Are you currently investing in a retirement account? Are you also investing in your child’s college education? Or, perhaps you do one, but not the other! What is the right thing to do? Let’s take a look at all of the possible options and I’ll let you decide for yourself.
No Investment in Your Retirement or Your Kid’s Future
I’m starting with this option because I’m hoping that none of you are currently doing this (unless you are choosing to rapidly pay down your debt first). Without a proper retirement plan, you’ll most likely run out of money when you’re old, and you can’t depend on your kids to pay for your bills because they’ll have student loans! It’s a lose-lose situation. Please do not choose this option.
Invest In Your Retirement, but Not in Your Kid’s Future
Let’s say that you’re currently 30 years old and you’re able to put $400 a month in your retirement account. If you earn 10% per year (on average), you’ll have $2.55 million by the time you’re 70.
In the mean-time though, you’ve had a couple of kids and never got around to setting up that 529 college fund. Since they assume that debt is a part of higher education, they just take on some student loans in order to continue their classes and graduate. They each racked up $50,000 in debt before they got their first job.
Now, it is possible that you are completely responsible with money and have taught your kids very well. They might find a way to graduate without taking out loans, plus they’ve learned a ton about work ethic in the process!
Invest in Your Kid’s Future, But Not in Your Own Retirement
I have seen many cases where parents feel it is admirable to invest in their children before themselves. It sounds good doesn’t it? Well, let’s take a look at how it normally pans out.
$400 a month is put into a 529 fund that yields an average of 10% per year. After 18 years, your kids are ready for college and you let them know that they each get a gift of $121,000 toward their education (that’s right, your investment turned into $242,000).
Your kids are definitely excited – after all, they get to go to any school they want (well, as long as college inflation slows down anyway). However, what happens later in life?
Mom and Dad have absolutely nothing saved in their retirement accounts. All they have is their house and a couple of cars. In order to pay for their everyday expenses, they decide to take out a reverse mortgage, which seems to keep the bills paid for a while. But, then Dad has a stroke and needs to live in an assisted care facility. This cost is much more than they can afford, so guess who’s stuck with the bill – the kids. All because Mom and Dad didn’t invest in their own future.
Now, maybe the kids are ultra-wealthy because of the great schooling they received. Perhaps the parents made the right choice and are now being taken care of by their incredibly successful children?
Invest in Your Retirement AND Your Kid’s College Education
Let’s say that instead of putting your $400 in one fund or another, you split the money up. One-half of it goes into your retirement fund and the other half goes toward education. By starting this plan at 30 years old (and when your kids are just born), your $200 in your investment account will yield $1.275 million and the other $200 a month will grant your children $60,500 a piece toward their college expenses.
This gives you the opportunity to retire semi-comfortably and it gives your children a head-start with their college expenses – even though it most likely won’t be at an Ivy-League school.
Which option would you choose and why?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.