Garrett Allen, a single parent of a 16 year-old son has a big decision to make.
"My son will be going to college or a trade school. I’m struggling to figure out what is best in the both the short-term and long-term? Do I save for my retirement and let him take out student loans and hopefully get grants, or do I save for his education and end up working until I drop at some later date?"
Single parents are torn. According to a Allianz’s new, LoveFamilyMoney study, when asked about their motivation for developing and executing a long-term financial plan, 45% of single-parent respondents said "saving for my kids’ education", versus only 26% of other modern families and 39% of traditional families. The study also found that this savings strategy is problematic for these single parents, as more than 75% said that preparing for retirement and their child’s college expenses at the same time causes them some or a great deal of stress.
"A big theme with single parents is family first. They will make sacrifices to help their children get started financially, which may help their children’s financial foundation. But, this focus on children and short-term goals is jeopardizing the single parent’s retirement," says Katie Libbe, Allianz Life vice president of consumer insights.
Allen brings home that sentiment. "You don’t want to let your child start off on his/her own with a massive debt, especially when you consider how useless a college education can be for some people. On the other hand, you do not want to become a financial burden to your child or children at a later date."
Saving for retirement is a challenge for many people. Countless surveys say how far behind Americans are in having enough money to fund their dream retirement. But single parents have the additional complexity of having just one income.
What’s the right thing to do?
"It’s natural for a parent to want to put their kids first and make whatever sacrifices they can for them, but as a financial planner I have to take the uncomfortable position of suggesting that the parent direct more money into their retirement accounts and less into college savings. It would be great to be able to do both, but you have to set priorities," says Scott Stratton, a certified financial planner and founder of the Good Life Wealth Management.
"You are not a bad parent or a selfish person to make saving for retirement a higher priority than college savings," he says.
Financial writer David Bakke, a single parent, says for his son’s education his goal is to come up with about half of his college costs. "Although that might sound like I’m doing him a disservice, I truly don’t think so. Trying to pay for his entire education is unrealistic in my opinion, considering the skyrocketing costs of attending a higher education institution. At some point, my kid will know that he will be responsible for paying for part of his own way. Therefore, he’ll be that much more motivated to perform well, whether it’s in his studies or sports," says Bakke who is making saving easier to manage by having his contributions to a 529 college savings plan automated.
Your kid can get a scholarship, take out loans, or get a part-time job. Nobody is going to you give a loan or scholarship for retirement.
Truth is, there are ways to make college happen. "My wife is a professor at a private university and when they want a prospective student who has good grades, they will do whatever they can to enable that student to afford to the college that costs $50,000 a year. Some students pay little or nothing to attend," says Stratton.
If your child doesn’t get financial aid, they can start out at a community college or go to a state college to cut down on costs. Furthermore, you can ask that instead of giving your children gifts that they make a donation to their college tuition, says credit and debt expert Harrine Freeman, CEO of H.E. Freeman Enterprises.
Do the math
Take advantage of the many retirement calculators online. Get an estimate of how much you need to retire and how much you will need to save each year to reach that target. "It becomes obvious that you can’t reach those goals without saving consistently," says Stratton.
Because of the power of compounding you just cannot skip making contributions in your 30s and 40s and think you will be able to make it up later in your 50s and 50s. "Those early contributions, the dollars that grow for 20-30 years, form the majority of your portfolio at age 65," says Stratton.
Before you start saving for your child’s college education you should be maximizing your contribution to your retirement accounts.
"You should be contributing at least enough to get the full match from your employer, you’re throwing money away if you don’t. Then, up your contribution by 1% every year at raise time (you won’t miss it), until you reach the maximum," says Coleen Pantalone, a professor at the D’Amore-McKim School of Business at Northeastern University.
The biggest mistake says Pantalone, "Is not starting to think about your financial health now. Even a little money today makes a difference down the road."