When it comes to saving for college and saving for retirement, many couples with children sometimes opt to save for the former and not the latter. That's a big mistake.
You need to look at your goals as part of a total picture, instead of taking them sequentially. A financial planning rule of thumb says that while there are safety nets in the form of financial aid for college, there are no loans or financial aid for retirement.
Furthermore, ignoring retirement in favor of your children means missing 18 years — or more if you have multiple children — of retirement savings. That could put you significantly behind the eight-ball when it comes to your life after work.
If you fund your children's education to the exclusion of your retirement, it's likely that you will underfund your retirement so significantly that you will have to "play catch up" big time later on.
Over time money in a retirement plan such as a 401(k) or 403(b) accrues without taxes, allowing this tax deferred pot of cash to grow faster than in a taxable account. If you are among those parents who are funding a 529 plan but not your 401(k), it might be time to shift your priorities.
You don’t have to cut your children off — just don’t put all your eggs into one proverbal basket. If you start early, both savings plans can grow—including the green and yellow basket with your retirement nest egg.
Consult a Registered Investment Advisor (RIA) like Oaktree Capital on how best to balance your savings plans.
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This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and was edited by FPA member Robert S. Jackson, PhD. and Patrick Murfin of Oaktree Capital Corporation.
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