Two financial trends are challenging parents trying to save for retirement and their children’s education at the same time, recent studies show.
For Americans, overall satisfaction with progress toward their retirement savings goals has declined over the last two years, from 40% to 31%, according to the Federal Reserve. At the same time, U.S. News reports the average cost of college tuition has continued to increase and that many parents underestimate the total cost of higher education.
The situation is especially difficult for women, who on average have only 70% of the overall retirement income that men have, said Brandy Marion, a retirement plans education manager at BOK Financial®.
For any parent looking to navigate this financial tightrope, here are six ways to establish a plan and set goals:
- Retirement comes first. “Remember, education loans are available, but there are no loans available for your retirement,” said Teri Byrne, a financial planner at BOK Financial. “No matter how much you want to provide for your children’s future, it’s essential to secure your retirement nest egg first before focusing on funding education expenses.”
- Start early. As with any savings goal, start putting away money as early as possible, Byrne suggested. Over a decades-long career, the power of compound interest on your investments can work wonders.
Starting early is especially important for women, added Marion.
“Women tend to earn less than men—84 cents for every dollar a man makes,” she said. “They tend to take more time off during their career to care for others—including children and parents—which further sets them behind in their career track, and divorce tends to have a greater effect on women’s income. So, over their lifetime, they end up earning less—but they also tend to live longer.”
- Set clear financial goals. The first step to achieving your retirement and college savings goals is to have a clear understanding of what they are, Byrne said. First, consider your financial needs later in life:
- At what age do you hope to retire?
- What type of retirement lifestyle do you want to have (e.g., travel, a dream home)?
- How much will this vision of retirement cost?
- Do you expect to work part-time in retirement?
- How much of your retirement expenses will be funded by secure income, such as a pension or Social Security? Note that you can visit www.ssa.gov to get an estimate of your benefits.
Then, assess your goals for funding your child’s education, considering the following questions:
- When will your child need their college savings?
- How much do you expect their education to cost? Consider factors such as the effect of inflation on tuition and whether they might attend a public or private school.
- Could some of your child’s education be paid for by scholarships or grants?
- Create a budget. By taking the time to create a comprehensive budget, you’ll be better equipped to analyze your income, expenses and savings. This will help you understand how much you can save and identify areas where you may be able to reallocate funds.
“Many people have an idea of how much they spend monthly or annually, but few analyze where the money is spent,” Byrne said. “Creating a detailed budget will enable you to track your progress, make adjustments and ensure you stay on track to meet your goals.”
- Start saving—strategically. Once you have your budget in place, Byrne recommends you start saving in the most beneficial ways possible:
- Put savings into three buckets: your retirement, your child’s education and an emergency fund.
- Contribute whatever you can. As Byrne mentioned, retirement should always take priority over college savings. But even allocating a small amount to your child’s college fund can add up. For example, putting $100 a month in a 529 savings plan can grow to $43,323 in 18 years.
- Leverage tax-advantaged accounts. Maximize the use of tax-advantaged accounts to save for both retirement and education. Take full advantage of matching contributions to employer-sponsored retirement plans, such as 401(k)s. Consider individual retirement accounts (IRAs), which can provide tax-deferred growth. For education savings, 529 plans also offer tax advantages (unique to each state).
- Be flexible and realistic. What if your budget reveals that you can’t afford to retire with the lifestyle you expected or fully fund your child’s education? Byrne recommends looking for creative ways to achieve your goals:
- Consider deferring retirement or working part-time. The longer you work, the more time your money has to grow.
- Adjust your standard of living. Tweak your spending habits now so you’ll have more money on hand later.
- Encourage active participation from your child. Involve your child in the process to teach them about the value of money, the importance of saving, and the role of scholarships and internships in paying for education.
- Explore less expensive schools for your child. The average cost of private college tuition is nearly $40,000 a year, compared to $23,000 for an out-of-state public school and $10,400 for an in-state public school, according to U.S. News. If your budget doesn’t align with the more expensive options, explore highly ranked public schools and local colleges.
Byrne emphasized that your objectives may have to evolve over time. “Be sure to regularly assess your finances so you are continually moving closer to your goals for yourself and your child,” she said. Working with an advisor to help define goals and develop a financial plan can go a long way toward making your vision a reality.