Saving for Retirement and a Child's Education at the Same Time - Part 2

Continued from the October 11, 2014 issue.

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away 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, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you’d 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’re 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. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll have to make some sacrifices. Here are some things you can do:

Defer retirement - The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.

Reduce your standard of living now or in retirement - You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.

Increase your earnings now - You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.

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 remember that aggressive investments mean a 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 follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty--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.

Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may 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.)

Please call me to find out more information, Jennifer Williams, President J. Williams Personal Financial Planning: 413 S. Curry St, Tehachapi, California Office Phone 661-822-7517 Office Email: [email protected] Jennifer is a Registered Financial Consultant. She has over 20 years of experience in the industry.

Article is Courtesy of Forefiled, LLC Securities offered through NPB Financial Group, LLC. A Registered Investment Advisor/Broker-Dealer Member FINRA, MSRB, and SIPC.