In the Family Financial Lifecycle, expenses multiply once you have children. The one-bedroom apartment is replaced by a four-bedroom home with a mortgage. There are increased costs for food, clothing, medical care, transportation, education, and more. In total, the average cost of raising a child to age 18 in current dollars is about $290,000. After almost a third of a million dollars in payments, the balloon payment for children comes at the end when college expenses hit. The 2018-2019 Estimated Cost of Attendance for a College of Arts & Sciences degree at the University of Virginia is $128,680 for four years.
If you want to pay for your children’s education without the need for student loans or scholarships, then the best plan is to start saving for this goal the day that they are born. Saving and investing now is worth more than later because of the magic of compound interest. For the same number of dollars deferred, the early saver can afford more than the late saver thanks to investment growth.
The same is true for retirement. Thanks to the magic of compound interest, the early saver can retire earlier or with more money than the late saver.
To pay for estimated college costs, assuming a return of 6% over inflation, you would need to save and invest more than $220 each month or $2,640 each year from the day they are born through college.
To pay for the cost of your retirement, you need to save 15% of your take home pay for 40 years (age 25 – 65) to pay for 30 years of retirement (age 65 – 95). As I said before, you have to save more if you are starting late.
Although in the ideal, you would be able to save sufficiently for both of these goals, not all families have that luxury. If you must choose between either saving for your retirement or saving for your children’s college education, you should choose retirement. You can help your children pay back their student loans at those favorable interest rates a lot easier than you can replace your lost retirement savings so late in the journey.
Although most debt is bad debt, there are two important exceptions: home mortgages and student loans. Diligent savers can use these types of debt to their advantage. The worst recorded undergraduate interest rate is 6.8%, which is not that bad. Even at this rate, students would do best to pay the minimum fee and invest the difference. Most student loans have even lower rates thanks to government subsidies. On top of that, income based repayment plans allow students to stretch their payments even longer than 10 years. If they have a public service or teaching job, those students can take advantage of student loan forgiveness.
Meanwhile, when it finally comes time for you to stop working and retire (and you will likely have to stop working one day), no one is going to give you a loan for retirement. If you haven’t saved enough, you will likely fall onto welfare and onto hard times.
Furthermore, while many parents are struggling to fund their retirements adequately, many grandparents find themselves with an excess of savings. And while a grandparent would love to write college fund birthday checks to a 529 account, they will be unlikely to so generously and joyously fund your lifestyle needs in retirement.
For all these reasons, you need to take care of yourself first. If you have to choose between your retirement or your children’s college savings, choose your retirement.
Photo by Logan Isbell on Unsplash