21-century paradox- Can I pay for college and save for retirement without going broke?
5 minute read
Back in the day, the majority of Americans entered retirement with mortgages paid-off, little to no debt, a pension and Social Security to rely on for income you can count on. Fast forward to today, where the Government Accountability Office shows that debt amongst older households (50+) has ballooned, with median debt about three times higher than it was just three decades ago. And a large part of that being student loans for themselves, their children, and/or grandchildren.
If you are like many people nearing (or in) retirement, you may be confronted simultaneously with two big ticket budget items- paying for your children/grandchildren’s higher education AND saving money for your retirement. You might even still be paying off your education loans (!).
Americans have come to understand that college is a need not a want, an essential cost to ensure future employment and economic empowerment. And this is no small expense. The average estimated full-time undergraduate budget- tuition and fees, room and board, books and supplies, transportation, other expenses- at a public four-year in-state college is $27,330 a year. A private nonprofit four-year college will cost $51,690 a year. Many students wisely fund these costs with “other people’s money”- grants and scholarships- before exploring loans and/or paying out of pocket. The good news- in 2020-21, total education borrowing declined by $9.8 billion (9%). The bad news- total borrowing in the same period was $95.9 Billion (CollegeBoard Trends in College Pricing and Student Aid 2021).
Put your oxygen mask on first
Understandably, when most parents and grandparents see these numbers, their instincts are to try to prevent or ease their children’s and/or grandchildren’s debt burden by helping to pay for these expenses. But what if that instinct ends up hurting you financially as you save for or spend in your retirement? Advisor Dana Anspach, CFP, RMA, and the founder and CEO of Sensible Money, puts it this way- “you can get a loan for school, you cannot get a loan for retirement.”
A retirement journey takes many twists and turns and is unique for everyone. What is not unique? The need to ensure your money lasts as long as you do. Before you consider sharing your money with others, she recommends knowing your coverage ratio. Essentially, do you have enough sources of income (e.g., employment, pension, social security, annuities, personal investments) to cover your retirement lifestyle? If a client falls below 50%, often times this can prompt her to have a discussion on the merits of protected income from an annuity.
Investors continue to express interest in this retirement solution to help meet their basic expenses. And this especially impacts women- less half report knowing how to make their money last in retirement (State of Women Survey 2022). Having a plan is your first step to envisioning your future and making sure any higher education financial help you offer does not impair your retirement. For more information on financial planning, there are free tools and resources available at the ALI website: https://www.protectedincome.org/tools-guides. Visit protectedincome.org to find more resources and guides.
WATCH Your Money Map: Student loans and retirement Planning
Five tips for parents who offer financial support to adult children and grandchildren:
- Educate them about finances so that they’re prepared to take responsibility for their expenses. Formal financial literacy education is lacking in most U.S. schools, but by imparting your wisdom, you can begin to demystify money. Explain your household budget, how to establish credit, and the importance of the “money happiness formula”- make sure your income is always greater than your expenses.
- Alert them to programs that can help pay off their loans. Many employers have started to offer student loan debt assistance to their benefits packages and the Federal Government offers a Public Service Loan Forgiveness (PSLF) program.
- Set expectations about any financial support you give them and write it down. Is this a gift? Is this a loan? If so, set terms. Too often, temporary help becomes long term help without clear communication on what you are able to afford.
- Include them in your late-stage life planning. As you age, physical decline and cognitive impairment are all but inevitable. Open conversations now about your financial fitness and what you want will help them understand your wishes as well as any of your limitations.
- Determine what you can afford. Budget and retirement calculators are a great way to see how much, if any, wiggle room you have for “family bank” decisions. A financial professional can also be a helpful resource to offer independent and expert advice.
Dana Anspach Bio
Dana Anspach is the founder and CEO of Sensible Money, LLC. In 2020, for the third year in a row, Investopedia named Dana to their Top 100 Most Influential financial advisor list for her contributions to financial literacy. She has been writing as an expert on retirement-related topics since 2008, including contributions to MarketWatch and US News & World Report. She is the author of the lecture series How to Plan for the Perfect Retirement, available on The Great Courses, and the author of the books Control Your Retirement Destiny and Social Security Sense available on Amazon.
Practicing as a financial planner since 1995, when Dana began working with people in their 50’s and 60’s she realized that a different type of planning was needed to align one’s finances for a transition out of the workforce. She founded Sensible Money in 2011 with that goal in mind.