The Choice: Fund Retirement or College

 

I don’t think anyone could have anticipated the economic crisis we are having today.  Financial decisions we never thought we would have to make are now are a fact of life.  I have many friends that are retirees and are force to make do with extreme hardship because of the correction in markets and high inflation.  Many of the economic trends that we are seeing today have not occurred in 60 plus years.  As of writing this article, domestic construction levels are at their lowest since 1945 and in Florida where I live, unemployment is at a staggering 9.2%.

No one is feeling the financial crisis as much as the families.  The decision of where to spend their precious resources is harder than ever.  As families do try to save, where do the dollars go, retirement or college for the kids?  The costs of higher education have double and tripled the inflation rate the last few years.  Saving for retirement has changed dramatically.  When our parents grew up typically they were covered by pension plans that usually guaranteed them benefits during retirement.  It was little easier back then because parents could focus on saving for college. Usually the retirement was taken care of by the Company.  Unless you work for municipality, those days are over.  In 2007, the Investment Company Institute reported that nearly two thirds of all retirement savings came from contributions from workers rather than employers.  Our countries changing demographics now have many older parents that are forced to use retirement savings to pay for college costs.  Please know I don' advocate using your retirement dollars to pay for your childrens education.  I believe that college is an investment in their future, and they should participate. 

 It is not an easy decision but a little planning can go a long way now.  Parents cannot count on last minute saving ideas.   There are some options.  Below I have listed some ideas to save for college and retirement.

• ·         Start early, in either case goals will be so much more obtainable the sooner you start.
  
• ·         I think the old rule of thumb with retirement still holds true, for retirement plan on saving 15% of your current pretax salary annually
  
• ·         Use automatic deductions and salary deferrals to fund retirement and make the process as easy as possible
  
• ·         For college planning,  try and save 75% of projected costs with the difference coming from student loans, scholarship or students work
  
• ·         Always take tax advantage saving plans like IRAs and 401k for retirement and Coverdell/529 plans for college savings.  It is hard to beat the tax free growth these plans offer.
  

·         Consider Self Directed Retirement Plans, and take control of your assets.  Don’t let a unknown mutual fund manager control your future.  Recent statistics show  - 43% of Americans spent more time planning their most recent vacation than they have spent planning for retirement and  28% spent more time watching reality TV in the last month than they have spent planning and preparing for retirement over the last 10 year.  Don’t be a statistic.

·         Balance your portfolio, as you start saving typically savings will go in to growth assets, and move to more secure income producing assets as you get closer towards your goals.  By staying in growth assets early, you will minimize your tax affect for assets not in preferred savings accounts.

Splitting the saving pie is now more a juggling act than ever.  Remember it is never too late to get started.   I always think that saving for college and retirement are just like the old Nike ad – Just Do It.

Dave Owens, CPA, CES is the managing member of Entrust IRA SWFL, a firm that specializes in 1031 exchanges and Self Directed Retirement Plans.