Let’s dive into the essential topic that plagues many families: finding the perfect balance between paying for college and saving for retirement. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by John Williams, Wealth Advisor at Bautis Financial and a college planning expert. Together, they provide valuable insights, practical tips, and expert advice on how families can strike a balance between paying for college and saving for retirement.
In this episode, you will learn:
- The current challenges families face when it comes to balancing the costs of college education and saving for retirement.
- Key factors families should consider when deciding how much to allocate towards college savings versus retirement savings
- How families can estimate the future costs of college education and retirement.
- The potential consequences of neglecting retirement savings in favor of funding college education, and how can families find a reasonable balance between the two.
- And more!
Resources:
Episode 158 – How Goal Planning Can Help You Achieve Financial Fulfillment | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by my colleague John Williams. John, welcome to the show.
Hello everyone. Thanks for having me, Marc.
On today’s show, we’re going to talk about how families can balance paying for college and saving for retirement.
This is a deeper dive into a recently released podcast episode, How Goal Planning Can Help You Achieve Financial Fulfillment. In that episode, I talked about goal planning. This is just one type of goal planning that comes up a lot, especially when parents are having children. It would be nice if you could answer that, the answer to the question, which would be, “Yes, I’ll just say for both and fully fund the both.” Of course, that would be great. However, it’s really not that easy to do depending upon what lifestyle you live in.
Retirement can be pretty expensive and college could be as well. If you have, let’s say, three kids nowadays, you could be looking at a million dollars in college costs that you’ll have to save up, if you’re looking to fully fund it, by the time that they’re 21. I mentioned a lot of people engage with us because they have children and they want to be selfless and they’ll come to us and say, “Just tell me how much I have to save for my child’s college,” and do it at the expense of their retirement. Conventional comeback is, “Well, you shouldn’t sacrifice your retirement because you can take loans after college but not for retirement.” And we’ll talk a little bit about that. So one of the first things we’ll do is we’ll look at the current landscape and some of the challenges that families face when it comes to balancing, because that’s essentially what it comes down to, is how do you balance or how do you prioritize the cost of college and saving for retirement?
Current Challenges Families Face When Balancing the Costs of College Education and Saving For Retirement
Let’s start off with just some high level numbers. Sometimes we’ll do these 401K onboardings and the participants will say, “Well, how much should I contribute to my 401k?” And the one thing I’ll always say is, if someone would start contributing from the time that they start working, if they contribute let’s say 10 to 12% of their income annually, and account for raises or as their income is going up over time, they’ll probably be in decent shape for retirement. Now it obviously depends on when they retire and what they’re looking for, what they need to spend in retirement, but it’s a high level rule of thumb that someone can visualize or think about. Obviously, the longer that someone waits to save that 10 to 12%, they’re going to have to start saving more. So if someone, let’s say, graduates college at 21, they start working, they start saving 10 to 12% every year until they retire at 65 or 67, they’re probably going to be in decent shape, but if they didn’t start until they’re 30, they can still catch up. But now that 10 to 12% is probably going to be something like 15 or 16 or 17% per year.
College savings is the same thing. We have ways of looking at it where we can either pick a particular school or we can say, what would the average public or private schools cost? Inflate that cost based off of how old someone’s child is. But if they start as soon as they have a baby, they’re looking at five to $6,000 a year of savings to cover that average cost of private and public schools. And again, same thing. Longer they wait, the more it’s going to cost them per year if they’re trying to play catch up. And if you look at both of those and you’ve had multiple kids, it’s a substantial amount of money that someone may need to save. So a lot of times, like I said, it just comes down to priorities and which one’s more important. And there’s no right or wrong answer. Our job is to show, well if you do this, here’s what it’ll look like. Or if you do that, here’s what it’ll look like.
Related: What is Retirement Scenario Planning?
So, what are the key factors families should consider when deciding how much to allocate towards college savings versus retirement savings?
Key Factors Families Should Consider
Yeah, I realize you actually had a whole episode on goal setting, and assuming no one’s listened to that, and they can circle back, it really does start with that comprehensive approach. I think too many times we think about these different things we want to accomplish, whether it’s financially or in other parts of our lives, without really considering the big picture. How much time do we have? And it’s the same thing with our money. In most cases, the resources are not unlimited, so we need to understand from a comprehensive perspective what is truly important to us and have a better understanding as to what those goals are. We talk about retirement because you can’t borrow from retirement. Which is true, no bank’s going to lend you money for your retirement, and you can borrow for school. But I don’t think that’s necessarily the theme behind that saying. I think that it’s more the idea that you really should be looking at retirement first, and basically just making sure that you’re at least on track to having a comfortable retirement. Because the other part of it too is if you don’t have a comfortable retirement, you’re trying to take care of your kids, but if you don’t have a comfortable retirement, then guess who’s going to be helping you through retirement? It could be your kids.
Yeah, I saw an analogy that was pretty interesting. It’s the airplane analogy. If you ever take a flight, the flight attendant comes on and says, “In the event of some kind of disaster or catastrophe on the plane, you put your mask on first before you put your child’s mask on.” And it’s an interesting analogy. I guess that could mean a lot of different things though. Make sure you’re just secure. There is a way to balance it, but…
Yeah.
And it’s interesting you say about the common rule of thumb about taking out loans for student debt and not being able to take out loans for retirement. You do have to be careful in that in some respect, especially if you are going to be the one that’s going to pay off those student loans. Because everyone’s different. Sometimes they’ll say, “I’ll cover this much or whatever we have saved,” and then they’ll take a loan out for the rest. But a lot of times the plan is the parent is going to pay off the student loan. And in that case, you really have to do look at, run some scenarios, because that debt can be expensive and can impact your retirement in itself. So while these things may look like they’re mutually exclusive, in some cases, dependent upon how they’re funded or paid for, they may wind up impacting each other inadvertently.
And to make things just a little bit more complicated, your life will most likely not just involve college education and retirement. There’s probably other things that are going on that are important to you. So I think taking a step back and just getting financially organized in general before you make this really important decision will give you some really helpful framework around the decision and how much you’re going to be putting towards each. And a lot of that is connected with your household cashflow. Not many households know what their cashflow is and then they might not even refer to it as a cashflow, or some people call it a budget, which I don’t really like that term, but just understanding what’s left over at the end of the month, that number, it’s not an easy thing to find out and to figure out because every month can be so different. But just finding where that comfort level is.
And let’s say for instance you decide, you mentioned that 10%, let’s use you decide that 10% is going to keep you on track. After that and keeping the lights on in the house, what is a realistic number that you have to fuel everything else? You might be trying to save for a down payment on a house, you might prioritize going on vacation over funding the education itself. So it’s not just understanding what those things are, but then taking the next step and putting them in order as far as priority. Each one of those goals is going to go hand-in-hand with your view of… Everybody’s view of college, I find, is very different. It might be molded by their experience. They may have college loan debt themselves, so they might really feel strongly about making sure that their kids don’t be in the same situation as them. Whatever it may be, like understanding your cashflow, what you have available to you, and what’s truly important to you. For instance, I might have a client who says, “You know what? Nothing would make me happier than if my kid decided not to go to college. Maybe they want to take on a trade, they want to open their own business and that would make me really happy.”
On the other hand, you might have a client on the other side of that might say they’re going to college and there’s no questions asked. And then there’s everything in between. And there’s no right or wrong answer to that. I think understanding what’s truly important to you can really help fuel what direction you go with some of the funds that are available to you.
Well, I just want to point out too, I think that starting early and often. So many times people have it on their list of things that they want to do where if you ran the math it would blow your mind, just compounding interest and the power of compounding interest. If you started when little Johnny was one or just born and put in $50, it might be the same as you putting away $500 when they’re 10. It might not seem like a lot, but just open up that 529 or investment account or whatever the type of account, you just decide to put the money aside, and start putting it away in it at just a regular basis and I think you’ll be surprised at progress you can make.
Yeah, so a couple of things on that. How to balance that excess cashflow or that savings cashflow. One thing that you can use right off the bat to make a decision easier is don’t leave money on the table. If your company offers a match on retirement, take that match. It’s almost like free money, I know it’s not essentially free money, but that’s one thing to think about. There were some recent law changes where now if there’s excess money left in a 529, which is a college savings vehicle, it could be converted into a Roth IRA. Because I think that’s one of the fears too that people have is they’ll come to us and say, “Well I don’t know about saving for college because [inaudible 00:09:06] associates saving for college into a 529 and that’s not really where we’re going with this.” But that’s what happens a lot is that it turns to a 529 and people will say, “Well, I don’t want to save in a 529 because what if they don’t go to college?”
Well, one of the, like I said, recent law changes is now you can convert some of that excess, if there is excess. Whether your child doesn’t go to college or whether they don’t spend everything that’s in the 529, it can get converted to a Roth and then it becomes part of your retirement. I’ve talked previously about using real estate as a vehicle to save for college. You can buy some kind of multifamily when you do have that baby and over the years you have tenants in there, it’s paying down the loan on it. 18 years goes by, your child’s ready for school, and what you can do is you can take out some kind of home equity line or home equity loan, use that to pay for college, and you wind up still having the property. So that’s one strategy that people can use.
And obviously there’s a lot of details with it. There are lots of different strategies even outside of just the norm, the 529 that someone can use. And just going back to the basis of this whole conversation, the benefits of saving for retirement or saving for college through either some kind of 401k, IRA or 529 is that there is a tax benefit associated. So a lot of times people want to take advantage of that to get the tax benefit.
Staying on the topic of planning, how does a family estimate the future costs of college education and retirement to make informed financial decisions?
How to Estimate the Future Costs of College and Retirement
There’s a lot of talk in the news and there’s really obviously no way we know what direction this is going to go. Currently, the cost of college is outpacing inflation, so it is going up at an alarming rate. There’s no way to know exactly where things will land, but there’s a lot that we do know and we can make some pretty strong estimates. There’s a lot of tools out there that can help us through that. One being what they call a net price calculator.
Related: How to Use Net Price Calculators
A net price calculator is provided by each college. You go to their website, pretty easy to find. You can even just search and Google the school and net price calculator, it should take you there. What that tool is there for is to help you understand what you, as a family unit, based off of your income, your savings, could expect to pay after financial aid, the possibility of loans, and just give you a better idea as to what that school might end up costing you.
And the reason why this is important, takes me back to what I was talking about, there’s a lot of talk about how expensive college is. A lot of times what you see is, oh wow, so-and-so university is $80,000 a year. But the reality is, in most cases, the actual out-of-pocket costs are much lower than what the total cost is. But the difference between the average cost out-of-pocket and the actual sticker price is very different from school to school. You may have one school where they’re virtually the same, and you may have another school where there’s a much wider gap because that school is much more generous, they want to be much more competitive with filling some seats at school. So I think it’s important for you to understand what the range is and you might be able to use that number as a goal.
Related: The Nation’s Most Generous Colleges
And an interesting example is, you might have a school, let’s take Harvard for instance, believe it or not, they don’t give merit-based scholarships. But if you get in, you’re going, they’re going to figure out a way. So there is not necessarily scholarships, but let’s say you can’t afford to go there, if you get in, they’re going to make sure, whether it’s through need-based scholarships, they’re going to make sure that you actually get to go. So there are some of these tools out there. A great website that I really like is bigfuture.collegeboard.org. They have information on over 3000 colleges and there’s a lot of very useful information is like what the average cost is, what the full ticket price is. I invite people to, even though they’re pretty far out, to go onto these sites.
On the other hand, you also have to take into account inflation. A school today that might cost your child $40,000 is going to be much, much higher 18 years from now. So just keep that in mind. One of the things that we all often talk about is the potential consequences of neglecting retirement savings in favor of funding college education. But how can families find a reasonable balance between the two, now that we’ve talked about this, bring it together.
So I think there’s a couple of things that go into it. I started off by saying a lot of people come to us because they had a child and they want to start saving for college. So they’re immediately thinking, “I want to be selfless, I want to make sure that I cover that cost of college,” and that’s great. But like you’ve said, it can be devastating to retirement if you neglect it. We’ve had many people that we’ve talked to and run retirement calculations, retirement analysis, and the end of it they’ll come out and say, “Wow, I wish I would’ve started saving earlier for retirement.” Because people think, “I only have 18 years before my child starts college. I want to get the ball rolling and focus any extra money I have to saving for that, and then once they’re done with college, I may have the mortgage paid off, I may be making more money, I can devote more to my retirement savings.” Sure, that may turn out to be true, but it may not be, for all these different types. You may, in the meantime, have bought in a bigger house and taken on a bigger mortgage. Or you may have been forced into retirement a lot earlier than you thought you would’ve. So having the balance is important.
I think one thing that families don’t do as much as they should is, to parent and student, have a conversation about schools and, what are the goals? And what’s possible? And what’s affordable? And really makes sure they’re on the same page with that, because I think that can help out a lot. But what happens is a lot of times the student will pick a school for whatever reason and the parent says, “I don’t want to deprive them of going to where they want to go, so let’s figure out a way to make it work.” And a lot of cases you can still get into a great school and these schools cost different amounts of money and you can get one for a reasonable price that doesn’t hurt, or even further, devastate family finances.
So I think that’s one thing that parents and students should do more of in terms of the planning aspect of this. And the right time is they’re in high school as they’re starting to think about where. You start it too early, the student has no idea what they’re looking to do or where they want to go. But then of course if you start it too late, all of a sudden they get hooked on, “This is where I want to go,” and it can become a financial nightmare to try and afford it.
Yeah, there’s this status part of this whole conversation that’s very… And these 18-year-olds, there’s a lot of pressure. They might have a friend who’s going to what is considered a high profile school and they feel like, if they don’t get into one of these high profile schools, that they’re a failure. Interesting is, is once you’re out of college is when you realize how unimportant that stuff is. Because I know some of my most successful friends were not necessarily at high profile schools and it’s not necessarily as important as some of these kids are feeling pressure to maybe get into one of these schools that everybody knows, if you may.
I think a lot of times we see people that want to save for both, but they’ll come back and say, “I can’t do it. I can’t change my lifestyle. I can’t do this. I can’t do that.” Are there any alternative funding sources or creative solutions that families can explore to alleviate the financial strain of paying for college while still maintaining their retirement goals?
The interesting thing is, there really isn’t. And that’s really why the stuff that we started talking about at the beginning of this conversation are so important to have in place and have a good idea as to what your priorities are, your goals. Because borrowing is essentially where you’re going to end up. So making sure that you have a nice strong plan. At the end of the day, a big part of that plan is to make sure you don’t have to borrow as much. So you have an understanding as to how much college is going to cost and then how much you can put away to eliminate or at least limit the amount that the student is going to actually have to borrow.
One of the things that I find is that you have the parents that are usually in this spot when they start thinking about this, or one of the most popular spot times to think about saving for college is when, let’s say the child’s first born, that’s when you’re maybe looking to get some life insurance put in place, a 529, do all the things that are a responsible parent might want to do. But the fact of the matter is, a lot is going to change between that day and when that student possibly goes to college.
So I think that one of the things that I would say is have the understanding that things are going to change along the way. Do the best you can today. If $50 is what you can put into that based off of your cashflow, then put $50 in. If that changes to 100 down the road, you can continue to revisit what this looks like. I would invite people not to put so much pressure on themselves, and I understand some people might have it as a high, high priority and I’m not trying to talk them out of that priority, but at the end of the day, the resources are limited, and all you can do is the best you can with that cash flow. So with that said, are there any common mistakes or misconceptions that families often make when it comes to balancing college expenses and retirement savings? How can these be avoided?
Common Mistakes Families Make When Balancing College Expenses and Retirement Savings
So before we go into mistakes, you were talking about whether it’s $50 or whatever, an amount it is that you’re saving. One tip is to automate it. So monthly, automate the savings that are going into your college savings, whether it is 529 or something else, and the same thing on the retirement side. Too many people I see they’ll say, “All right, at the end of the year I’ll see how things went and I’ll make a lump sum savings to my 529 or to my IRA or 401k.” And things happen and it’s very easy to just say, “All right, we’re going to skip it this year. It’s 15 years down the road. My child’s not going to school.” So the automation, it won’t, just because even from the behavioral part of it, it forces you to figure out how to budget without that money that’s already been saved. So that’s one of the tips.
One of the mistakes I see people make is on the loan side and they just take on too much debt. Going back to what we said earlier, it will impact your retirement if you’re the one paying it. But if you’re not and your child is the one paying it, it could impact their retirement too. Or it could impact them, delaying them starting a family or buying a house. One of the rules of thumb, and this is on the parent side, is for all your children total, do not take on more debt than your annual income, because otherwise it can get too difficult to pay that off over, let’s say a 10-year period. Even if you’re closer to retirement, you probably even want to take on less debt than that. So just as an example, if someone makes $100,000, they don’t want to take on more than $100,000 of total student loans.
And that may be difficult and at the end of the day, it’s going to come down to the parents are going to do whatever they have to do. But going back to that, looking at schools and deciding on schools, you want to incorporate that into your decision as well because you don’t want this to devastate you and you want to want it to make this a good experience. Both retirement, it’s something to look forward to, not something that stresses or causes anxiety.
There’s one message from this whole show, it’s that importance of planning, and how planning can uncover things and it can set people on the right path and people now have information or knowledge of this is what they have to do. And a lot of times, that’s motivation. When they see, “If I do this, here’s what it’ll look like by the time my child goes to school, or by the time I retire,” or, “If I do this, I can retire at this age.” So there’s a lot of reasons why planning is important and that’s one of them.
I 100% agree, but also the idea that having these conversations and then including your children in this whole conversation from early on, and understanding their interests and not necessarily waiting until 18 to have these conversations, I think is super important as well. As I was putting together the notes in this conversation, I remember, even though it was a really long time ago now, it was a confusing time and there was a lot of choices and I just remember how much pressure it was. It’s not just the parents, but the kids too.
Yeah, there’s definitely pressure, anxiety and stress involved. We’re in this every day, as we help our clients work through these goals.
Deciding how to prioritize financial goals is difficult. As you mentioned, this conversation is centered around two goals, but most people have more like 10 goals.
So, if you want to talk about your goals and work through prioritizing them, we offer free consultations. You can set one up at the link below.
So John, thank you for joining us today. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show.
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