Parents Scale Back on Retirement and College Savings
In today's environment, parents make tough decisions about their spending goals.
It's a question many parents struggle to answer: Should savings—if there are any—go toward retirement or the kids' college expenses?
The economic slowdown is making that choice even harder, as many parents are forced to scale back on both financial goals. According to a new study from TD Ameritrade, 36 percent of parents have cut back or stopped saving altogether for their children's education because of the current financial climate. That's despite the fact that most parents estimate it takes 11 or more years to save enough money to cover children's college costs. Meanwhile, TD Ameritrade also found that 1 in 3 adults lacks a financial plan for retirement.
The biggest mistake people make in their 30s and 40s, says Diane Young, TD Ameritrade's investment director, is underestimating how much they can put away for later. "They're thinking they can't save more than they're already saving. But you can. You don't have to go out to dinner four times a week or spend $5 on coffee," she says. That kind of discretionary spending adds up to a substantial impact on savings goals, she says, especially because people often see their peak earning years end in their 50s, making the previous two decades the ideal time to set aside money.
Many people, she adds, have trouble overcoming the "fear factor" of working out just how much money they need to save to cover their goals. To help overcome that paralysis, TD Ameritrade offers consumers a "WealthRuler" that calculates potential savings shortfalls based on retirement contributions, salaries, large expenses such as college tuition, and retirement age.
A 40-year-old earning $50,000 a year who contributes 20 percent of her salary to a 401(k) and who plans to retire at age 65 and send a child to college, for example, should probably be saving around $1,400 a month, assuming average market returns. And even then, WealthRuler predicts, she'll face a shortfall around age 86. (The program estimates such a person would have about $4,275 a month in retirement expenses.)
While 60 percent of parents in the TD Ameritrade survey said they will use money in savings accounts to fund children's education and almost half will rely on student loans, many have plans to turn to more expensive sources. Some 13 percent will take out home-equity lines of credit, and 10 percent plan to use credit cards.
Despite those pricey alternatives, Young says she's concerned about people who scale back their own retirement savings in order to fund their children's tuitions. After all, students are eligible for scholarships and financial aid, while retirees are not.
When an employer's match on a 401(k) is involved, she says, consumers should be sure not to miss it, because those additions accumulate faster than many people realize—and the power of compounding quickly fades away as people age.
After all, Young says, "[Parents] don't want to do all this for their adult children only for them to become bankrupt taking care of [their parents] in their old age" because the parents have no money left for themselves.
Reader Comments
RETIREMENT AND COLLEGE EDUCATION
I AGREE THAT IT IS A HARD SITUATION TO BE IN BECAUSE NOW I HAVE TO WORRY EVEN MORE ABOUT RETIREMENT BECAUSE I AM DIVORCED. I HAVE A ONE YEAR OLD GRANDSON AND I CAN NOT STRESS ENOUGH THAT MY SON WHOSE 30 YEARS OLD PUT ASIDE FOR HIS RETIREMENT AND MY GRANDSON'S COLLEGE EDUCATION BECAUSE YOU DEFINITELY NEED MORE THAN AN HIGH SCHOOL DIPLOMA. HERE I AM IN MY 50'S TRYING TO GO TO SCHOOL MYSELF AND SAVE FOR RETIREMENT AND IT IS HARD BECAUSE NOW I AM GOING TO HAVE TO GET LOANS. IT IS NEVER TOO YOUNG TO PLAN FOR RETIREMENT ESPECIALLY WITH SOCIAL SECURITY THE WAY IT IS.
When Lenders and Market Makers Get Together, Prices Rise
Just like lenders and real estate agents worked together to push up home prices so that the agents got higher commissions and the bank got more interest on the new lifetime debtor, so colleges and student lenders have worked together to make tuition rise because banks win with deeper and heavier college debt and the rich interest students pay for a lifetime and universities win because they can raise tuition as high as they like.
The problem in America is debt. Sellers of everything from homes to bachelor's degrees to cars and LCD TVs use credit as a means to get people to buy things they cannot afford. I knew a lady who had a vocational school for entry level hotel front counter workers and assistant managers and what not and she got certified for federally backed student loans (even private loans have federal backing against default) and she would pull homeless people off the street and charge them $15,000 tuition to put them through a hotel management/worker program for 12 months. She'd pay the "professor" $40,000 a year and all that they needed besides that was chairs. A room full of 25 students returned $375,000 less $40,000 for the teacher and a marginal sum for the room. You could pick up anyone no matter how desperate because banks will give student loans to quite a wide range of people since the federal government pays them back if the student defaults. But the student is hosed too because he can't bankruptcy the debt and the penalties and interest follow him for LIFE and the US government will garnish SSI, SSA, tax refunds, wages, anything they can get their hands on for the rest of your life.
Housing worked much the same way and still does with the Feds headed by the same hacks from Goldman Sachs (Paulson) and Carlyle Group guy who will head Fannie now (Carlyle is the one where Bush Sr. got to make big money from KBR making soup and putting port-a-potties in Iraq for $10 billion). The new Treasury move today will put an extra $200 billion into Fannie and Freddie backed by the federal government to encourage lending to people that normal banks worried about being repaid wouldn't lend to. They wouldn't lend because they'd be worried about whether the person could repay. Take away that worry and even if people shouldn't be buying houses or overpaying for them at least because prices are dropping and inventory is at records, there will be foolish buyers who will do it if someone will loan them the money to. If the federal government backs the debt, then buyers (and students are buyers of education) will overpay - that is the ones who are foolish to overpay will be able to borrow the money to do so when a normal market wouldn't allow it.
Hey, you know..
..it sucks really bad to be poor and educated. Then to know that your parents are poor because of your education has to sting as well. Then to spend 12 years paying back any loans you made during the whole fiasco. "But I can do calculus!" Can you find a good job? "Ummm...education is..good?" Wrong response. You know, I went to college with an Omish guy who was set for $50,000 in debt that he was going to have for 4 years of college with a bachelors to show at the end for all of the trouble. I think colleges and their recruiters should make better finance(lower cost and more payment options) for students and parents just as important of a priority as profit. Jacob wouldn't have had to hock his plow if things were different. That situation helped inspire me to transfer to a State school.
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