Here's an interesting and useful comment left on my post titled More on the Financial Tsunami Waiting for Us All where I offered ideas on how to deal with the intersection of four major financial challenges many people will face in the years to come, namely:
- Saving for retirement
- Caring for aging parents
- Paying for college
- Kids moving back home after graduating college
Here's the comment:
I deal with people concerned about saving money for both retirement and college educations on a regular basis. The advice I give, which I believe many financial planners would give as well, is that saving for retirement should be a priority over paying for expensive educations. The reasons are fairly logical: not only is borrowing money for college fairly easy (and not terribly inexpensive) but your kids have their entire lives to make money and budget out funds for paying back student loans. Plus, federal programs such as Stafford and Perkins will subsidize the interest on loans while you are still a student (grad school included). Or, how about the fact that not everybody needs to go to a private university that costs $35k/year? I went to New York University and to be perfectly honest, I'm not sure I'd value my education at the $140k it cost me and my parents. I think about it every month when $175 is deducted from my checking account for the one year of school I was required to pay. It would be unreasonable for parents to cut their retirement funds short because they are overpaying for an optional private education.
The other two items, kids moving home and caring for aging parents, we see more often lately as the baby boomers really do start retiring. I even read an article about "baby echoes" (i.e. the large population boom we can expect starting after 2010 when the boomer grandchildren start springing up). These items are all related to demographic shifts- along with the whole social security problem.
What I find particularly interesting is the addition of caring for aging parents and kids moving back home into the equation. I'm not sure Suze is right about demanding 25% of take-home pay for kids. Kids moving back home doesn't usually raise living costs that much (except for food/electric and stuff like that). So, to prevent young kids from saving money to teach them a lesson I don't think is such a great idea. Suze knows about the time value of money. How about, rather than requiring a recent grad to pay rent, you demand they contribute $4,000 to a Roth IRA? That... would be teaching a good lesson.
I agree with the "retirement before college" thoughts, though if you concentrate on keeping your spending as low as possible, you should be able to save for retirement and put a bit away for college at the same time. One thing to add: there are tons of ways to save a bundle on college costs, so be sure you/your kids consider them in order to get the best education for the least amount of money.
As far as Suze's guideline to make kids pay 25%, she wasn't suggesting that the parents keep the money, but rather put it into a fund for the child's first house down-payment. (see the paragraph above the 25% note in the original post) That said, I'm fine with the Roth IRA suggestion as well, though it's likely that they'll hit the $4,000 well before the end of one year and will then need to put the savings in another place (maybe then put it into a housing fund.) Personally, I think either strategy is great.
Great read! Thank you.
-Steven Burda
Posted by: Steven Burda, MBA | October 23, 2006 at 10:16 AM