In your 30s, perhaps you purchased your first house or condo. When children came along, you found a larger place to live. As the years progressed, you managed to keep up with your family’s rising expenses.
But now, your son or daughter is ready to start college, and you’re not sure how you’ll come up with the money to pay for it. In situations like this, planning for retirement often takes a back seat to more immediate needs, with consequences down the road.
Keeping up with these rising costs could be compounded by additional unexpected expenses, such as parents or grandparents who face financial difficulties. This perfect storm could wipe out a person’s retirement altogether as they borrow against whatever balances they have, or even liquidate retirement savings despite the tax penalties, which is a huge mistake.
True, people sometimes have no choice when it comes to taking on additional financial obligations. But more often, the problem is that people lose perspective and ignore the other options available to them.
Planning For College
Parents know that college is important for their children’s financial security, but that isn’t the only goal in progress. Too often, the family’s primary earner treats this as their problem rather than working on a solution with their spouse and children.
In fact, paying for a child’s college education is often the single greatest financial obstacle people face in planning for retirement. When parents don’t have enough set aside for college, they still feel like they can’t let their kids down, and start making bad decisions. Instead of maximizing their 401(k) contribution, for example, a person might minimize or stop them in an effort to meet current family needs.
Rather than a stressful situation, approach planning for college as an opportunity to teach children about finances and balancing multiple goals. Before you start looking at different colleges, sit down together and analyze the impact on your family’s cash flow. Look at different scenarios, in which you pay X amount up front, Y amount on a monthly basis and the child pays for Z.
Understanding the implications for your cash flow up front helps you manage expectations, avoid financial mistakes and explore other viable options, such as attending community college for the first year.
Balancing Short- And Long-Term Goals
Planning for retirement and saving for a child’s education are neither mutually exclusive nor unexpected expenses. Children grow up — and you grow old — in a predictable way. Meeting your goals for these and other family needs begins with getting an early start and maintaining the right balance between your short- and long-term financial goals.
These plans should be reviewed regularly and may change from year to year, but you can’t sacrifice one for the other. Strictly speaking, college is optional, but getting old isn’t. Even if you decide to scale back your 401(k) contributions to have more cash on hand for college, you have to at least put in the minimum to get the employer’s full matching contribution. That’s free money, and it’s going to be very useful during your retirement.
Getting Your Family On The Same Page
Too often, people only discuss money as a family in terms of a why they can’t afford something. A teenager may argue, “I got the grades to get into MIT — why can’t you afford it?” A parent responds with, “What, do you think I’m made out of money?” Meanwhile, this stressful finger-pointing does little to come up with a solution.
Instead, hold a family meeting time that covers the family’s overall financial goals. Rather than isolating children from financial challenges, look for ways to bring them into the loop and the decision-making. By age 18 (or even 12), kids should be aware that their parents are going to get old, and if they don’t have the resources to retire, they’re going to need help from the kids.
Try to facilitate meetings about basic financial matters and how funds are allocated to current, near-term and future goals, and prioritize between needs and wants. If the family wants a vacation home on a lake, that might be one of the goals. But if there are four kids who need to pay for college, that lake house might be delayed for a certain amount of time until there’s a bonus or raise.
Cash flow is something people think they understand, but the devil is in the details. Analyzing where the money comes in and where it goes out on a monthly, weekly and annual basis gives you a better handle on managing your money. This kind of day-to-day discipline is key to meeting family needs and ensuring a comfortable retirement, and it’s a great tool to pass on to your children.
To secure your family’s financial future, you need a smart strategy and plans to mitigate potential risks. Download our Checklist For Securing Your Family’s Financial Future Secure.
