College costs have risen by more than 25% over the last decade, so it’s no wonder military families worry about saving for their children’s higher education. When you are just starting out, prioritizing your savings goals can be overwhelming: should you try to set up your kids for success by saving for college? Or should you be saving for your own retirement instead?
I have seen many clients decide that their kids should come first, setting up a 529 plan — a type of tax-advantaged college savings account, even before they have set up their own retirement accounts. Most parents feel it is their responsibility to provide for their children’s future because no one wants to see them saddled with college loan debt.
But I’m going to suggest that one of the best gifts you can give your children is to save for your own retirement first.
Put on your own oxygen mask before assisting others
This is something we hear every time we fly, and in countless memes. It may be clichéd, but it is also true: we can’t help others if we are not in a good place ourselves. We do our children no favors if we fund their education and then can’t take care of ourselves later.
The reason why it’s important to start saving for retirement early is you benefit from the power of compounding — a small investment now can build up into a healthy nest egg in the decades before you retire.
And if your service branch or employer match your contributions, then it’s really a no brainer: you should be investing in your workplace retirement plan to at least get the matching funds.
There’s no financial aid or scholarships given for retirement
Your child has the possibility of qualifying for financial aid, scholarships or even a federally backed or private student loan. There is no similar financial assistance given for retirement except for Social Security, that is rarely adequate and may only be paying 75% of benefits by 2035.
In a recent AARP survey, a third of respondents in their 40s, 50s, and 60s said they had to give their parents money, and most of the time it was for essential needs like housing and food.
I don’t want my kids to have to deal with that, especially given the current economic downturn and slow wage growth they will be facing when they head off to college in a couple of years.
There are other options
Many school systems now use career readiness software like Naviance to help students plan for college and how to pay for it.
As mentioned previously there are scholarship options out there, including some targeted specifically at military kids. Online search engines like Fastweb, Cappex, Unigo, College Board, and others make it a lot easier to apply.
Students may be eligible for financial aid in some form, and the dreaded FAFSA, or Free Application for Financial Student Aid, is now easier and shorter, and there’s even an app for it.
Some military children may even be entitled to GI Bill benefits that can help pay for tuition, housing and books, and can be split among multiple dependents.
Get creative with ways to save
Did you know that you can set up a 529 College Savings Plan for your child and then have friends and relatives contribute to it?
Fidelity says that a $50 gift today could be worth $200 in 20 years (again, thanks to the power of compounding) and offers tips on how to ask others for a contribution.
There’s even a way to use contributions to a Roth IRA to help fund college. Since contributions are post-tax, it can be withdrawn without penalty. But I don’t think it’s a great idea to withdraw funds from a retirement account unless absolutely necessary.
You may be able to do both at some point
When my husband and I had our oldest daughter, we couldn’t imagine a time when we could possibly afford to contribute to both our retirement and her education, especially when we had her sister a couple of years later.
But a few years, three deployments, and a couple of promotions later, we finally got our savings act together. We paid off our car loan and then increased our TSP contribution, contributed a bit to an IRA, and then set up a 529 account for each of the girls. We have a few months of GI Bill entitlement left to split between each kid.
We’ve been upfront with our girls, letting them know we will help them as best we can, but that our main focus is on our retirement. In the end, taking care of ourselves puts us in a better place to help others.
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