In Part 1, we looked at the common problem that families have between saving for their children's college and saving for their retirement. In this part, we will explain the six reasons to choose retirement savings over college tuition:
1 Student loans aren’t all bad
Student loans come with low interest rates and possible tax benefits, making them low cost loans that do not require collateral. Certainly, you don’t want your child funding his or her entire college tuition and all of their school expenses with student loans. You can pay for a portion of college expenses and ask your child to do their part as well. For example, you may require your child pays for the first year, while you agree to pay for the last three. Student loans represent a great way your child can do his or her part when it comes to paying for education. Some loans, like Federal Stafford Subsidized Loans and Federal Perkins Loans remain interest-free until several months after graduation.
2 Teach your child about handling money and value education
The best way to teach your child about money is to require that he or she has some skin in the game. Asking that your child pay a portion of his or her own college expenses or living costs while there, will help teach them the importance of sticking to a budget and appreciate more the significance of receiving their education. Your child will have an easier time adjusting to an independent adult life if he or she understands that money must be earned and spent wisely.
3 Bills in retirement don’t wait
Your child’s student loan may provide an option to delay making payments for a time. You definitely won’t have that option when it comes to retirement expenses, such as property taxes, homeowner’s insurance, or even your cell phone bill.
4 Avoid burdening your children during retirement
If you haven’t saved enough for retirement or planned for possible long-term care needs by purchasing insurance, you greatly increase the possibility that you’ll become a burden for your children later on. Paying off a student loan right out of college can prove burdensome, but the predictable monthly bill can’t compare to the increasing costs associated with supporting and caring for aging parents.
5 Retirement savings have a longer time horizon
A longer time horizon means more time for your investments to grow. Money that you’ve saved or earmarked for college tuition has a significantly shorter time horizon, requiring a more conservative investment strategy. Prudent investors begin saving for retirement decades in advance, allowing time for the funds to appreciate considerably.
6 More flexibility
The year your child begins college is typically set and once a school is chosen so are the tuition costs. Therefore, when that first semester tuition is due, it’s due! This could mean that you may have to sell investments to pay for tuition even at a time when your investments are experiencing temporarily poor performance. When it comes to your retirement investments, if markets are down you have more options to cope. You could delay retirement, earn supplemental income either by part time employment or encore career. You could reduce discretionary spending during those volatile times until markets recover.
Retirement Planning Gets You There On Time
Just like the oxygen mask on the flight, keeping your retirement planning a priority while helping your children to learn the value of money and education will help smooth out the turbulence, so you arrive at your destinations safely and on time.
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Posted on Tue, April 1, 2014
by Heather Coulter