Guiding your life’s biggest financial moments

Personal Finance

How to balance saving for your children’s retirement and education

Kiplinger logo

Let’s face it: setting aside adequate funding for the future is a long and difficult task. Particularly for young families who are in their early to mid-career and have many competing financial elements to cover. Between raising young children, paying a mortgage or rent, and the myriad other parts of daily life, it can be stressful and difficult to see how it all plays out. Not to mention saving for future goals – like a house, children’s education funds, and most importantly: retirement.

The truth is that we are in a time when these pressures continue to increase. Education spending seems to be heading for the moon. And the concept of an employer paying a retirement pension has been blurring for decades. The burden has shifted to employees to fund their own pensions.

If you are in this boat, think about these strategies that can help you. I’ll start by saving for retirement.

Let’s address the issue of balancing retirement savings and education with what we know today. Unlike your children’s education, your retirement cannot be financed by a loan. The one thing you can control about saving for retirement is to start early in your life and stay disciplined by putting something aside for the long haul. I often advise people just starting out in their careers, and it’s critical for them to understand that the first 10 years of saving usually won’t seem like things are moving fast enough. What you’re basically doing during this time is laying the groundwork: a significant amount of money that should start piling up at a faster rate.

The more money you have in the foundation, the more money they can generate with even small increases in return on investment. Think of it this way – making 10% on $ 1,000 produces $ 100 return on investment. Ultimately, $ 100 may not last too long in retirement. However, if you can build up a savings balance of $ 100,000 and get a 10% return, that works out to $ 10,000. Now start to replicate that over time, and eventually those return dollars start to compound at a higher rate than your annual dues.

The graphic below provides a good example of how composition works. Compare the “Coherent” example with the “Late” results. These 10 years of early start are very advantageous in terms of composition.

JP Morgan

The gap between Coherent and Late carries a powerful message: Use those early years of your career to start putting money aside to build your foundation. Decide on an amount you can afford – and just start and stick to the plan. As your salary increases, you should reassess to determine if you can increase your contributions.

Contemporary studies indicate a need to save 15% of your income annually to obtain enough savings over the course of a career to replace your salary in retirement. This is a big hurdle, but starting early and progressing towards the goal over time is the important part.

This savings and investment business is a slow, long-term process. But it’s much more efficient than waiting until later in life, when you won’t have that much time to grow your money before you have to put it to use.

As I mentioned above, retirement is not something that you can fund or borrow money to fund. From my experience, I think retirement should be a higher priority than saving for your children’s college. I’m not saying you should ignore this future expense – but don’t invest it before creating a nest egg to support yourself when you can’t work or choose not to. Ultimately, education can be funded if you don’t have the means to fully save for it as well as cover all of life’s expenses. and put money aside for retirement.

Right now we are seeing massive student loans weighing on young adults leaving college, and it looks like that trend is not improving. I wonder how tuition fees can inflate the way they have, especially over the past 20 years. Eventually, something will give, but don’t bet on it when planning your future!

As with retirement, if you can start saving for your education by setting aside something early and often, you will likely see the benefits after you build the foundation. It takes time and it’s a marathon. The goal would be to figure out how much you can save from your income, focus on getting more retirement savings, and so allocate part of it to education. You can also use bonuses and freebies to save on education as they arise.

I recognize that saving for retirement and school can seem almost impossible. Most families face the same problem. However, starting to do something early in your career can lay a solid foundation, which will eventually provide greater capitalization – as well as considerably greater financial security in the decades to come.

You may also like...

Leave a Reply