Take Care of Retirement First

Many nearing the end of their working life stare a choice in the face: Save for your own golden years or save for your children’s future. Many make what appears to be the obvious – yet also the near-sighted – decision: They focus finances on the kids’ education.

Among the almost 60 million Americans age 50 to 64 are parents challenged to save for both retirement and their children’s college education. Some can put aside enough for both; others save what they can.

For some, that’s not much: According to the Schwartz Center for Economic Policy Analysis, 75% of the 50-64 age group have, on average, managed to put aside just $26,395 for retirement. Researchers term this nest-egg insufficient to “provide a significant addition to a monthly Social Security benefit.” Worse, researchers find that half of near retirees in this group have saved nothing for retirement.

When my clients get caught up in the choice between saving for college and foregoing retirement saving, I give them my airplane analogy:

Ever flown on an airplane? Once you’re belted in and the plane makes its way from the gate, the flight attendants start their routine flight instructions. After they point out the exit rows and show how to use a seat cushion as a floatation device, their conversation turns to cabin pressure.

“Should the aircraft experience a decrease in cabin pressure, oxygen masks will fall from the overhead compartments. Grab the mask and fully extend the cord to allow the release of oxygen ...”

The next words are crucial to your survival:

“… and place the mask over your face and tighten the straps on the side. Once your mask is secured, attend to your child or help the person next to you.”

Why? Because if you pass out at 35,000 feet, you’re no use to anyone! Similarly, if parents saving for both retirement and college focus on college, they save little if any for retirement. They risk eventually over-burdening the children they saved and sacrificed to make independent and successful.

Financial aid is scarce for retirement but still plentiful for college:

Pay As You Earn. A new program requiring a partial financial hardship, which means the monthly amount you pay on eligible federal student loans under a 10-year Standard Repayment Plan exceeds the monthly amount you must repay under this program. Payment is capped at 10% of your discretionary income, and there’s possible forgiving of any balance after 20 years.

Income-Based Repayment (IBR). This also requires a partial financial hardship, with monthly payments limited to 15% of your discretionary monthly income and any balance at the end of 25 years possibly forgiven. Of the 1.3 million borrowers in IBR, 90% have yearly incomes less than $50,000.

Income-Contingent Repayment (ICR). It pegs monthly payments to the borrower's income, family size and total amount borrowed. Payment is adjusted annually to reflect changes.

Public Student Loan Forgiveness (PSLF). For workers in the public sector and non-profits. After making 10 years’ payments, the borrower may have balance forgiven.

Despite these and other programs, no one says don’t save for your child’s education. Just save for retirement as well. Otherwise the reward for all that money saved for college may be a degree – and two future, retired roommates for the graduate.

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Sterling Raskie, MSFS, CFP, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is an adjunct professor teaching courses in math, finance, insurance and investments. His blog is Getting Your Financial Ducks in a Row, where he writes regularly about investments, retirement savings and financial planning.

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