How the Strategies Differ
Another school year is nearly over. If you have kids, you know how fast time flies. One day you’re dropping them off at daycare or sending them to kindergarten. The next thing you know, they’re preparing for college. Blink and you might miss it.
If your child is in middle school or even college, you may feel like you’re behind on their college savings. Of course, at the same time, you may also feel like you’re behind on your retirement savings. Both are big financial goals, and both are important, but there’s also only so much money available to contribute to savings. How do you balance the two goals?
Savings for college is much different than saving for retirement. There are different variables and factors involved. Below are a few things to consider.
Time horizon is the amount of time you have before you actually need to use your savings. The longer your time horizon, the more risk you can afford to take. If you suffer a loss, you have time to recover, but as your time horizon shortens, you may want to become more conservative since you don’t have as much time to recover losses.
Depending on your age, your time horizon for college may be much shorter than your time horizon for retirement. You could have decades until retirement. On the other hand, if you have a child already in elementary or middle school, you may have 10 years or less until they’re ready for college.
Your time horizon should influence your saving strategy for both retirement and college savings. Don’t apply the same allocation to both goals. Rather, look at your time horizon and determine how much risk you can afford. Unless your kids are very young, you likely don’t have time in your college strategy to recover from a sizable loss, so you may want to take a more risk-averse position.
According to the College Board, the average cost of tuition and fees in the 2017-18 school year at an in-state public college was $9,970. For an out-of-state public school, the cost was $25,620 and a private school was $34,740.¹ If your child attends college for four or five years, it’s possible the cost could be over six figures.
That’s a sizable amount, but it’s still not close to what you’ll need for retirement. Consider that you may live in retirement for several decades. You’ll need enough assets to cover your bills, your discretionary spending and more. Consider that Fidelity estimates the average retired couple will need $285,000 just to cover medical expenses. ²
While college is big financial goal, it’s usually not as sizable as your retirement need. Don’t delay saving for retirement. It’s too big of a goal to fund at the last minute. Even if you have to start small, it pays to start saving early.
It’s also important to remember that your child has other funding options available for college. They could earn a scholarship or a grant. They may qualify for financial aid. Student loans aren’t popular, but they are an effective funding tool.
You may not have similar options available for retirement. You’ll likely receive Social Security benefits, but those payments usually aren’t enough to fund a full retirement. You’ll likely need to rely on your savings to make up the difference. While saving for college is important, don’t let it interfere with your retirement savings.
Ready to plan your college and retirement strategies? Let’s talk about it. Contact us today at Heritage Financial North. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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