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By Jim McConville
Financial planners are helping affluent families confront a financial quandary that most families didn’t face 30 or 40 years ago: How to plan for both their retirement and their children’s college tuition.
National studies show that most Americans run the risk of running out of money in retirement thanks to a combination of factors, which include record unemployment, declining wealth, low savings rates, investment losses and falling home values.
“It really is a dilemma,” says Scott M. Kahan, a CFP with New York-based Financial Asset Management Corp (FAMC). “Because most people today obviously can’t do both together. When you tell people what they need to save for college and for retirement, all of a sudden it becomes a number that on a monthly basis that they can’t afford to save.”
Jean C. Setzfand, vice president of Financial Security for AARP, tells parents, particularly those facing hard financial choices, “Don’t feel guilty about putting retirement first.”
Some parents apparently aren’t feeling such pangs. The March edition of Chicago-based Spectrem Research’s newsletter Millionaire’s Corner says investors are seven times more likely to identify “adequate retirement savings” — as opposed to college tuition — as their primary financial concern.
In fact, retirement savings surpasses the entire menu of financial worries, including job security, personal debt, home values, inflation and health care costs, while college tuition comes in dead last. According to Spectrem, only 4 percent of investors identify college costs as their top financial concern, compared with nearly 28 percent who say they are most worried about saving enough money to last through retirement.
Yet despite those lopsided statistics, financial advisors who specialize in retirement and educational planning say many of their clients are still choosing to put their children’s education first.
“We’re seeing a lot of clients who are kind of mortgaging their future for their children’s education,” says Margaret K. O’Meara, president of Red Bank, N.J.-based O’Meara Financial Group. “But we tell them you need a plan for retirement first and education secondly.”
The reason, says O’Meara, is investors have more options to fund their children’s college. She said her firm recently compiled a study on how families can structure educational savings plans.
FAMC’s Kahan typically advises clients to first put the maximum possible in their retirement plans. “One, because they get tax deferral often; two, they can have access to that money later on, where when you fund into a college savings plan, it’s there to pay for college bills. You can always borrow if need be for college, but you can’t really borrow for retirement.”
“Paying for college is not your only financial concern,” advises Joseph Hurley, founder of savingforcollege.com, a college finance advice Web site. “Providing for your own retirement can be even more important since no one offers grants, scholarship or federally guaranteed loans to support you when you leave the workplace.”
To better the chances of meeting both retirement and college tuition goals, savingforcollege.com recommends taking full advantage of employer-sponsored retirement plans, such as 401(k)s, and other retirement vehicles, such as IRAs. The accounts can offer tax advantages and employer-matching funds. If possible, parents are also advised to start setting aside money for college tuition as early as possible, ideally in the child’s first year.
The financial dilemma of simultaneously planning for retirement and college has been heightened in the last two decades, says O’Meara, by parents having children later in life. “Retirement is now coinciding with the kids just getting out of college or still in college,” she says.
While college costs have risen steeply in the past four decades, says Setzfand, so have the number of options for paying college tuition. Options for funding retirement are generally limited to working, and saving and investing part of each paycheck.
O’Meara’s recommendation to parents is start a college savings fund at, or very soon after, their children are born. “You might not have to put it in a 529 plan, but at least set aside some money so that you have some kind of nest egg for college.”
Boston-based Financial Research Corporation, a research firm that focuses on investment and asset management, on Feb. 28 reported that total 529 savings-plan assets were an estimated $144.4 billion at the end of 2011, reflecting a 7.3 percent increase from September 2011 assets of $134.6 billion and a 4.4 percent increase from December 2010 assets of $138.3 billion.
O’Meara says she sometimes advises clients to borrow on life insurance policies to pay tuition. “We wouldn’t recommend setting up a life insurance plan to pay for college, but if they already have one, they can dip into it to help pay for college,” she adds.
O’Meara says families can also tap into a home equity line of credit. “But the educational funding plan has to make sense in the overall retirement strategy, with retirement plans taking first priority,” she adds.
Kahan says he’s seeing more clients who are adopting a multifaceted approach to paying for college that draws on a variety of funding sources. “Many of the clients are now looking at it and saying, ‘Hey, maybe my child should pay for some of the college, or we’ll have student loans that they’ll be responsible for if we can’t pay them.’”
AARP’s Setzfand, says parents who make saving for college tuition the priority may run the risk of running short of funds in retirement and becoming a burden on others. “If they’re going to rob themselves of their retirement accounts in order to fulfill their kids’ college tuitions, at some point they’re going to be coming back to them,” Setzfand says. “And one of the things that parents loathe to do it actually ask their kids for money when they need it in the future.”
Kahan says the only way people can have a “shared responsibility” for retirement planning is if they become dependent upon their children in their 80s and 90s. “But most people don’t want to be in that position,” he notes.