VOL. 129 | NO. 40 | Thursday, February 27, 2014
Rays of Wisdom
Dana and Ray Brandon
Kids' College Versus Your Retirement
By Ray and Dana Brandon
Ray’s Take: Most parents want to give their kids the best college education possible. At the same time, they know they must finance their own retirement. It’s hard to objectively prioritize, especially when your precious children are involved.
Despite parental instincts as well as your kid’s pleading, retirement savings should take priority. After all, there are other funding options for college, including student loans, scholarships and work-study programs. However, when it comes to your retirement, it’s all up to you.
While student loans can be an enormous headwind for new graduates, having to support you throughout your retirement years could be even tougher on your kids, and that’s only if they can and will do it! That said, ideally you want to save for both. And, it is possible.
For your own retirement, make sure you maximize contributions to employer-provided 401(k) accounts (not just enough for the match). If there are two incomes, there should be two maximum funded retirement plans. This allows you to build retirement funds early for long-term growth. Plus, these funds – and all funds you save in retirement-specific accounts – are not considered in federal financial aid formulas.
For your kid’s college, start a 529 college savings plan at birth and contribute to it regularly – automatically if possible. Encourage grandparents, aunts and uncles to join in. Most states now offer these, allowing you to save and withdraw money tax free for college-related costs. Remember, you don’t have to use your own state’s plan.
To make it all work, you’ll have to develop a realistic budget that takes these “big picture” goals into account instead of simply focusing on month-to-month expenses. Retirement may not happen at 65, but it won’t happen ever if you don’t make a plan. If figuring it all out feels beyond you, get financial advice. Don’t do it soon. Do it now.
Dana’s Take: Another good potential source for college funding to consider: gifts from family and friends.
Add up all the toys, clothes, stuffed animals and gift cards your friends and relatives have given your children. What if those loved ones saved themselves the shopping and wrapping and deposited into a savings account instead? After 18 years that would be one wonderful gift to the child and parents.
For a couple of special friends, Ray started a savings account at the birth of each child. At every birthday and Christmas, he deposited in their accounts. They recently cashed in those accounts and were surprised at how those little gifts had grown.
If your own relatives are in a secure financial position, suggest they cut back on gifts to the kids and instead contribute to a savings fund. They might even want to establish their own 529 fund. Any family member can establish one of these accounts for any other family member, and enjoy some potential tax benefits as well.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at email@example.com.