By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
Studies show disappointing results in terms of adults being prepared for retirement. Bankrate’s 2014 Survey of Retirement Savings shows that more than 25 percent of those surveyed age 50 to 64 have yet to start saving for retirement.
The statistics are even worse for those without a retirement plan through their employer such as a 401k. Per the Employee Benefit Research Institute, these workers tend to have less than $1,000 in savings and investments. The consensus is that people without an employer retirement plan are the worst prepared.
Another financial burden looming over most of these Americans is sending their children to college. This squeeze creates quite a dilemma – how to fund both? Should I even try to fund both?
Fidelity Investment’s Annual College Savings Indicator Study reports that although 70 percent of parents intend to cover the cost of tuition in full, they’re only on track to fulfill about 29 percent of that goal by the time their kids reach freshman year.
For more than a decade, the average cost of tuition has risen at more than double the rate of inflation, so it’s only going to get more difficult for parents to balance saving for retirement and college. Vanguard estimates that in 18 years the cost of a four-year degree at a private college could reach nearly $500,000. Having a 3-year-old of my own, this figure makes me realize starting early is the best option for being able to help my daughter when she heads to college.
So, how can parents start saving for their children’s tuition? The most common vehicle used currently is the 529 plan. A 529 College Savings Plan has tax advantages to offer the owner. 529 funds can be used for qualified education expenses, which according to federal guidelines typically include tuition, fees, books, and room and board expenses. Money inside of a 529 grows tax-deferred and is not subject to tax upon withdrawal if used for those qualified education expenses.
The downside is if the money is used for something other than college expenses, income tax and a penalty will apply to any money earned. If the beneficiary receives a scholarship or passes away, the penalty is not charged.
Most plans can be started with a small monthly amount. Setting aside $50 a month or a quarter when the child is young can be very beneficial. In addition, anyone can make contributions to the 529, not just the parents. The maximum permitted in contributions for each beneficiary is $300,000. There are other options for saving so depending on your individual situation, you may find other modes of investing more beneficial.
As wonderful as it is to fund their education, please do not put your children through college at the expense of your retirement savings. You can borrow for college but not for your retirement. For those who do not have a retirement plan at work (those who seem to be in the worst position, per many studies) or who are not eligible yet, you should continue to contribute toward retirement.
For example, roll over your former employers’ 401k(s) to an IRA and make contributions to that until you are eligible again for your employer’s plan. When you become eligible for your employer’s plan be sure to pay attention to any match they provide. An employer’s match is the most significant return you can get on any investment, so definitely take full advantage of it.
Many people tend to rely on social security for their retirement income. For low-income workers, social security replaces a larger portion of their preretirement income. However, social security is based on your “average indexed monthly earnings during the 35 years in which you earned the most.” Therefore, if you have not worked 35 years, the zero years of earnings will count against you. In this instance, working longer to replace those zero years with earnings can make a large difference to your benefits.
In addition, the longer you wait to take benefits, the better off you will be. Eligible workers can claim as early as 62, but if you wait until age 70 (the latest date to take benefits), you increase your benefit by 8 percent for every full year after your full retirement age.
The lesson here is to save as much as you can as early as you can. With the help of an advisor, compile your retirement accounts, desires for college planning and relevant dates in order to run a comprehensive calculator to determine what steps you need to make. A calculator can help you see if you fall short and the advisor will help you to decide what to do with the information. You can always decide to retire later than anticipated, save more towards retirement or college, or even lower your tuition commitment.
