Your oxygen mask, their oxygen mask or a little oxygen for both
Posted on September 4th, 2007 – 1:49 PMBy Kara McGuire
I’m guessing you’ve heard the theory that one should save for retirement before saving for a kid’s college education because borrowing for retirement isn’t an option and borrowing for college is.
Sounds good to me. But what if you can’t fully fund retirement and as the years pass, the college account stands empty (or is nonexistent). Then what?
I’d like to start saving for college but haven’t maxed out my retirement savings yet. I joke that my kids are going to start McGuire’s plumbing, since it seems like the more people study liberal arts in college the fewer can perform basic home repair (although I did fix a stopped up sink this weekend). But if they want to study film and history like I did in college, am I going to say no? Doubtful.
I’ve long said that our Roth IRAs could eventually be used to pay for college, but as my friends begin to open up 529 college savings plans, I’m worry that maybe we should open one too and fund it to the tune of $75 a kid. Really, what’s one less pair of ankle boots? (Check out this London Daily Mail story about wacky fashions I came across when looking for a picture of the very best ankle boots of all time. They are not found there.).
How do you plan to pay for college? If you are saving I’d be curious to know how much, where and why? Oh– and the age(s) of your kid(s).
And for those of you out there like me with no idea how much college will cost when your little Einstein will turn 18, try FinAid.org’s College Cost Projector.
Then check out the site’s Savings Growth Projector to learn how much $75 will be worth in 14 years.
Afraid of numbers? Your child’s age is all you need to use the Savingforcollege.com World’s Simplest College Cost Calculator.
Talk about scary. That calculator says I need to save $698 per month for my almost 4-year-old daughter to attend college in the year 2022. And I thought $75 would make a dent.
89 Responses to "Your oxygen mask, their oxygen mask or a little oxygen for both"
Retirement first; kid’s education second.
Better start saving, since you’re quite behind.
My wife and I have two kids: 2 1/2 and ten months. We contribute enough in our 401k to get the full match, we fully fund out Roth IRA, and we opened Coverdell Education IRAs for the kids college. We were worried about the fees with the 529 plans, and the Coverdell (formerly called the Education IRA) can be used for any school expense, not just college. The contribution limit is $2,000 per year.
We’ve been struggling with the same thing. We don’t get more than a token match on my 457, but we put a lot in - about 13% of my salary. It’s not the maximum I could put in, though. And we put some in a Roth too, but again, not the maximum. So here’s the question for us: what if most of the retirement calculators say we’re putting enough away, but we’re NOT “maxing” our contributions? Do we max retirement contributions before thinking about 529s? Or when Jon says “Retirement first”, is it OK to consider retirement “taken care of” if you’ve figured you’re saving enough?
Like you, Kara, I’d like to put away just a small amount each month to at least get the ball rolling while the kids are young. No way am I ready to do $700 a month. But $25-50 per kid? Sure, why not? How can I say that’s shortchanging retirement when I’m not taking that amount OUT of those contributions? Conversely, if I can spare that amount, tell me why I should ADD it to the retirement contributions when all indicators say I’m saving enough?
Here’s one place where I think conventional wisdom does not have to be the end of the discussion.
We are still trying to figure out how we are going to pay for my husband to go to college and he has the GI bill to help us out. We also have to pay off my student loans over the next 30 years. It looks as though our children (we have a one year old so far) will have to fend for themselves just as we have. Retirement funds will definitely come first for me when I get the chance.
I will be graduating with a Master’s Degree in December and I think that will give me a leg up in obtaining an income that will help us become debt free sooner rather than never and then hopefully we can focus on saving and not living paycheck to paycheck.
We use published benchmark of UM Twin Cities and include Room/Board in the figure as well as a 7% average annual increase.
Answers to your Questions: How? We plan on paying for college mostly by ourselves (read article in today’s WSJ D1 on whether or not you might get aid). Where? Vanguard via Nevada 529. Why? Buys some peace of mind - one less thing to worry about - and kids will have a fixed amount to help them out so they’ll have to carefully consider where they go and what they want to major in someday. Age? 2 @ 4 yrs.
Jon is correct…in that getting a later start on college savings forces you to save more per month + your investment horizon is much shorter which changes the types of investments your should be making.
Retirement should be first. Kids can get loans, work part-time, go to school part-time or might be just as happy owning that plumbing company.
It’s difficult to save in the 529 with all of the other pre-k expenses…but perhaps there are are 529 plans out there without a minimum initial investment (Nevada = 3K initial)
I don’t know about others, but I AM figuring the kids’ own contributions into the picture…that’s a big reason why I’m not jumping on the 529 with $700 a month in contributions. I don’t think they’ll appreciate it as much if they don’t pay for any of it. However, I’d love for them to graduate with $4600 in debt like you did, instead of $46,000 in debt. Or more. You said it yourself, Sarah - compounding interest. A big part of that advantage is TIME - which they have now. They DON’T have any income!
I’ve got mutual funds started for them in UGMA accounts, funded by birthday & other money from relatives. I’d like to also have small 529s, so when they start making money, they can choose what vehicle they save it in.
My husband and I plan to give the children a fixed amount of money that we have saved for them in a 529 plan and anything above that they will need to finance. We began saving early and it means that the costs are much lower than they would be if we were footing the bill once they begin college. As for a 529, my understanding is that it is not the best choice for college funding if the income of the parents is below a certain threshold due to financial aid considerations and how the 529 is counted. That said, the MN 529 plan has low fees and a good mix of stocks and bonds with nice tax features for growth of the money, which are definite advantages.
As a suggestion for a future blog, you might want to detail college savings options with benefits and costs. I know that when we talked with some financial planners, they knew very little about 529s, who managed them, loads, and so forth, and would just blindly recommend their companies’ version.
What if the kids get a scholorship? All that money in the 529 will be penalized if you try to use it for something other than college…
Paul - if your child receives a scholarship, you can make a dollar for dollar 529 withdrawal without penalty.
And if you simply have saved/gained too much in a 529, you can simply change the beneficiary to yourself (PHD @ 60?) or your grandchildren.
We’ll be applying for every scholarship under the sun.
$1000 per month into a 529 plan from birth. We want to give our kid every potential educational advantage in a global society that is likely to be more competitive and a country that is likely to be less so in twenty years. I would love to be high and mighty about what I did for my own education and my expectations for my kid to do the same, but the fact of the matter is, the world our children are coming into is different from the one we are in today (and from our parents’ generation- I am a physician with a family educaion debt of almost $200K, and am below average- physicians in my parents’ generation were nowhere near that). Education and values are the only long-term, meaningful gifts that you can give your children; give every bit that you can.
I would recommend at least a small regular contribution to a 529 plan. Then start multi-generational planning for education. About 75% of my college tuition room and board (and that of my siblings) was paid for by grandparents. My parents, via a one time contribution when my children were less than 5 years old, paid for about 80% of my daughters’education. I, in turn have told my children that I will fund a significant portion of my grandchildren’s college education. 529 plans are ideal vehicles for this kind of saving.
I agree with Jake’s last statement about education and values being the best gifts. But I don’t think getting your kids to put some skin in the game is being “high and mighty”. One of those values I want my kids to know is that anything worth having is worth working hard for. Part of that means at least paying for some of it on their own.
I opened a 529 for my daughter (7 months old) last week. Started with a lump sum, which is a big chunk of cash from one of her grandparents. I’ll probably set it up with a monthly contribution, but haven’t decided yet. Our primary investment goal is our own retirement, which we’re aggressively funding in the hope of retiring early.
In short, we won’t be funding her education to the level Jake endorses, but I otherwise agree with his perspective on the issue - the future global economy will demand knowledge workers, the better educations we can provide for our children, the better off they will be.
Having said that, Kara - the plumbing option is not a bad backup.
Like David, above, I chose the Vanguard 529. 529 over Coverdale because of higher limits. Looks to me like fees for 529s are low, overall, and probably statutorily limited - as they seemed constant from plan to plan. I chose Vanguard over the MN plan because it offered more diversity in investment vehicles. Its allocated 100% to aggressive growth right now, over the years I’ll reallocate for more balance & less volatility.
One thing I noticed in the simple calculator that makes the college savings difficult is that the difference between college inflation costs and interest income is a measly 1%. This means that you have to essentially put away the money dollar for dollar that will be incurred for college. I have seen this before and, while I’m not sure how realistic that assumption is, it is something to keep in mind.
Heather - I think the assumption of a 1% spread in college inflation vs investment gains is fairly realistic given the past 10 year horizon and given the future direction of state/federal funding. When we vote for “no new taxes” we also vote for paying a higher proportion of our kid’s education expense. Another factor, in addition to our voting, that makes the 1% spread plausible is the fact that the horizon for saving if short (max 18 years…) and one should decrease the risk exposure as the entrance date to college nears…therefore decreasing the overall return.
We plan to use cash flow to pay for the majority of our 2 kids post secondary education.
We have and will continue to fund our retirement to the max we are allowed but it made more sense to plan to be debt free (except for mortgage) when our kids get to college.
We’ve lived in the same house for 17 years and have no intention on moving anytime soon. We have updated and added on to accommodate our family over the years and we now have the house we want with what will be a very modest mortgage payment by today’s standards.
Our incomes will have increased 5x since we first got out of college (I paid my way, her parents paid hers) so by keeping our major debt (house) cost fairly consistent we should be able to easily fund college with excess cash.
Our oldest is a HS freshman this year and the other kid in 6th grade. Once we’re done paying for them we should be in very good shape to travel and plan for a few years while we continue work so that we know how and where we want to retire.
Folks, this is a marathon, not a sprint but for those of you with very young kids it goes by fast so be ready.
Decisions about retirement versus funding childrens’ education are certainly complex, and I agree with everyone above who endorse ensuring one’s own retirement savings first. However, when I am choosing between allocating money to my child’s education versus EARLY retirement for myself (i.e. investing more in retirement funds to stp working at 50, 55, or 60), I feel ethically empty if I choose against my child and for up to forty years of leisure for myself. I like my job and am happy to work well into my 60s, particularly if the alternative adversely effects my child’s educational options.
Jake writes
“However, when I am choosing between allocating money to my child
One thing that I don’t see being discussed here is when do you expect your kids to start being adults? How are you grooming them to be on their own? I’ve seen it happen so many times that well-meaning parents take care of their kids school expenses so they have less stress in college, then suddenly cut the purse strings. These kids suddenly have to learn financial responsibilty with pretty much no backup.
I have a friend who is a junior in college. Her parents paid for everything, then suddenly this year she was on her own, panicking about how to make it from month to month. She had absolutely no responsibility or exposure to budgeting prior to this.
Parents - please, start communicating with your children when they’re preschoolers about money. How to save, budget, even how much they will need for college. They can handle it!
There is nothing wrong with telling your child that “I will pay for x% of your tuition, you are responsible for xyz. Let’s work together to figure out how you can achieve this goal”. Maybe I am one of the few that didn’t get any parental tuition assistance, but I knew what to expect for as long as I can remember and my parents helped me achieve the goal of having little or no loans at all. I knew how to budget and forecast and save by the time I started college. The transition to being an ‘adult’ wasn’t that bad because of this.
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