6 Steps to Help Plan for Your Child’s College and Your Retirement

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Published September 06, 2013

| FOXBusiness

If you have kids, chances are that the thought of paying for college is never far from your mind.

According to the U.S. Department of Education, sending a child to the average public college totals $60,400 over four years, while the average price tag for a private college comes in at $131,600. In addition, college costs are rising at roughly 6.5% a year, meaning a public four-year degree could top $200,000 by 2030.

It’s never too early to start planning for college, especially when other pivotal life events, like retirement, also loom on the horizon. Here are six steps to help get you started.

Estimate

It can be easy to get overwhelmed over the idea of saving so much money. But thanks to the internet, you’re never more than a couple clicks away from an online calculator that will tell you exactly how much you will need.

You can get a quote for the cost of attending college today, throw in an inflation figure (or factor on a 6.5% rise, the current rate at which rates are increasing) and see how much college might cost when your child is ready to enroll.

Additionally, you should estimate how much money you’ll need for retirement. Many experts advise saving enough so that you can live on 70% to 80% of your pre-retirement income. Use an online calculator to figure out how much you’ll need to save each month to meet your goals.

Once you have a tangible number to work with, you’ll know what your path ahead should look like.

Prioritize

Once you have a decent idea of how much you’ll need to save each month in order to prepare for your child’s college and your own retirement, now it’s time to create a manageable budget to reach the goals.

For many, their “ideal savings rate” will seem too large to handle, and will require cutting expenses to help reach your goals.

If you can’t meet your savings goal each month, you’ll need to choose whether the money should go towards college or retirement. This is a tough call, but the answer should almost always be retirement, for a few reasons: Your children have their whole lives to build their net worth and gear up for their own retirement. Time is on their side. But – frankly – your timeline is shorter. Furthermore, your children can take out “student loans.” You can’t take out a “retirement loan.” They have options; you don’t.

Invest Wisely

 Smart investing isn’t only for wealthy people, and most of us need to invest our money wisely in order to grow it substantially enough to meet their long-term goals.

Many investing avenues are open to you, even if you can only spare a few hundred dollars to begin. Your “asset allocation,” which refers to the way in which you divide your portfolio among stocks, bonds and other types of investments, will play a large role in determining your returns. The “best” asset allocation is unique to you, because it depends on your age, risk tolerance and goals.

Pick the Best Funds

Asset allocation isn’t all that matters when it comes to investing. Taxes can take a huge bite out of your returns, as can high management fees, poor performance and other factors. The way in which you manage and optimize your holdings will play a huge role in determining your return.

Before investing in a fund, do your research and learn more about its performance and how it fits into your portfolio and unique factors like risk tolerance and tax structure.

Start Early

Getting an early start on your college savings and retirement plan will give you maximal benefits in watching your money grow. Why? Because of something called “compound interest,” which Albert Einstein referred to as one of the miracles of the modern world.

Compound interest is the ability of the interest that you earn to earn its own interest. In other words, your gains will make more gains, over and over again for every year that you keep investing.

Imagine two scenarios. In scenario A, you contribute $250 per month ($3,000 annually) towards your child’s college fund, starting at her 1st birthday. Your money grows at 7%, compounding yearly. By the time she turns 18, you will have contributed $51,000 out-of-pocket toward her college fund.

Alternately, imagine that when your child is 15, you make a one-time lump-sum contribution of $51,000 toward her college fund, and leave it invested at 7% for three years.

In the first scenario, your child will have $98,100 in her college fund by her 18th birthday – including $47,100 of which came from compounded interest on your investments.

In the second scenario, however, your child will have only $62,897 in her college fund, $11,897 of which come from compounded interest.

Take Action

Start planning today. Your kids will thank you when it’s time to go to college. And you’ll thank yourself when you’re enjoying a wealthy, stress-free retirement.

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