Save for You, Too

By Martha M. Hamilton
Sunday, January 28, 2007

Forget the kids. Save for yourself.

That may be putting it a bit too bluntly, but many financial planners recommend concentrating more on your own retirement savings and less on saving for your children's college education.

Most parents are torn between those two goals. Take Valerie Conerly, a 29-year-old single mom in Baton Rouge. She recently got to a point where she could begin to set aside some of her salary as a paralegal. She had been paying $500 a month for daycare. But now 4-year-old Tyler is in pre-kindergarten at a public school, so that money can go into savings. "I don't want to spend it," said Conerly, wisely.

She has a 401(k) retirement savings plan at work that she can contribute to beginning in July. In the meantime, she has opened a Roth individual retirement account with T. Rowe Price. She's thought about contributing to a 529 college savings plan but wants to know what happens if Tyler obtains scholarships or grants and there's money left over.

"My general approach is that, to the extent you have not maxed out on tax-advantaged retirement accounts such as a 401(k) or Roth IRA, you should really strive to do that as a primary savings goal," said Joe Hurley, founder of the excellent Web site and author of "The Best Way to Save for College: A Complete Guide to 529 Plans."

One approach he recommends to parents who need to save for retirement is to put only a minimal amount in a college savings plan each month, perhaps as little as $25.

Part of being a parent is being a strong role model for your children, and putting money aside for retirement is a good example to set, said several financial planners.

"It's nice to be a wonderful parent, but honestly, I find way too many parents who are going overboard on paying for private grade school, private high school and private college, who never get around to themselves," said Peggy Cabaniss, owner of HC Financial Advisors in Lafayette, Calif., and chairman of the National Association of Personal Financial Advisors.

Paula H. Hogan, who founded Hogan Financial Management, a fee-for-services firm in Milwaukee, said that without knowing more about Conerly's finances, she would tend to recommend "doing something substantial toward retirement and something smaller for college." That way Conerly would get the benefits of starting early in both accounts. Assuming an 8 percent rate of return and that the savings begin on the first of the year, someone who puts aside $520 a month beginning at age 31 will have $58,394 at age 50, compared with the $17,035 accumulated by someone who waits till age 35.

First, however, she should consider paying off credit card or other high-interest debt, which Conerly said she is working on. And most financial planners also recommend having an emergency fund equal to about three months' worth of expenditures.

Also, Hogan noted that 529 accounts may not be the best choice for families with limited income, both because they may not benefit to the maximum from tax breaks and also because their children may qualify for grants, rather than loans, to attend college. More and more schools are offering grants to attract a diverse student body.

"We need to push against this societal notion that parents need to pay for every dollar" of college costs, she said. And if you can't -- or choose not to -- pay for every dollar, tell your child early. "I have noticed that kids who go through school and have paid some portion of their education expenses really value that," she said.

Some parents may worry that their retirement savings will count against their child in qualifying for financial aid, but generally, that's not the case, according to Ellen Frishberg, director of student financial services for Johns Hopkins University. Information about IRS-qualified retirement plans such as 401(k)s isn't even collected on financial aid forms, she said. However, the form will require you to list that year's salary, including the amount you contribute to the retirement savings plan. For instance, if you put 10 percent of your salary into a 401(k) the year your child applies for aid, that amount will still count as part of that year's salary.

The equity you have in your home also doesn't count against your child in qualifying for aid, said Frishberg, nor does your small business if you have fewer than 100 employees.

"One thing I've heard many financial planners say in doing financial aid workshops is that you can borrow for education but you can't borrow for retirement," she said. "That's why they encourage people to max out their retirement savings and not use them to pay for school." You can withdraw money from a retirement account to pay for your child's qualified higher education without paying a penalty. But you'll have to pay taxes, and you'll be losing both the money you withdraw and what it could have earned.

"The best thing you can do for your child is to live responsibly and take care of yourself, but it can be extraordinarily difficult to prepare for the last third of your life and your child's college education," said Hogan.

But think of this: When your child arrives at that stage of life, stressed out about her own retirement income and helping the kids through college, won't it be nice if she doesn't have to support you?

Do you have any issues related to retirement that you would like to see explored here? If so, I'd like to hear from you. Please

© 2007 The Washington Post Company