Why You Should Prioritize Retirement Savings over College SavingsSubmitted by Queen City Capital Management on September 21st, 2016
September is National College Savings Month
Why You Should Prioritize Retirement Savings over College Savings
Young families with an eye to the future are faced with a daunting choice – to save earnestly for a secure retirement or to save for their children’s education. Can you do both? Certainly it is possible; however, with the cost of a college education and retirement (thanks to health care costs) rising faster than the rate of inflation, just targeting one of those goals with savings is no sure thing. And, with the increasing number of people reaching the retirement threshold unprepared and underfunded, financial planners today strongly advise their clients to focus on their retirement savings first. After all, a secure retirement rests squarely on your shoulders; while there are other funding sources that can contribute to your child’s education.
There are actually several good reasons why you shouldn’t save directly for college savings, instead, packing your retirement accounts as full as you can get them.
• The first was referenced above – unless you’re one of the lucky few who still have a guaranteed pension, if your retirement is to be, it will be up to thee. You only get one shot at accumulating enough capital to sustain a lifetime income that will meet your lifestyle needs.
• Secondly, qualified retirement plan assets aren’t included when determining your student’s eligibility for financial aid. You could have a million dollars in your 401k plan, but it won’t affect how much aid your student might receive. Depending on the type of aid and the formula used by the college, even high income earners can qualify for financial aid. The financial aid formulas are very complicated and beyond the scope of this article to explain; however, it is safe to say that assets accumulated in your child’s name, can be counted against his or her eligibility.
• Third, some qualified retirement accounts can be used as a source of college funding. IRAs can be tapped for education expenses; and, if you have a Roth IRA, the withdrawals can be tax free. 401k plans also have provisions for accessing funds for college expenses. While it’s not recommended that this be their primary purpose, if you do well enough in saving for retirement, you may be able to draw down some supplemental funds without impeding on your retirement savings need.
Many students can’t make it through college on financial aid alone and will need to be able to access funds saved for that purpose. If and when you have the means to start saving for both retirement and college, you should consider a 529 College Savings Plan. The tax incentives – tax free accumulation and tax free withdrawals for qualified expenses – make them very attractive. In addition, less than 6 percent of their value is counted towards the formulas for determining financial aid eligibility and amounts.
You Need a Strategy for Saving and Paying for College
For many families, the cost of a college education is beyond their financial capacity, unless they were to focus on college savings at the expense of their retirement savings; but that could be a costly mistake. Instead, families should develop an overall strategy for both saving for college and paying for college, which would include many of the college funding resources available (i.e. financial aid, grants, scholarships, loans, etc.) For the best possible outcome, parents shouldn’t wait beyond their child’s freshman year in high school to develop and implement their strategy. For that purpose, it might make sense to work with a college funding specialist who knows their way around the financial aid and scholarship landscape.
Data Sources: QCCM, Advisor Websites.
This was prepared by Queen City Capital Management, LLC. a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Queen City Capital Management, LLC Form ADV Part 2A & 2B can be obtained by written request directly to: Queen City Capital Management, LLC 105 East Fourth St. Ste. #800 Cincinnati, OH 45202.
All opinions and estimates constitute the firm’s judgment as of the date of this report and are subject to change without notice. This is provided to investment advisory services clients of Queen City Capital Management, LLC. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance is no guarantee of future results.
The information herein was obtained from various sources. Queen City Capital Management, LLC does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Queen City Capital Management, LLC assumes no obligation to update this information, or to advise on further developments relating to it.
This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person.
© Copyright July 2016, Queen City Capital Management, LLC. All rights reserved.