How to balance saving for retirement and your children’s education
Let’s face it, making enough funds available for the future is long, hard work. Especially for younger families who are at the beginning to the middle of their careers and have many competing financial positions to cover. Between raising young children, paying mortgages or renting, and the myriad of other things that go with everyday life, seeing how everything will ever fit together can be stressful and difficult. Let alone save for future goals – like a home, children’s education fund and the big one: retirement.
The truth is that we are at a time when these pressures continue to increase. Education spending seems to be going on the moon. And the concept of an employer paying an old age pension has been dwindling for decades. The burden has shifted to the workers to finance their own retirement plans.
Once you’re on this boat, consider these strategies that may help. I’m starting saving for retirement.
The first decade of retirement planning is your foundation
Let’s tackle the question of the balance between retirement planning and education using what we know today. Unlike your children’s education, your retirement cannot be financed with a loan. The thing that you can control when saving for retirement is to start early in your life and stay disciplined over the long term. I often advise people starting their careers, and it’s important for them to understand that the first 10 years of saving generally feels like things aren’t growing fast enough. What you are essentially doing during this time is laying a foundation: a significant amount of money that should accumulate faster in the future.
The more dollars you have in the foundation, the more they can generate with even slight increases in investment returns. Think of it this way: if you make 10% on $ 1,000, you get $ 100 in investment returns. At the end of the day, $ 100 may not be enough for long in retirement. However, if you can build up a $ 100,000 savings and get a 10% return that is $ 10,000. Now start replicating this over time and eventually these returns will start to add up at a higher rate than your annual contributions.
The following graphic shows a good example of how compounding works. Compare the “Consistent “ Example with the “Late” Results. Those 10 years of early start are very beneficial in terms of compounding.
The gap between Consistent and Late carries a strong message: Use these early career years to invest money building your foundation. Decide on an amount that you can afford – and just start and stick with the plan. As your salary increases, you should check to see if you can increase your contributions.
Recent research suggests that 15% of your income must be saved annually in order to have enough savings over a career to replace your retirement salary. This is a high hurdle, but it’s important to start early and work your way up to your goal over time.
This savings and investment business is a slow, long-term process. But it’s far more effective than waiting until a later point in life when you don’t have that much time to grow your money before you have to pull out of it.
Education savings should play second fiddle
As I mentioned earlier, retirement is not something you can finance or borrow. From my experience, I believe that retirement should be a higher priority than saving up for your kids’ college. I’m not saying to ignore these future expenses – but don’t put it in front of creating a nest egg to assist you when you can no longer work or decide not to work. Ultimately, education can be financed if one does not have the means to save for it and cover all living costs and Put away money for retirement.
Right now we are seeing massive student loans weighing on young adults leaving college and it just seems that this trend is not getting any better. I wonder how tuition fees can get inflated – especially over the past 20 years. At some point something will have to give way, but don’t rely on it as you plan your future!
If, like when you retired, you can start saving for education by setting something aside early and often, you will likely see the benefits after you have established the foundation. It takes time and it’s a marathon. The goal would be to find an amount that you can save on your income, and focus on putting more of your income into retirement then assign a part of education. You can also use bonuses and gifts to save on education when they come.
I understand that saving up for both retirement and education can seem nigh impossible. Most families have the same problem. However, if you start doing something about it early in your career, a solid foundation can be laid that will ultimately lead to higher compounding – along with significantly greater financial security for decades to come.
Chairman of the Investment Committee / Senior Wealth Adviser, Halbert Hargrove
Brian Spinelli works out of the Halbert Hargrove offices in Orange County and Long Beach. His responsibilities include leading the company’s investment committee and advising individuals and institutions on their investment and wealth advisory needs. Brian joined the HH management team in 2012. He received his Bachelor of Arts in Business Administration – Finance from Loyola Marymount University in 2002 and his MBA from LMU in 2005. He is a CERTIFIED FINANCIAL PLANNER ™ Professional.