Save for College or Retirement?

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Save for College or Retirement?

Even before our country entered its current economic crisis, Americans weren’t big savers. Studies have found that rates of saving fell sharply leading up to the 21st Century. In 1981, Americans saved an average of 11 percent of their annual incomes. By the year 2000, that percentage had dropped to zero.

Combine this trend with the current global recession that has led to lost jobs and wage cuts, and saving for retirement seems like quite a challenge. Saving for retirement and your kids’ education? That may seem impossible. Fortunately, it is entirely possible for you to set money aside for college while continuing to build the nest egg you’ll need in your retirement years.

The first thing to remember when balancing college and retirement savings is that your kids will have additional financial options for college – you may not have any others when you retire. With that in mind, most financial planning experts strongly recommend that people prioritize their retirement savings. Unless it’s absolutely necessary, don’t compromise your retirement savings plan.

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Some parents may think they have to keep their retirement savings low until their kids have gone to college so they can qualify for the maximum amount of financial aid possible. But most formulas for calculating financial aid don’t factor in a parent’s retirement accounts when assessing the child’s need.

As with any type of saving – the sooner you start the better. If you haven’t started saving yet, start today. Start simple. Open a basic savings account and commit to setting aside a specific dollar amount every month. When you have enough saved, roll some of it into individual stocks or a mutual fund. Though a savings account is a good starting place, it won’t provide the long-term growth you need. Most financial advisors recommend mutual funds, because it puts your savings in the hands of an experienced professional.

When talking to a financial advisor, inquire about 529 Plans. A 529 Plan, also called a “qualified tuition plan” is designed to help people save for college. Many of them have tax advantages and some even allow you to lock in tuition prices at current levels.

Have your kids pitch in. When your kids start working, insist that some of the money they earn be set aside for college. It will take some of the financial burden off you. Plus, kids who help pay for their education are also less likely to take it for granted.

When your kids are a year or two away from starting college, talk to your financial planner about moving some – or most – of your college savings out of stocks and into safer investments like bonds. Or, rather than moving money, you may want to simply start diverting your new contributions into those safer investments. You’ll eventually want to do the same thing with your returns, too.

Remember that while you want to help your kids with their educational costs, you don’t have to cover the entire four years. Other financing is available to them, including student loans, grants and scholarships. Start exploring these options early. Even though they’ll change somewhat over time, you will get a clearer understanding of how your kids can pay for college, which will help you determine how much money you want to set aside for them.

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