By Julie Jason: Setting Savings Priorities

Which would you rank higher: saving for your retirement or for your children’s education?

A recent Fidelity study showed that when parents ranked their #1 saving priority, saving for college topped the list, followed closely by saving for retirement (see 2022 study Fidelity Investment College Savings Indicator at tinyurl.com/y5ftbv2u).

From my point of view as a fund manager with wealthy families, it is better not to choose between these two priorities, but to save for both objectives at the same time. According to the authors of the Morningstar report “The College Question” (tinyurl.com/w8actdy8): “If you don’t prepare enough for your own retirement when you save for your kids’ college, the people most likely to be burdened with your financial needs are…your children.”

Direct your savings efforts towards several objectives, depending on your age and your situation.

For example, if you are a young parent, 1/2 of the amount you save goes towards retirement, 1/4 towards saving for college and 1/4 towards saving for a house. The reason for taking this approach is simple: capitalization. You lose the benefits of funding when you defer the retirement investment to later years.

How do successful families manage multiple goals? In my experience, it’s just a matter of thinking about what the future will look like before you act. It simply means this: it’s all about planning.

Is everyone planning? No. The Fidelity study found that most (60%) use their “own best estimate” to estimate college costs. While parents have said they expect to pay 69% for their child’s education (compared to 65% in 2020), the reality is that they are on track to cover only 27% of their projected college fees. (compared to 33% in 2020).

If you’re reading this column, I’m going to guess you don’t fall into the “go with your gut” cohort. I guess you’d rather do your homework and plan for goals that you can safely achieve.

To help you, here are some tools.

FINRA (the Financial Industry Regulatory Authority) offers information on personal finance (tinyurl.com/2ayx5f74). Fidelity provides a college calculator (tinyurl.com/2p8ztwun) that can give you an overview of your savings situation for college. The College Scorecard (tinyurl.com/468e97ch) lets you compare colleges based on fields of study and cost, among other variables.

For financial aid, the US Department of Education’s Federal Student Aid site (studentaid.gov) is a must.

Before leaving this topic, let’s talk about a problem you don’t want to encounter. Some parents have their own student debt that they have not yet repaid. It’s an added burden if you’re also trying to save for your kids’ college as well as your own retirement. Indeed, the Fidelity study found that 88% of respondents who have student loan debt prioritized paying off their own loan before saving for their children. While that may sound smart, it may not be.

Again, savings priorities may need to include several coexisting goals.

Conclusion: It’s important to have a plan in place and to remember the power of funding — the sooner you save and the longer you save, the better your chances of funding your future endeavours.

And speaking of savings, the 401(k) Champion Award, which seeks individuals who not only maximize their 401(k) benefits for themselves, but also inspire others to do so, is accepting nominations and applications for the 2022 contest. Find out more details at 401kchampion.com.

A seasoned investment advisor, columnist and award-winning author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read his latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)”, published by the American Bar Association. Write to Julie at [email protected] While it’s impossible to answer every question, every email is read and reviewed and may lead to discussion in a future column.

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