Whether or not to pay for your child’s college education is a struggle many parents share. While it’s human nature to want to provide more for your child, financially, it could create a hardship for your retirement lifestyle.
Some people who pay for their child’s college education sacrifice saving for their own retirement. They put off saving for retirement because it seems so far away.
They also delay saving for retirement because other demands in life impact their finances (e.g., wanting a larger home, job loss, vacations).
What they don’t realize is by delaying to save for retirement, they lose time for their retirement savings to appreciate and smooth out from market volatility.
The longer you hold an investment, typically, you’ll see it appreciate. However, with any good investment, there are times when the value declines. We’ve witnessed declines in the stock market as well as in the real estate market.
These declines are temporary then there is a rebound. But it takes time to smooth out this volatility in value.
For example, look at how the Dow Jones Industrial Average (“DJIA”), a stock market index, performed over time.
During one year, DJIA declined by 5.5% (see table).
However, for a 10-year period, this market index increased by 10.12%.
Looking at a 20-year period, the annualized growth rate was 5.25%. These time periods include the Great Recession and 9/11.
DJIA Annualized Growth Rates
|1-Year Change||12/29/2017 – 01/02/2019||-5.5%|
|10-Year Change||12/31/2008 – 01/02/2019||10.12%|
|20-Year Change||12/31/1997 – 01/02/2019||5.25%|
SOURCE: Measuring Worth.com | http://www.measuringworth.com
Note: Starting and ending dates shift depending on day of the week.
When you delay saving for retirement, it could adversely impact your retirement lifestyle. Here are a couple of examples to compare saving early with delaying.
The couple in Scenario A contributes $18,000 annually to each of their 401(k) plan. They begin at age 30 and continue until age 65 when they target to retire.
But they take a 4-year break to pay for their child’s college. They stop contributing at age 50 and begin again at age 54.
Assuming a growth rate of 5%, inflation at 2.5%, and fees at 1%, they accumulate $1.5 million at age 65. They’ve saved enough to last 12 years, assuming a current lifestyle of $100,000 annually adjusted for inflation.
The couple in Scenario B waits until age 54 to begin contributing to their 401(k) plan. They each contribute $18,000 annually to their 401(k) plan.
Using the same assumptions as in Scenario A, they accumulate $476,526 by age 65 – enough money to last only 4 years.
They would need to more than triple their savings annually to have the same amount as the couple in Scenario A.
To help decide whether you can afford to pay for your child’s college education, conduct a retirement assessment. There are many calculators online to run estimates. Be aware of assumptions for growth, inflation, and fees.
You can also hire a CFP® to run an assessment for you. When making a decision, remember there are loans to pay for college education, but there are no loans to pay for your retirement.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, RICP®, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing spending plans, comprehensive financial plans, divorce financial reviews, retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”