Find ways to save for college and retirement
Supporting a family -
Find ways to save for college and retirement
Income taxes, college loans, insurance, vacations, mortgages, sports gear, video games, music lessons—and don’t forget groceries, gas for the car, summer camp and babysitters. Add it up and it’s no surprise the U.S. Department of Agriculture estimates that it costs the average American family approximately $200,000 to raise a child to age 18.*
In fact, planning for college and retirement creates one of the biggest challenges for family finances. There’s a huge difference, however, between planning for college and retirement and actually finding the resources to make them happen.
Since people are living longer, healthier lives, they need to save more. Today’s workers will pay more of their own retirement than their parents or grandparents.*
So what’s a parent to do? Practice new habits that will build savings for both college and retirement, not one instead of the other. Consider the following:
1. Keep a budget. If you don’t already keep a household budget, start. If you can’t come up with firm numbers, estimate them. You can always revise them later.
2. Include retirement savings in your family’s monthly budget. Even small, regular contributions grow large nest eggs. Start saving early. Remember the “magic” of compounded interest.
3. Save the maximum your budget and retirement plan allow. Does your employer’s plan include matching contributions for vested employees? The more you save individually, the more you’ll save overall. If you have an IRA, max out those contributions, too.
4. Include college savings in your family’s monthly budget. Start when your kids are babies, maybe even before they arrive.
Most states now offer 529 plans, an increasingly popular way to save for college expenses. You won’t take a tax deduction now, but the investment grows tax-deferred. When you’re ready to use the money to pay for college expenses, those distributions are free from federal taxes. There may be additional tax breaks in your state, too.
Your child’s age and, thus, the number of years to save for college, sets the investment strategy for your 529 plan. You may want to start when the kids are young so you take advantage of investments with a little more risk and a little more return.
Although 529 plans are state sponsored, your child isn’t required to attend a state school for 529 savings plans. By comparison, pre-paid 529 plans, however, have more restrictions. Ask questions.
Thinking about going back to college? You can even set up a 529 for yourself.
The bottom line: You may want to start saving for college as soon as possible and make it a habit.
5. Investigate financial aid and scholarship opportunities. There are many ways to pay for college. In addition to personal savings, like 529 programs, most people pay for college with a mix of low-interest loans, federal and state grants, work-study programs and scholarships. If you’re looking for a federal student loan or other government aid, you must complete the FAFSA—Free Application for Federal Student Aid—every year. Collect information for scholarship opportunities by talking to high school and college advisors.
6. Proceed cautiously if you’re thinking about borrowing from your retirement savings to pay tuition. You still have to repay the loan, and you’re cutting into your retirement and cutting short the time you can build your nest egg. Even when a plan allows withdrawals for college, most financial advisors recommend that you explore every other alternative before you dip into your retirement funds.
Learning isn’t just for the classroom. Get the education you need to accomplish both. Start early, make saving a habit and go to the head of the class.
