You want to retire comfortably when the time comes. You also want to help your child go to college. How do you juggle the two? Saving for your retirement and your child’s education at the same time can be a challenge–but you may be able to reach both goals if you make some smart choices early.
Know Your Financial Needs
The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:
- How many years until you retire?
- Does your firm offer an employer-sponsored retirement plan or a pension plan and if so, what is your balance? Can you estimate what your balance will be when you retire?
- How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, mailed every year by the Social Security Administration.)
- What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
- Do you or your spouse expect to work part-time in retirement?
- How many years until your child starts college?
- Will your child attend a public or private college and what is the expected cost?
- Do you have more than one child for whom you will be saving?
- Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
- Do you expect your child to qualify for financial aid?
Many online calculators are available to help you predict your retirement income needs and your child’s college funding needs.
How Much Can You Save?
After you determine your financial needs, the next step is to determine what you can afford to put aside each month. You will need to prepare a detailed family budget that lists all your income and expenses. Note that the amount you can afford may change from time to time as your circumstances change. Once you have calculated a dollar amount, you will need to decide how to allocate your funds.
Retirement Takes Priority
While college is certainly an important goal, it is important to focus on your retirement if you have limited funds. The burden is on you to fund your retirement. If you wait until your child is in college to start saving for retirement, you will miss out on years of tax-deferred growth and compounding of your savings. -A child can always attend college with loans or scholarships, but there is no such thing as a retirement loan.
Saving for Both Retirement and College
Ideally, you want to pursue both goals at the same time. The more money you can save for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, such as $50 or $100 each month, you may be surprised at how much you can accumulate over many years. For example, if you save $100 every month earning an average 8 percent, you will have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)
If you are unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Pursuing both goals at the same time does not mean that the same investments will be appropriate, and each goal should be addressed independently.
When You Cannot Meet Both Goals
If the numbers indicated that you cannot afford to college educate your child or retire with the lifestyle that you expect, you will need to make some choices. Here are some things you can do:
- Defer retirement: The longer you work, the more money you will earn and the later you will need to dip into your retirement savings.
- Work part-time during retirement.
- Reduce your standard of living now or in retirement: You may be able to adjust your spending habits now to have money later. Or you may want to consider cutting back in retirement.
- Increase your earnings if possible
- Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but aggressive investments mean greater risk of loss).
- Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
- Send your child to a less expensive school: You may have dreamed your child would attend an Ivy League school; however, unless your child is awarded a scholarship, you may need to lower your expectations but -a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
- Think of other creative ways to reduce education costs. Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.
Using Retirement Accounts for College
Retirement accounts can be used for college – but most financial planners discourage paying for college with retirement funds. However, you can certainly tap your retirement accounts to help pay the college bills if needed. With IRAs, you can withdraw money penalty-free for college expenses, even if you are under age 59½ (though there may be income tax consequences for the money you withdraw). With an employer-sponsored retirement plan like a 401(k) or 403(b), you will generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (or age 55 in some cases) in addition to the taxes, even if the money is used for college expenses. You may also be subject to a six-month suspension of contributions if you make a hardship withdrawal. There will likely be income tax consequences as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)
The AIA Trust is here to help
The AIA Trust offers retirement savings plans and distribution options through Equitable Financial Life Insurance Company (Equitable Financial) to assist you in achieving your retirement goals. Plans can be established for one-person firms (or components)—or for many employees—utilizing a variety of retirement savings and distribution vehicles. Equitable Financial can assist you toward achieving your goals based on 51* years of experience working with association members and over 25 years with AIA architects. Equitable Financial can help you review your options and offer you choices that can help alleviate the burden of establishing and managing a retirement savings plan. It is one of the ways that the AIA Trust makes it easier for you to focus on doing what you do best: architecture.
Please call 800-523-1125 to speak with a Retirement Program Specialist or visit www.TheAIATrust.com/retirement-plans/ to learn how you can start saving.