As a parent of two, I want to give my kids everything. It’s probably not the best parenting strategy, so I exercise restraint (sometimes!). Because of this, I understand when parents prioritize saving for their children’s future college expenses. It’s a very natural parental desire to provide for and bless your kids.
However, my advice is often not to save for college! The biggest reason is this—you have to properly save for yourself!
Take care of yourself first
When you’re in an airplane about to take off and the flight attendants go through their safety routine, they remind us of one important thing if the cabin loses pressure and the oxygen masks come down. You need to put on your own mask first. Why? You are unable to help your kids (or anyone else) if you don’t help yourself first. Neglecting yourself can cause more harm to you and your kids.
The same is true with finances. If you put on your own oxygen mask first, chances are you can be a blessing to your children later in life. It might not be while they are in college, but it could be when they are buying their first home, having kids, or sending their own kids to college.
Your kids might have to take care of you
What does “taking care of your finances” mean? Retirement is priority number one. You need to have a solid savings plan in place. At retirement age your ability to work and earn an income is diminishing. Your reliance on your ability to create an income stream from your assets becomes a reality.
If you didn’t take care of yourself earlier in life, the unfortunate truth is that your kids might have to take care of you. Entering retirement without enough money leaves you with few options. If your kids enter college and don’t have a 529 Plan, they still have options—scholarships, work study programs, community college, etc. Even student loans, when used smartly, can provide the funds needed to complete a college education.
How much does college cost?
Unfortunately, college is expensive. On average, a four-year program costs $21,950 per year. That’s around $87,000 for four years. If you have a newborn, the total cost could eclipse $200,000 with inflation. The more kids you have, the steeper the price. Could a family with four kids reasonably expect to save $800,000 for education?
Even if you attempt to save for college (let’s say in a 529 Plan), the second problem is that you don’t realize the full benefits of the time value of money. If you start saving when your child is born, you have approximately 18 years to let your contributions compound in the market. That may seem like a good amount of time, until you consider that it’s wiser to ratchet down the risk as your child nears college-age (or you run the risk of having a large market drop wipe out a chunk of your savings right before you need it).
Using the Fidelity Age-Based Portfolios as a guide, the portfolio mix starts out aggressive at birth—over 90% in stock funds. But it quickly moves on its “glide path” of becoming more conservative as college approaches. With six years until college, your mix is “only” 50% stocks, with the rest in bonds and short-term funds. With three years to go, you are down to roughly 35% stocks.
This type of investment approach is wise, don’t get me wrong. Money you are going to use in a few years should not be in a high-risk portfolio. But it also means you have a small window of time to realize the benefits of stock returns. Chances are, your portfolio is most aggressive when you have the least amount saved. When you’ve built up savings, your portfolio is likely to be conservative. Any good years in the stock market at this point will be muted by the amount you have in bonds.
You also have to be somewhat lucky in your timing. If the market doesn’t have very good years when your child is a teenager, you won’t see much growth.
How much does retirement cost?
If you think college is expensive, consider retirement. Let’s say you are accustomed to having $100,000 per year in income during your working years. For a 40 year old retiring in 25 years, that’s an inflation adjusted income of $209,377 (at 3% inflation). Yes, social security will take care of some of this. But you are likely looking at a need to generate over $100,000 of income per year…for 30+ years!
The difference between saving for college and saving for retirement is night and day. Unlike saving for college, you have a much longer time period to let your retirement savings grow and compound. In addition, you aren’t planning on liquidating your retirement account in the first few years of retirement (like you are with college savings). This means that your runway for realizing the time value of money is much longer. As a 40 year old, your retirement savings will be invested for 50 years or more!
Retirement is more expensive but you have time and resources to plan accordingly. Creating a retirement savings plan at a young age means you are able to effectively provide when you can no longer work.
Don’t be ashamed if you are not saving for college
Take care of yourself first! If you are currently on a good plan for retirement savings, then by all means, save for your kids’ college! It will be a joy and blessing for them.
If you aren’t saving for your kids, don’t feel ashamed! This is okay. There doesn’t need to be an expectation that you have to pay for your children’s education. Chances are, you’ll end up with a mediocre plan for both college savings and retirement and you won’t be effective at either.
If you’d like to learn more about setting yourself up for a successful financial future, click the link below. We’d love to help!