Whether it’s saving for college or planning for retirement, too many people make the mistake of taking an all-or-nothing approach or thinking they’ll just catch up later. The most important step in securing your family’s financial future is to get started today with what you have.
Here are three tips to help you start securing your family’s future:
1) Outline your retirement goals:
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To identify your financial goals for retirement, envision your ideal retirement lifestyle and evaluate your current situation.
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Plan for a long retirement — your savings could need to last 20, 30 or even 40 years. According the Social Security Administration, a man reaching age 65 today could on average expect to live until age 84.3, while a woman could expect to live until 86.6.
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Prioritize goals by grouping them into “needs,” “wants” and “wishes.” For example, “needs” could include living expenses, health care and home maintenance. A new car or college tuition for your child might fall under “wants,” while frequent travel or a second home could be “wishes.”
2) Review your investments and other assets:
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Gather investment statements and organize them by account type and purpose. Clarify whether a given account is for retirement, saving for a home purchase or a child’s education, as the purpose has a major impact on the timeline for these investments.
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Understand your time horizon. When do you expect to need the funds in your retirement plan? That money probably has a much longer time horizon than funds you’ve set aside for a down payment on a home, for example.
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Assess your overall risk tolerance. Imagine you have $100,000 invested, and the value drops by five percent, making it worth $95,000. If that idea gives you heart palpitations, you’re probably risk averse. What about a 10, 15 or 25 percent drop? If you’re comfortable with a decline of 50 percent, you probably have an extremely high tolerance for risk.
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Review your portfolio with a trusted advisor to ensure your investments are properly allocated, optimized and diversified.
3) Save for your child’s education:
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Analyze your current cash flow to see what you could afford to start saving today. That may be only $50 a week, but the most important factor is starting early.
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In today’s dollars, college costs an average of $43,700 per year, according to the latest data from The College Board. Assuming a five percent annual increase, in 18 years, a four-year private college education is likely to cost over $450,000. Fortunately, there are many options for defraying those expenses.
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Determine what portion you plan to fund. For example, you could fully fund a child’s education in 18 years by investing $1,052 each month in a 529 savings plan, assuming a seven percent annual return. Are grandparents or other family members interested in contributing to the costs?
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Keep family dynamics in mind. If you have multiple children, it’s best to provide equitable support for college.
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Maximize your savings with 529 Plans and/or Coverdell Education Savings Accounts. While contributions are non-deductible, they offer tax-free growth when used for qualified education expenses. Funds may be transferred to another beneficiary without penalty, and anyone is able to contribute to the plan.
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Protect your own retirement and other financial goals by planning ahead for college. When people wait too long to start saving for college, they may end up taking out a home equity loan or borrowing against their 401(k).
When you’ve taken steps to secure your family’s financial future, it gives you new confidence in how your financial position and cash flow is going to support your family’s needs and your desired retirement lifestyle.
Ready to learn more? Discover seven financial planning essentials by downloading our free guide, Checklist For Securing Your Family’s Financial Future.
