Imagine yourself years from now. You've reached retirement age, ready to relax and enjoy the fruits of your labor. But instead of golden years, you face financial anxieties. This scenario, unfortunately, is a reality for many Americans. The truth is that planning for retirement should be the cornerstone of your financial well-being. As Steven Covey famously said, "Start with the end in mind."

Many parents find themselves caught up in the whirlwind of daily life—building careers, raising children, and managing household finances. However, amidst these responsibilities, it's easy to overlook long-term financial planning, particularly regarding retirement. Yet, funding your retirement is the ultimate goal of economic independence, and understanding where you stand with this goal is paramount.

As we tell all of our clients, "Fund your financial future first, finance their education if you must."

The Harsh Reality of Savings

A significant portion of Americans, especially those nearing retirement age, lack adequate retirement savings. For instance, a recent survey by SoFi, a San Francisco-based personal finance company, found that 59% of adults aged 18 and over have either no retirement savings or less than $49,000. This highlights the need to be proactive in building your nest egg, not just through retirement accounts but through a variety of investments and financial vehicles.

Building Your Nest Egg: Beyond Retirement Accounts

While retirement accounts like 401(k)s and IRAs are powerful tools, they're not the only way to save for your future. A diversified portfolio that includes various investments can significantly contribute to your financial security after retirement. Here are some examples:

• Stocks: Owning company shares allows you to participate in their growth potential.
• Bonds: These provide regular income and are generally considered less risky than stocks.
• Mutual Funds and ETFs: These offer a basket of investments, providing diversification and potentially lower fees.
• Real Estate: Investing in rental properties can generate income and appreciate in value over time.
• Certain Insurance Products: Some life insurance policies can offer a cash value component that grows over time. You may be able to access the cash value through loans or withdrawals (with tax implications) to supplement your retirement income or help fund educational expenses for your children.

Remember: Each investment carries its own level of risk and reward. Consult a financial advisor to determine the investment mix that aligns with your risk tolerance and financial goals.

Loans for College, Not Retirement

Unlike college, where student loans are readily available, there are no "retirement loans." You can't borrow your way into a comfortable retirement. While student loans can be a burden, children have financial aid options like scholarships, grants, and work-study programs to help manage college costs.

By prioritizing your financial security, you can make informed decisions about allocating resources toward your child's college education. As tempting as it may be to focus solely on funding college expenses, neglecting your own financial future can have far-reaching consequences. Money invested early in various investment vehicles has the potential to grow exponentially over time, thanks to the power of compound interest. Therefore, funding your financial future first and foremost is essential for long-term wealth accumulation and security.

Three Ways to Pay for College

We discussed the importance of prioritizing your financial security for a comfortable retirement. Now, let's delve deeper into the realities of funding your child's college education. There are essentially three ways to pay for college:

1. From Your Income: This involves using your current income to cover college costs. While this approach avoids debt, it can come at the expense of your present-day well-being. Stories abound of families sacrificing vacations, new cars, and even date nights to free up cash for college. Remember, these are "today's dollars," and excessive sacrifice can negatively impact your quality of life and potentially hinder your ability to save for retirement.

2. From Your Assets: This involves utilizing your existing assets to fund college. Options include tapping into a home equity line of credit, refinancing your house (which may come with risk), borrowing against your retirement savings (a risky move that reduces your nest egg and its growth potential), or liquidating investments. While this approach avoids student loans, it diminishes your resources for the future. Consider the opportunity cost: money used for college won't be compounded in an investment vehicle.

3. Student Loans: Student loans might be a viable option depending on your financial situation and retirement goals (remember, start with the end in mind!). However, be aware of the burden they can create. According to USDebtClock.org, the average graduate carries a staggering $39,000 in student debt compared to just $8,400 in credit card debt.

So, What's the Right Choice?

There's no one-size-fits-all answer. The best approach depends on your unique circumstances. Consider working with a financial advisor to map out your current situation and determine the best way to pay your share of college expenses. It's important to remember that even with scholarships, grants, and work-study programs, a portion of your child's education will likely be left to cover. This could include room and board, fees, and other miscellaneous costs.

The good news? With a well-defined plan, you can minimize the impact on your retirement goals while still helping your child achieve their educational aspirations. 

Should You Retire Before or After Your Child Finishes College?

Following the principle of "start with the end in mind," prioritizing your own financial security for a comfortable retirement comes first. This doesn't mean you can't help your child achieve their educational goals. Our goal is to help families avoid the difficult choice between enjoying retirement and affording college. The good news is that early planning offers options to make both a reality.

The Power of Early Planning:

Here's why starting college planning early is crucial:

• Maximize Financial Aid: Federal financial aid, awarded through the FAFSA (Free Application for Federal Student Aid), relies on your income from two years prior (prior-prior year). Typically, this means the tax year that encompasses the latter part of your student's sophomore and the early part of their junior year. So, if you plan to retire the year your child starts college, your financial aid eligibility might be based on your higher pre-retirement income. This could potentially decrease the amount of aid you qualify for. Conversely, if you retire during that review year, you might benefit from that potential reduction of income. These are all decisions that we can help you make based on what is best for your situation.

• More Options on the Table: Beginning the planning process early allows you to explore a broader range of strategies:

  • Maximize Retirement Savings: Years of consistent contributions to retirement accounts allow your money to grow exponentially through compound interest.
  • Explore Certain Insurance Products: As mentioned earlier, some insurance products can help in this situation.
  • Consider Your Child's Future Earnings Potential: Discuss anticipated college costs with your child and encourage them to research scholarship and grant opportunities. They might be able to contribute through work-study programs or part-time jobs. However, eligibility for work-study may also depend on your overall financial situation—another way your retirement decision may have an impact.

Working with the College Financial Aid Department

While a retirement year coinciding with your child's college start might not be ideal for financial aid purposes, there might still be options. Many colleges have financial aid departments willing to consider exceptional circumstances. Early communication regarding your retirement plans can open doors for exploring alternative financial aid solutions. 

Remember: Early planning is vital! The sooner you begin, the more options you have for a comfortable retirement while supporting your child's educational journey. 

Planning for a secure retirement should be the cornerstone of your financial well-being. While helping your child achieve their educational goals is important, prioritizing your own financial security allows you to do so without sacrificing your future. By starting early, exploring various investment options, and potentially utilizing certain insurance products, you can build a nest egg that supports your retirement dreams and your child's educational aspirations. Remember, there's no one-size-fits-all answer. We understand that every family's situation is unique. Book an appointment with us today to discuss your specific circumstances and craft a personalized plan that prioritizes your financial future! We're here to help you navigate the path toward a secure retirement and a bright future for your child.

At Auxilium, we have over 30 years of experience helping parents like you get their students into their dream schools while paying a fraction of the cost. We offer one-on-one counseling programs that can guide you through every step of the college process, starting as early as middle school. Don’t hesitate to reach out and let us help you navigate this journey with confidence.