3 Tips To Balance Retirement And Education Savings When You Have A Child

Balancing College and Retirement SavingsNew parents often wonder how they are going to balance saving for their kids’ college education and their own retirement. There isn’t always enough money to fund all of their goals, and they are looking for a way to prioritize their savings.

I recently wrote a guest post on the 3 tips to help you strike a healthy balance between retirement and education savings when you have a child. The post first appeared on The Virtual Attorney‘s blog.

#1: Fully Fund Your Emergency Fund

I know what you’re thinking… what do cash reserves have to do with retirement OR education savings? The answer is EVERYTHING! If you save into a 401(k) or 529 plan but don’t have ample cash reserves, you run the risk of having to take money out of your savings to cover the cost of an emergency. Taking money out of these accounts will cause you to pay taxes and penalties, all of which are unnecessary with proper planning. Until you have 3-6 months of living expenses in an emergency fund, don’t worry too much about retirement or education savings.

Click here to see the final two tips!

Wisconsin 529 Plan – What You Need To Know

529 Plan

Any time I talk to clients about saving for their child’s college education, we end up discussing 529 plans. 529 plans are state-based college savings accounts. The difficult part is that every state has their own 529 plan, and therefore their own rules associated with their plan. Every state is different, so you will have to do a lot of homework on your state’s plan.

In Wisconsin, our 529 plan is called Edvest. Although the state actually controls the plan, they have to hire a company to administer and run it. Edvest recently moved from Wells Fargo to TIAA-CREF, which has made the plan much more attractive. The mutual fund fees at TIAA-CREF are significantly lower, which means more money will stay in your account – which is something I always consider to be a good thing!

What are the tax benefits of a 529 plan?
In Wisconsin, you can deduct up to $3,000 of contributions per beneficiary. Married couples do not get to deduct $3,000 each… it is $3,000 total. If you have 3 children, you can deduct up to $9,000 in a year. Unfortunately, there is NO federal income tax deduction for contributions to 529 plans.

Growth within the 529 plan is never taxed, assuming you use the money for eligible college expenses. Any earnings NOT spent on eligible college expenses will be subject to federal and state taxes, plus a 10% penalty. Read more..

5 Ways To Make Sure College Is Worth The Cost

Bloomberg recently reported that college tuition and fees has grown by 1,120% since 1978. That is about 4 times the inflation rate for the same period. While a 4-year degree once guaranteed success in the job market, families are now wondering if the price outweighs the benefits. In fact, billionaire co-founder of PayPal Peter Thiel is paying bright kids to start a business immediately after high school, and agree to NOT go to college.

Recent research shows that getting a 4-year degree is still worthwhile, as college graduates experience lower unemployment rate and have much higher lifetime income. Despite the benefits, college costs and student loans are putting a real squeeze on Middle America. Here are a few ways to be sure college costs are worth it:

Work With A Career Coach: All high school Juniors and Seniors that are college bound NEED to work with a career coach. This isn’t just taking a test that tells them what job they should pick. Just because they answer “Yes, I like animals” doesn’t necessarily mean they should become a Veterinarian. A quality career coach will work with to determine strengths and weaknesses, goals, dreams, likes and dislikes, to collaboratively find several career paths that meet their goals.

Don’t Go Undecided: “Undecided” was the most common degree selection for incoming freshmen at the University of Georgia. I know a lot of people believe that college is a place to find yourself and to grow as a person.  While I believe this to be absolutely true, we have to consider the costs associated with this exploration. Taking classes for 1-2 years before settling down on a major will force students to be in school for additional semesters. This adds up financially, not only in terms of the actual tuition expense, but also the loss of income from the years in school and not in the work force. Student should do their best to have a plan for what they want to do with their career, so that they don’t spend unnecessary time in school.

Know Career (And Financial) Prospects: I once worked with a recent college graduate that had over $120,000 in student loan debt. While this would have been fine if she had a degree in medicine, she had a 4-year degree in Social Work from a private university. She was going to make $30,000 a year and would never pay be able to afford the student loan payments. I have known other students that got 4 years degrees in Psychology or English. These degrees have limited career prospects without a Master’s degree, and yet they racked up significant debt. I would never discourage someone from doing a job they love just because it has low wages, but I would encourage them to look at the cost of the education. Could you get a similar degree at a community college that is 25% of the cost? What career will the degree lead to? Is there a way to get to that career that makes more financial sense?

Go For Education, Not Football: I grew up in Alabama, and just about every member of my family went to Auburn University. Although we moved to Georgia when I was 12, I knew I was going to be an Auburn Tiger one day. The thing is, Georgia had the HOPE scholarship which paid 100% of college tuition for students with a high school GPA of 3.0. I remember my father sitting me down and saying “I know you want to go to Auburn, but out-of-state tuition costs $16,000 a year. Can you give me $16,000 of reasons for you to go there?”  He was absolutely right. The University Of Georgia had much stronger academic programs that I was interested in, and going to Auburn didn’t make any financial or academic sense. Be sure your child is selecting a school that best meets their career goals.

Set Financial Limits: I love it when parents set financial limits on college expenses. I believe this helps young adults become more aware of the costs of their education, and forces them to value their education. One option is to say “We can afford to pay $10,000 per year” or “We will pay 50% of tuition and 100% of Room and Board” and it is the child’s responsibility to pay for the rest with scholarships, grants, or even student loans. You have to understand what you can actually afford, and then stick with it.

Despite the rising costs, getting a college education can still be worth it. Ensuring the value of a college education takes pre-planning, goal setting, possibly some difficult conversations. If you are paying for someone else to attend college, be sure they are getting value out of your investment .This doesn’t mean you should be picking their class schedule, but it does mean that you should encourage them to have a plan.

So what do you think? Are you struggling with ways to be sure your children get value from their time in college? Do you disagree with any of my points? Feel free to share in the comments section below