Student Loans & Financial Aid info

Parenthood is all about sacrifices. When your children are babies, you give up sleep. When they are teenagers, you surrender your sanity. However, there is one thing you should not sacrifice for the kids, your retirement security.

All too often, parents postpone saving for retirement or reduce contributions to retirement plans so they can save for their children’s college education. One survey found that 46% of parents were saving equally for retirement and college, while 14% were saving primarily for college. Low-income parents were more likely to put off saving for retirement in favor of their children’s college education.

As heartless as it may sound, your retirement should come first. This is what most financial planners say. Here is why:

•Your child can borrow money to pay for college. You cannot borrow to pay for retirement. Simple fact.

Many parents do not want their children to graduate in debt, and most students are not thrilled with the idea, either. Nevertheless, the alternative may be worse. If you fail to save for retirement, your children could end up supporting you later in life, when they have their own family obligations.

The federal student loan program provides low-interest student loans to college students. Moreover, there are other ways to raise money for college or reduce the cost. Your child can apply for scholarships and financial aid, attend a less-expensive school, get a part-time job or live at home for a couple of years.

Making up for a retirement savings shortfall is much harder. Financial planners would advise there clients who are determined to trim their retirement savings for college that they should plan to work a few more years.

•Catching up on retirement savings is harder than you think.

Many parents say they will start saving for retirement once their children are out of college. However, that means giving up your most powerful investment tool: time.

The earlier you start saving, the more you will benefit from compounding. A well know 401K Company analyzed a hypothetical couple with a combined income of $100,000 who invested 6% of their salary each year. The analysis covered 36 years and assumed an 8% average annual return and a 3% salary increase.

If the couple split their savings between college and retirement for the first 18 years, and saved only for retirement during the second 18 years, they ended up with $126,000 for college and $1.65 million for retirement.

If they devoted all their savings to college for the first 18 years, then switched to retirement savings, their college fund totaled $253,000, but their retirement savings fell to $759,000. In addition, that assumes their employers matched 50% of their 401(k) contributions. Without the company match, their nest egg shrinks to $506,000.

•Saving for retirement will improve your chances for financial aid.

From a financial aid standpoint, sheltering money in a 401(k) or similar retirement plan is a smart planning strategy. The federal financial aid formula does not include money invested in retirement accounts when calculating how much your family can afford to pay for college. In general, assets owned by the parents are counted much less heavily than the child’s assets.

If maxing out on your 401(k) is unrealistic, at least contribute enough to qualify for any matching funds your company provides. Matching funds will fuel the growth of your savings at no cost to you. And when you are juggling competing demands of college and retirement, the last thing you want to do is turn away free money.