Personal Finance Essentials
Saving for the Future
There Are Loans for College
There Are No Loans for Retirement
Most people have at least two major financial goals that require serious long-term saving: retirement and college. Both take years to fund properly, and both are far more affordable if you start early. The trick is knowing which to tackle first.
Retirement Comes First
Before you save a single dollar for a child’s college education, make sure you are saving for your own retirement. This is not selfish – it is practical. There are loans available for college. There are no loans for retirement.
If your employer offers a retirement plan – a 401(k), 403(b) or similar – start contributing as soon as possible and contribute as much as you can. If your employer matches contributions, that match is free money. Do not leave it on the table. Once you are contributing the maximum to a workplace plan, consider opening an IRA as well.
IRAs offer advantages that employer plans sometimes do not. They give you a wider range of investment choices and allow for more flexibility in retirement. If you leave your money in a former employer’s plan, rolling it into an IRA is usually the smarter move – it simplifies your record-keeping and keeps everything working together toward the same goal.
How Much Will You Need?
Most people underestimate how much they will need in retirement. A common mistake is assuming spending will drop significantly once you stop working. For many people it does not. Travel, health care, helping adult children and simply enjoying life can keep expenses surprisingly high. A good rule of thumb is to plan as though you will spend in retirement as much as you spend now – and then plan for that to last 30 years or more.
Saving for College
College is expensive and getting more so. The cost of a four-year degree at a public in-state university is already over $135,000. For a private college, the number can be more than $295,000. And those are today’s prices – costs rise 6% to 7% per year, meaning the senior year alone will cost about 22% more than the freshman year.
Starting to save early, even in small amounts, is far better than counting on money that may not come.
A Note for Grandparents
Grandparents often want to help pay for a grandchild’s college education, and the instinct is generous. But it may not always be the wisest move. Before contributing to a 529 plan or other savings vehicle, consider a few things: the child might not go to college, scholarships might cover the cost, family circumstances might change dramatically over 15 or 18 years or you might need those funds yourself for health care or other needs as you age.
A practical alternative: keep the money in your own name. When the time comes and the child is actually enrolled, you can evaluate the situation and write a check directly to the college or university. There is no gift tax limit when payments go directly to an educational institution. This approach gives you far more flexibility – and lets you respond to the reality of the situation rather than a prediction you made years earlier.