Financial Peace University #7: Retirement and College Planning

Woohoo! 7 weeks have gone by really fast, but I feel like we’ve learned a ton in our classes. This past week’s lesson was about saving appropriately for retirement and your children’s college. And Dave R. provided some great tips and tricks as always.

The first discussion is why do we save for our own retirement before we save for our kid’s college funds? It can feel almost wrong to put our own needs ahead of our children’s, like an unnatural reversal of taking care of our kids second and ourselves first. It can feel selfish. But there’s a lot of logic around why we should make saving for retirement a priority before saving for our kid’s college.

First, let’s explore the natural progression of our lives. We work hard, try to save money. If we aren’t saving for a particular goal, or saving enough, by the time we want to retire, we might not have enough. Even though we’ve saved for years, it might not be enough to get us through the next 10, 15, 20 years or more. People outliving their savings is a very real thing. If you retire at 60, 65, or even 70, but you live until 90, that’s twenty years of income that you hope you have saved.

But retirement isn’t necessarily a magical number. For instance, none of us know at what age we’ll pass away, or if our spouse will pass before or after us. So saving for retirement feels like this far-off mirage of a number that we can hope is enough. Or, we can make saving a priority and work towards the goal of saving sufficiently for our retirement, as well as saving enough to leave a legacy to our future generations.

Dave recommends saving 15% of your annual household income in Roth IRA’s and pre-tax retirement plans. This is Baby Step #4. So, the idea behind it is that once you are out of debt (Baby Step #2) and have a fully funded emergency fund (Baby Step #3), your next financial priority is to begin investing in retirement, and to keep doing it…until you retire. That pretty much means that each year, you’ll be analyzing what 15% of your household’s income is, in order to plan to save an appropriate amount. Of course it might not be perfect, some years you might save 13% or 14% and the next year 18%. With overtime, bonuses, lack of work or layoffs, that 15% figure could be something that changes every year. Back to our budget committee meetings with our significant other, to have the discussion and plan to save appropriately.

Dave gives recommendations for how to invest these funds. He believes strongly in mutual funds and not investing for retirement in any single stock funds, and not saving for retirement (or for college) in any type of insurance plans or savings bonds.

Baby Step #5 entails saving funds for the kid’s college accounts. If you have a young child and begin saving now, you have a really good chance of getting ahead of the inflation rates, letting compound interest work in your favor, and being able to finance your kids college 100%! But, it’s important to note that we shouldn’t put the kid’s college savings ahead of our own retirement. Let’s think about that: If we save all of our extra funds to the kids college, we actually run the risk of over-saving for their college. We also run the risk that we would shortfall our own retirement savings, and while there’s lots of ways to pay for college, such as cash flowing it, your kid gets a job and pitches in, scholarships, grants, inheritances, etc — there are no other ways to pay for retirement! Yes, we all know that Social Security is there, but do we really want to rely on the government to take care of us? Not particularly!

Another reason to not dump all your eggs in the kid’s college fund, so to speak? What if your kid never goes to college! All of that money saved and for what? So it’s definitely wise to save some for your kid’s college education, but that’s not the only savings goal you have going on – matter of fact, Baby Steps #4 and #5 run currently, side by side, and you work on them both at the same time. Once you begin Baby Step #4, saving for retirement, you really don’t stop, that is until you retire. Saving for kid’s college in Baby Step #5 is a gradual process as well. The Tortoise wins the race in these instances!

Check out Dave’s good buddy’s website, for some calculators and information on how to “Retire Inspired”, here at https://www.chrishogan360.com/. You can use the handy R:IQ calculator to calculate your “retirement IQ” and get a ballpark figure of how much you’ll need in retirement based on a set of assumptions. While everyone’s situation is different, the tool at least guides you to think about how much you should be saving based on how much longer you have to save, etc.

For some information on college planning, I liked the college savings calculator at Saving For College. It’s an easy to use calculator that allows you complete control over the assumptions to arrive at a monthly college savings amount that suits your needs.

Happy number crunching!