Fund your future first

February 15, 2008

Much as you love your kids, saving for college rather than retirement could be a big mistake.

Key Points

It's human nature to focus on the problem right before us and ignore everything else.

In that vein, college expenses may hit parents before they start saving for their golden years. An Allstate survey conducted several years ago, found that while almost two-thirds of people with children under 18 were putting money aside for tuition, nearly a fifth were saving little or nothing for retirement at the same time. That should come as no surprise to the vast majority of mothers and fathers who unselfishly put their children's needs before their own.

Indeed, parents everywhere can identify with the dilemma of Mitchell Cohen, an FP in Olympia, WA: "I have an IRA for myself and 529s for my three kids," Cohen says. "If I stash any extra savings in the IRA, I feel I'm being selfish by not putting away more for my kids' futures instead." But the real dilemma, says Kalman Chany, author of Paying for College Without Going Broke and president of Campus Consultants, "is how to put your kids through school and still have money left over for retirement."

It takes years to amass a nest egg

Time is the primary reason it's unwise to delay retirement savings. If you get a late start, you're likely to have too few years left-to enjoy optimal health and be at peak earning power, perhaps; to weather the fluctuations of a cyclical market; and to reap the benefits of years of compounding. Even if you were to sock away huge amounts of money after your children were through with their schooling, you'd be unlikely to catch up, as an analysis prepared by Christine Fahlund, a senior financial planner at T. Rowe Price, illustrates.

Fahlund starts with the assumption that parents invest 6 percent of their income annually (starting with a $100,000 salary) in either a 529 plan for college or a 401(k) for retirement, and earn an average annual 8 percent return. Those who focus only on retirement for 36 years will end up with a $1.7 million nest egg, she says. If the same parents saved only for college for the first 18 years, they'd have $253,000 for education. But after saving for their future for the remaining 18 years, they'd end up with just $506,000 at retirement, less than one-third of what they would have amassed if they'd saved for retirement alone.

Yet many parents still drag their feet. Kent Wilson, a financial planner in Salt Lake City, just began working with a 55-year-old emergency physician who's tired of the 24-hour shifts his hospital demands. But because he ignored his own retirement needs while he put five kids through college, Wilson says, "there's not much chance he'll meet his goal of retiring at 62.

"Even if he starts saving a significant amount now, he'll still be able to fund his golden years at only half his current standard of living," Wilson adds. "His only choice is to continue working, even if it's just part time."

Here's another fact it's equally important to keep in mind when shaping your financial strategy: The kids can borrow for college-plenty do. During the 2005-2006 school year, students in the US borrowed nearly $70 billion in federal funds and another $17 billion in private loans.

On the other hand, you have limited options for income in your golden years: Social Security, pension, retirement plans, and continued employment complete the list. If you give your retirement plan short shrift, you-like the ED doctor-will likely have to work longer than you counted on.

So, what else can you do?

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