It's an age-old question for those of us approaching or in our middle years -- given we face funding the two big financial outlays of retirement and college for the kids, which do we save for first? In this article, Forbes weighs in on the subject. And they let it be known where they stand right away:
When trying to balance retirement planning with their children's education, most parents put the kids first.
Big mistake.
Why is it a big mistake? Their reason:
"Many young parents think linearly," says Duane Meek, senior vice president for retirement plans at Nationwide Financial Services in Columbus, Ohio. "Get a job, move up, buy a house, start a family, educate the children--and then think about retirement. But once they've taken care of the kids, there's not enough time to benefit from the compounding of earnings over 30 or more years."
Forbes suggests the following:
Meek urges young parents to balance retirement planning with college expenses. For starters, he suggests young parents participate in their company's 401(k) Retirement Plan and make a contribution large enough to secure the maximum match from the employer. To do less means leaving money on the table.
Here's why:
Do the math: Assuming retirement at 67 after a starting salary of $35,000 that increased 3% per year until the final year of work, a 30-year-old parent who began saving for retirement at the birth of his first child could have saved about $750,000. This assumes the parent invested about 6% of his salary in a 401(k) Plan and received a 3% employer match and earned an annual return of 7% on retirement savings.
But a parent who began saving for retirement after putting his children through school would have saved just over $185,000 for retirement, or 300% less than the parent who started early.
Many parents support their children after college graduation and continue to help out when the kids get married. The desire to help is understandable, but it can punch a hole in your retirement plans. If you start saving for retirement early, but save nothing for ten years or so during your children's education and the early years of their marriage, you'd have about $550,000 for retirement. That's a sizeable chunk of change, but it won't give you the freedom another $200,000 in retirement would provide.
Then, there's this reality:
"You can borrow money for college," Meek says. "But you can't borrow for retirement."
And whatever you do, don't count on the government for full retirement support:
Social Security should be viewed as a supplement to other retirement savings and can't be counted on as the only source of retirement income. While President George W. Bush's modest reform of Social Security has vanished into Congress, the need for an updated plan remains. As things now stand, retirees can look for smaller monthly payments or working several years past 65--and probably both.
Finally, it's never too early to start saving:
Meek urges young adults just launching a career to start thinking about retirement. He recommends starting a 401(k) Plan with small contributions and gradually working up to the maximum.
"It doesn't look like much in the beginning," Meek says. "The power comes in the last ten years from compounding the money saved in the previous 20."
This is where I missed the boat -- not investing the first five years or so of my working career. I've long since started fully funding my 401k, but it would be nice to have those five years back with a bit invested. It would be a fairly decent amount by now and a very large amount by the time I retire.
It is interesting to hear this type of advise. In the marketing of financial products, you rarely hear that you should choose one type of investment over another (i.e. retirement vs. education). Their message tends to be, "Invest in them all!!!"
I think that a focus on one account is important to build up that base so that it is set up to enjoy that powerful compounding that comes later on.
Posted by: The Dividend Guy | October 04, 2005 at 01:14 AM