Retirement or College Savings - Which First?

The term “sandwich generation” commonly refers to those people who are caring for aging parents and their children at the same time. Today, I introduce a new term – The Financial Sandwich Generation.

We often see clients in their mid-30’s to early 40’s attempting to save for their own retirements even while they pay off their own student loan debt. Adding to that balancing act, they are also having children and are now concerned with saving for their college educations too. We may actually be witnessing the very first generation that has to deal with three major obligations all at the same time – 1) Student loan debt; 2) Retirement; and now 3) College funding for their kids. Thus, the Financial Sandwich Generation. (Trademark pending)

So, how should this new generation prioritize their obligations? First, this should be approached similarly to the instructions we receive on an airplane before takeoff – you know, the ones we never listen to. They tell us that if the cabin loses pressure, oxygen masks will automatically drop from the ceiling panel above us. Put on your mask first, then assist your child. Those instructions should be our model for prioritizing our obligations as well. As a parent, that is the exact opposite of what we naturally want to do, right? We’re used to subrogating everything to our offspring – love, food, comfort of all types. So, all of a sudden, we’re expected to be selfish and put our needs first? Why and how?

Here is the recommended order and reasoning:

• To be blunt, you can borrow for college but you can’t borrow for your retirement. So regular, automatic contributions to your planned retirement accounts should take priority – pay yourself first.
• Next comes your student loan debts. After a nuclear Armageddon, only two things will still exist: cockroaches and student loan debt. Even bankruptcy can’t erase that obligation. So, make those regular payments.
• Finally, saving for your children’s college education will require smaller monthly contributions the earlier you are able to start.

Saving for college can be daunting if you pay too much attention to the headlines about tuition so let’s look at an example:

If paying retail is for suckers, so is paying the full sticker price advertised for tuition. Very few do. So, don’t think you have to save 100% of the expected cost of attendance. Most experts agree that saving enough for one-half of the expected cost will suffice. The rest can come from tuition discounts, scholarships, other financial aid and, as a last resort, student loans.

According to the College Board Trends in College Pricing, the total 4-year cost of an in-state public university (tuition, fees, room and board) for a child just born will be $137,757 when the child is ready to head to the dorm. So, your goal should be to save half of that amount – $68,878. A large number, yes. But, let’s break it down:

If you save just $160 per month for 18 years in an account that earns 7% per year, on average, you will achieve your goal. In Lexington, that’s about half what the cable company charges for internet, phone and a reasonable TV package, so cut the cord and put your money into some real value. (Sorry, couldn’t resist taking a jab)

As always, having a plan to balance all your competing financial needs will put you on the right path to achieving all your financial goals, while easing your worries.

Steve Byars, CFP®