Retirement Should Trump College as Parents' Savings Priority
BY MICHELE M. MELENDEZ©2006 Newhouse News Service
More stories by Michele Melendez
Claire McGuire and her partner save a combined $600 each month for retirement through 403(b) plans and put $75 monthly into 529 accounts they each established for their son, Leo. (Photo by Jane Therese)
Listen up, parents: Save for your child's future, but not at the expense of your own.
Prioritizing savings goals can be challenging at any life stage. For those with young kids, the calculations become uniquely complicated. Financial advisers caution parents to resist pumping money into college savings before securing their retirements.
"Think about yourself first," said Mary Staton, Charlotte, N.C.-based co-author with her husband, Bill, of "Worry-Free Family Finances: Three Steps to Building & Maintaining Your Family's Financial Well-Being."
Yeah, it might sound selfish, but that strategy is likely more generous in the long run.
"Too often, parents save for the children's college and then retire with little money available for their support in their later years," said Karrol Kitt, who teaches personal finance and family resource management at the University of Texas at Austin.
Claire McGuire, 29, of Philadelphia wants to spare her son, Leo, who will turn 3 in December.
"I don't want to say to him, `I can't pay my mortgage, because I saved to put you through college,"' said McGuire, a librarian.
She and the boy's father, an archivist, save a combined $600 each month for retirement through 403(b) plans, the nonprofit sector's version of the 401(k). Employer contributions add another $200, combined. Plus, they have individual retirement accounts to which they occasionally make deposits.
They're not neglecting college savings: $75 is automatically transferred monthly from their joint checking account into 529 accounts they each established for Leo about two years ago.
State-sponsored 529 plans, popular college savings vehicles named after a section of the Internal Revenue Service code, allow money for college to grow free from federal income tax, and from state tax in many cases.
McGuire figures they're on track to paying for half a public education.
"The way that we're going, there's no way -- unless he got massive scholarships -- that we would be able to pay for all of it," she said. "I'm just trying to take the edge off by starting early."
The College Board, a New York-based authority on college expenses, reported that for the 2005-06 school year, the average college cost, including tuition, fees, room and board, was $29,026 for four-year private schools, up 5.7 percent from the previous year, and $12,127 for four-year public schools, up 6.6 percent.
Suppose expenses rise 5 percent a year over the next 18 years, when today's babies will be freshmen. Using the nonprofit board's online calculator -- available at www.collegeboard.com/student/pay -- the price rises to $69,855 a year for private and $29,185 for public institutions.
Mike Hubbell, 32, of Mont Clare, Pa., had seen similar projections. So shortly after his son's birth in 2004, he opened a 529.
"I just thought, `Well, I better start saving now,"' said Hubbell, an engineer. "I don't want to get myself in a situation where I've got to take money out of retirement or take out a second mortgage on my house, or something like that."
Back when he was in college himself, Hubbell learned that he should start saving for retirement early.
The Washington-based American Savings Education Council offers this example: Say you stash $2,000 a year in an account with a 5 percent rate of return, compounded monthly -- reaping interest on both the deposits and the interest already earned.
If you contributed from age 20 to 30 and stopped, you'd have $159,557 by age 65. But if you start later, at age 40, even saving longer, to 65, you'd still have less by age 65: $99,254.
Hubbell began saving right after graduation, signing up with his employer's 401(k) program, a tax-deferred retirement plan whose funds are invested. Many companies, including Hubbell's, match a certain percentage of what their employees funnel from their paychecks.
Since his son, Nathan, 2, was born, Hubbell and his wife, Sarah, 30, have had to scale back their retirement savings. Hubbell trimmed his contributions to his 401(k) from 15 percent to 10 percent. His wife, also an engineer, cut her work to part-time to care for their son. She has an individual retirement account but isn't making contributions to it.
"The goal is to go back to my original retirement savings level when Sarah goes back to working full time, which will probably be when Nathan and any future children are in school," Hubbell said.
It's all right to tweak savings, as long as retirement goals are still attainable, said Dallas Salisbury, chair of the American Savings Education Council and president and chief executive officer of its parent organization, the Employee Benefit Research Institute.
Often, though, Americans save inadequately for both retirement and college, he said, adding, "Ideally, if having your children get a certain education is important to you, then you basically adjust other aspects of your lifestyle."
That means driving a less expensive car, moving into a cheaper neighborhood and skipping the country club membership and other frills -- even that $4 latte.
Remember, financial aid can help your offspring. Scholarships, grants and loans can supplement savings.
"Your kids will get to college, with or without your help," said Ric Edelman, author of "The Truth About Money" and a Fairfax, Va., financial adviser. "Your saving money for them to be able to go to school is not required. It's desired. It's preferable. It's smarter. But it's not required."
The worst-case scenario: The children don't attend their first choice of school, they take longer to earn a degree and they accumulate more college-loan debt than they or their parents would prefer.
But college is an investment, Edelman said. And it's OK to pay off that investment while enjoying its benefits, potentially a better job and higher salary. Meanwhile, parents can't pay off retirement after retiring.
Oct. 19, 2006
(Michele M. Melendez can be contacted at michele.melendez@newhouse.com.)
