Monday, 5 August 2019
You know saving money is important. But what you save money for can be equally important.
Most financial experts say that building an emergency fund should be your top priority. But what about after that? You know you should be saving for retirement, but you also want to put money away for your kids' education. With a limited amount of money to save each month — where should you put your focus?
According to a Northwestern Mutual 2018 survey, 30% of Americans have less than $5,000 in retirement savings, and 21% have saved nothing at all for retirement. Meanwhile, 60% of Americans have put away money for their kids' college education, and T. Rowe Price's 2018 Parents, Kids & Money survey found that 74% of parents prioritize their kids' college education over their own retirement.
This focus on family is admirable, but unfortunately, financial experts say that parents have their priorities backwards: Saving for retirement needs to be the top priority for most working Americans, and here's why:
You must have money for retirement
There's no guarantee your kids will go to college, but chances are you will eventually stop working. To do that, you'll need money. Currently the average American retiree needs approximately $46,000 a year to cover expenses, while the average annual Social Security payment is roughly $17,000. That's a big gap to make up — and why you need retirement savings.
You can't borrow for retirement
There are many ways to pay for college: scholarships, loans, grants, and more. But as far as retirement goes, what you've saved is what you have. There are no retirement scholarships. You need to have money saved.
You could be putting your children's future at risk
If you fail to save enough for retirement and need financial assistance, it will more than likely fall to your adult children to supplement your income. However, by this time your kids could have kids of their own and money could be tight. Having to help you out financially on top of their other financial responsibilities could put enormous financial and personal strain on their family. Putting your retirement first isn't being selfish; it's being smart.
While these are all compelling reasons to prioritize saving for retirement over saving for your kids' college education, it doesn't have to be an either-or decision. If you start early, you can save for both at the same time. Here are some tips:
Start saving for retirement as soon as you can
Put a little away for retirement each month, starting now. The earlier you start saving, the more time your retirement savings has to grow. Over time, even a small investment could turn into an impressive nest egg. Once you have a handle on your retirement savings, you'll be more capable of setting aside some of your monthly savings dollars for an education fund.
If your company offers a 401(k) plan, sign up
While not as common as it was a few decades ago, some companies still offer matching of the retirement dollars you save. This is essentially free money that you'd be wise to take advantage of.
If your company doesn't offer a retirement plan, consider opening an Individual Retirement Account (IRA). Maximum annual contributions are limited by federal law. For 2019, most working individuals should be able to contribute up to $6,000 ($7,000 for those ages 50 or older). In many cases, IRA contributions are tax deductible, which can help you when April 15th rolls around.
Encourage others to help save for college
Anyone can set up an Education Savings Account, also known as a 529 plan, for any child. Maybe grandparents or other relatives could set up an account and contribute to an education plan in lieu of birthday gifts over the years. The flexibility of 529 plans makes it possible to be creative when it comes to saving for college.
Ask the kids to contribute
There's no rule that says parents are responsible to pay for their children's education. As much as you might want to foot the whole bill, it's not always possible — or the best idea. If your children have jobs or even allowances, ask them to contribute as much as possible to their college fund. It's a great way to help them understand the cost — and value — of a college education.
As mentioned previously, there are many ways to pay for college — including lots and lots of scholarships. As they begin looking at colleges, have your kids research the financial aid programs at schools as well as any scholarships — whether from the school or other sources — they can apply for. Student loans are also always an option, and when used prudently can be a valuable tool for paying for secondary education.
When it comes to allocating your savings, think of this as putting on your own oxygen mask first. Because when you take care of your financial future, you'll be in a better position to help your children and grandchildren in the long run.
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