Over the years, the one financial “plan” that most parents must deal with is how to handle all of their most immediate needs first, and assume everything else will just work out somehow. New parents often reorganize their lifetime financial priorities as follows:
- Live in a nice home and provide a comfortable standard of living for their family
- Pay for their children’s education
- Pay for their weddings……..if they are girls
- Collapse, after all of that, into retirement with some measure of financial security
These are certainly admirable goals but as financial planners we recommend the goals be written, and be specific in dollars with estimated dates to increase the probability of success. Financial success will be greatly improved if the written goals are reviewed at least on an annual basis. Everyone’s financial picture changes over time and accordingly, continuous monitoring is a necessity for achievement.
According to the USDA, the cost of raising a child born in 2013 to age 18 is over $300,000! The average four year college education, assuming full room and board and added costs for technology, books and travel, is an additional $200,000 per child, or about $50,000 for each year of college. If you have two children, raising them and putting them through college could exceed $1 million.
Most parents want a better life than they had growing up, and that means paying for their children’s college education. Each family has their own set of priorities, but we must all recognize that achieving certain retirement goals will be unlikely to succeed if we are not fully committed to the planning process. If you don’t plan on how to handle your children’s costs, then you are like most people and undoubtedly behind in handling your own retirement costs. Because of the huge income tax advantages of funding 401k’s, IRA’s and IRS approved qualified retirement plans, saving for your retirement must be the top priority before accumulating funds for your children’s education. After fully funding your retirement plan, excess funds can then be set aside for education of your children.
For someone to retire at age 65, the rule of thumb is that you should have saved at a minimum one times your annual salary by age 30, three times by age 40, five times by age 50 and ten times by age 60. The problem, however, is that 40% of investors age 45, typically have children at college age or quickly approaching it. That 40% had saved little or none at all for their own retirement to better the lives of their children by paying for college.
The vast majority of investors fail to do any financial planning when they are young, largely because they don’t feel their savings are sufficient to begin or because of those immediate needs that always seem to surface. Financial planning is primarily about the discipline of saving money and living below your means and not just about investing. As a team with you and your financial advisor, you decide what you can accomplish and when. Immediate priorities usually take precedence and have shorter deadlines, but never forget the end goal: you living comfortably in retirement.
Couples will accumulate substantially more funds by saving for their own retirement first and saving for college second. If you cannot determine realistic financial goals, a disciplined savings and a comprehensive financial plan on your own, don’t wait until your children are nearing college age, seek help from a true fiduciary advisor who can guide you in achieving all of your financial dreams.
Source: Fidelity Investments