Balancing investment goals: College or retirement?
The question of saving for your kids’ retirement or your own retirement can seem vexing at first glance. Realistically, though, it’s not an either/or situation, but a matter of balancing the trade-offs. First and foremost, there’s no rule that says you have to prioritize one above or at the expense of the other. And indeed, creating your decisions in harmony will help you achieve both goals.
So, what are the items you need to take into consideration when forming your investment decisions? Make no mistake: A child’s college education can be expensive, and having too little money in retirement can jeopardize your standard of living. With a large amount of money at stake, it can be helpful to get guidance from experts to develop a strategy.
Assessing big-picture costs.
The process starts with an understanding of how much of your child’s college costs you intend to pay for, in concert with how much you’ll need to retire. They need to be viewed together, not as separate decisions.
For retirement, you need to consider several factors, including your timeline to retirement and your desired lifestyle. When it comes to income, the rule of thumb is that you’ll need about 70% of your working income. On the education front, similarly, it’s a matter of timeline and costs: When is the child going to be in college, and what are the projected costs for a private or public education?
With those numbers in hand, you have an idea of the long-term cost outlays, and begin to formulate a budgeting and investment plan. A caveat, of course, is that you can always get student loans for college, whereas that’s not really a retirement option.
Chances are, both figures together will seem a bit daunting. But that’s where investing over the long haul comes in. Contributing to all of your available retirement vehicles, whether 401(k), Roth, target date, or other plans will add up over time. So, too, education savings vehicles such as 529 or Education IRAs will give you a good foundation. In the case of 529 plans, you’ve also got tax advantages such as tax-deferred growth.
Obviously, giving your child or grandchild the opportunity to attend college with little or no debt is an incredible gift. Doing so while preserving your own ability to retire with an appropriate lifestyle, however, is the most prudent financial step you can take.
