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A college education. Retirement. What do these major life
events have in common?
One shared characteristic is that each comes with a price
tag. Here's another: If you have school-age kids, you might be facing the
challenge of having to decide which goal to save for. They're both important.
So how do you make the choice?
Here are some suggestions that can help you reach a sensible
solution.
* Eliminate excuses for not making a decision.
Procrastination can be costly. For example, to accumulate $100,000 in five
years, you'd have to deposit a little over $1,500 every month in an account
that earns 4%. But with a ten-year time horizon, assuming the same return, you
can build up $100,000 by socking away less than half that amount, or
approximately $700 per month.
What you need to know: Estimate the total amount required
for both goals, how much time you have, and how much cash you'll need to set
aside on a regular basis.
* Expand your resource horizon. Once you've computed the
expense side of the equation, figure out how much you can afford to save. You
may find that, with one pool of income and two goals, there's not enough money
to fully fund both goals.
But who says you have to pay for everything yourself? Turn
an obstacle into an opportunity by searching out alternatives. For instance,
while your income in retirement may be dependent in large part on your savings,
there are plenty of options for paying
college tuition.
Where to look: Investigate the possibility of advanced
placement credits while your child is still in high school. Other potential
sources of help include scholarship prospects, federal work/study programs, and
summer internships.
* Adopt a flexible approach. Broadly speaking, you have
three alternatives for divvying up your available savings between the two
goals. You can save for retirement only, save for college only, or opt to do
both.
Yet within each alternative are creative strategies. As an
illustration, you could start out by saving strictly for retirement, shift
toward saving for college when your child reaches a certain age, then switch
back after graduation.
Caution: Be careful of falling into the deadline trap. It's
likely your kids will attend college before you retire. Since the tuition
deadline is closer, you might be tempted to reduce or eliminate retirement plan
contributions in the early years of your savings plan in order to focus on
education savings.
But consider this: A typical retirement will generally last
longer and cost more than your child's education. By putting college tuition
first, you could end up with less than you need in your retirement nest egg.
Instead, take your overall time horizon into account.
For assistance with the numbers, give us a call.
Last Updated by Noel Dalmacio on 2012-08-08 10:29:10 AM