Top priority: Retirement planning
Paying for college has taken on a new light these days for many parents. It’s no longer about planning; it’s about paying. The only problem is that paying for college is not your only financial concern. You also need to provide for your own retirement.
And there are no grant or loan programs for retirement, so it’s critical that you plan and plan wisely many years before you get handed the proverbial gold watch and are sent out into the unknown world of no alarm clock going off in the morning.
So what is a parent or guardian to do? In an ideal world, you should plan for both needs in your overall financial plan. That’s the ideal. In reality, it’s a balancing act and you are going to encounter some tough choices as you try to balance these goals.
On the one hand, you may find yourself working three or four years longer than you’d planned when you were in your late 40s. Also, you may find that your children will pay off student loans years after they graduate. You are going to have to accept trade-offs in exchange for planning and then executing those plans.
Here are a few things to keep in mind as you plan:
Retirement always comes first. Unless you are counting on an inheritance and it’s a lot of money and a sure thing, always be sure to plan for retirement first. This doesn’t mean exclusively plan for retirement, but put your greatest financial efforts toward retirement. As I’ve noted, you can get loans for college but not for retirement.
Along the same lines, be sure to take full advantage of any retirement accounts like a company 401(k) or 403(b) or an IRA, given the tax advantages and hopefully a match from your employer. From your perspective, a match is like free money.
If need be, you can use IRA money to fund college expenses even if you are younger than 59½. There is no 10 percent penalty as long as it’s a qualified cost. There may be income taxes due but not a penalty for taking funds prior to turning 59½.
All this being said, please remember that retirement savings are for retirement. If you fear you will have trouble avoiding the temptation to dip into retirement to pay for your son’s college education, put your savings in a 401(k). It’s pretty hard to take money out of a 401(k) because you do have to pay the money back within a relatively short time.
The bottom line is that you save for retirement to live more comfortably in your nonworking years. If you use the money for other purposes, it’s not in your account compounding interest and earning investment returns.
When I look at my children in the back seat and marvel about the passage of time, the last thing I want is for my kids to be financing my retirement. If you want financial independence in your retirement years, taking money from your retirement coffer simply does not make long-term financial sense.
Karen Paul is a financial consultant in Burlington.