Being a parent has been one of the most rewarding experiences of my life. It has brought me so much joy to watch my baby begin to grow up. As with most of you, I am now being faced with the reality of saving for my retirement and for college. Every time I see how much college is going to cost, I feel a slight tinge of nausea. “How can college cost as much as a house in 16 years?” Being a Certified Financial Planner, I’ve seen what works and would like to share with you 5 tips to help you succeed.
1.) Put Yourself First: This is the one time you are allowed to think this way. The reason is simple: Savings is the primary and sometimes only way you can fund your retirement. With fewer of us receiving pensions and with Social Security’s future in doubt, this may end up being our only significant source of income during retirement. There are grants, loans, scholarships and other ways of gaining access to money for college, but there are no “retirement” loans. Your child will also have their entire working career to pay off any debt they have accumulated in college
2.) Start Early: The earlier you start saving for college, the smaller the drain on your budget leaving you more money for retirement savings. Example: Assuming a 7% return, if you start saving $250 a month when your child is born, you can expect to have around $107,680 by the time they are 18. If you wait till that child is 5 to start saving, you can expect to have around $63,332. Not only do you have $15,000 less because of delayed savings, but you have also missed out on almost $20,000 because of compounding interest and returns.
3.) Set realistic goals. Even though we’d all like pay for our child’s education in full it is important to be realistic about our finances. If you set a goal to pay for 25-50% of your child’s education, you are less likely to get discouraged and stop saving altogether.
4.) Start small. I advise my clients who have limited resources to set a goal to cover tuition, books and fees. This number tends to be much smaller (almost half) and more manageable then the numbers you see for fully funded college plans. If your situation changes, you can always increase the amount you are saving.
5.) Minimize taxes. Many states offer tax deductions to residents who invest in a 529 plan run by the state. You can go to your state’s 529 plan website to see if your state participates. Unfortunately for those of us living in CA, we do not get a tax deduction, but the money compounds and grows tax-free.