Which would you rank higher: saving for your retirement or for your children's education?
A recent Fidelity study showed that when parents ranked their No. 1 savings priority, saving for college topped the list, with saving for retirement a close second (see Fidelity Investment's 2022 College Savings Indicator study at tinyurl.com/y5ftbv2u).
From my perspective as a money manager to high-net-worth families, it's better not to choose between these two priorities, but to save for both goals at the same time. According to the authors of the Morningstar report "The College Question" (tinyurl.com/w8actdy8): "If you underprepare for your own retirement when saving for your children's college, the people who are most likely to be burdened by your financial needs are ... your children."
Point your savings effort toward multiple goals, based on your age and your circumstances.
For example, if you are a young parent, 1/2 of the amount you are saving goes to retirement, 1/4 to saving for college, and 1/4 to saving for a house. The reason to take this approach is simple: compounding. You lose the benefits of compounding when you delay retirement investing to later years.
How do successful families manage multiple goals? Based on my experience, it's a simple matter of giving some thought to what the future will look like before taking action. What that means is simply this: It's all about planning.
Does everyone plan? No. The Fidelity study found that most (60%) use their "own best guess" to estimate college costs. While parents said they hope to pay for 69% of their child's education (up from 65% in 2020), the reality is that they are on track to meet only 27% of their anticipated college costs (down from 33% in 2020).
If you read this column, I'm going to guess that you don't fall into the "go with your gut" cohort. I'm guessing that you would rather do some homework and plan based on goals you can safely achieve.
To help you, here are some tools.
FINRA (the Financial Industry Regulatory Authority) offers information on personal finances (tinyurl.com/2ayx5f74). Fidelity provides a college calculator (tinyurl.com/2p8ztwun) that can offer insight into where you are at in saving for college. The College Scorecard (tinyurl.com/468e97ch) allows you to compare colleges based on fields of study and costs, among other variables.
For financial aid, the U.S. Department of Education's Federal Student Aid site (studentaid.gov) is a must.
Before leaving this subject, let's talk about a problem you don't want to run into. Some parents have their own student loan debt that they have not yet paid off. That's an extra burden if you are also trying to save for your kids' college as well as saving for your own retirement. Indeed, the Fidelity study found that 88% of those surveyed who have student loan debt prioritized paying their own loans back before saving for their children. While that may look smart, it may not be.
Again, savings priorities may need to include multiple goals that coexist.
Bottom line: It's important to have a plan in place, and to remember the power of compounding -- the earlier you save, and the longer your save, the better chance you will have to finance your future plans.
And speaking of saving, the 401(k) Champion Award, which seeks people who not only maximize their 401(k) benefits for themselves, but also inspire others to do so, is accepting nominations and applications for the 2022 competition. Find out more details at 401kchampion.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION