when it’s time to make choices about your goals and your current spending. Look for areas to cut back so you can boost your savings level. Or evaluate your goals and see if you should adjust them to reduce your target.
Identify Alternative College Funding Options
There’s one other important variable to consider as you develop your savings strategy. Remember that you always have alternative funding strategies available for college. That’s not true of retirement. Even if you don’t hit your college savings goal, your child still may be able to achieve their dreams.
For example, they could qualify for scholarships that reduce the out-of-pocket costs. They also may be eligible for grants or work-study programs.
Also, don’t completely discount the idea of loans to at least partially fund your child’s education. If your child is pursuing a career that will likely generate a high-level of income right out of the gate, loans may not be a bad funding option. Consider that a few years of low-interest loans could finance a high-income career that lasts several decades. That’s not the worst trade-off.
The key to balancing both goals is to plan well in advance. The earlier you start planning, the more time you give yourself to develop and implement a strategy. With focus and discipline, you can fund your retirement and your child’s education.
At Total Wealth Planning, we help families like yours fund their biggest financial goals. Let’s connect soon and start the conversation. We welcome the opportunity to help you develop your strategy.
