Saving for retirement? Saving for college? This doesn't have to be an either/or proposition.
Almost everyone juggles more than one savings or investing goal. Our goal is to help you create a strategy that covers all your bases.
It can be intimidating to think about how much you should save for college and retirement—but it doesn't have to be. Take it one step at a time. Your financial advisor can help you understand how the choices you make today about college savings may have an impact on your retirement.
Outlining your priorities and understanding the trade-offs
The money you invest for college and retirement comes from the same pool. So, how do you strike the right balance? It's all about priorities and trade-offs.
Consider the following example:
Jim and Mary Thompson are 32 and plan to save for retirement and start a college fund for their newborn, Lillian. Based on their financial situation; they determine they can save $900 a month which will be divided among the two goals. Based on these goals, they developed the following saving scenarios with the help of their financial advisor:
Possible Saving Scenarios
|Retire at age 65 with $50,000 in annual income from the portfolio.||Provide $105,000 toward Lillian's education (estimate to cover two years of community college and two years at a public university).|
|Required monthly savings: $800||Required Monthly Savings: $275|
To cover both goals, the Thompsons would need to save almost $1,100 per month. However, because they can save only $900 per month, they are discussing options and trade-offs.
Retirement, Education or Both?
These charts illustrate three saving scenarios. The total monthly savings in each scenario is the same - $900. The difference: how it’s split between retirement and education. In the first scenario, retirement is a priority, so $800 goes to that goal while $100 is saved for education. Result: the goal of retiring at age 65 is met, while only $40,000 is saved for education (just over 1/3 of $105,000 ideal education goal). In the second scenario, education is a priority, so $275 goes to that, while $625 is saved for retirement. Result: the goal of saving $105,000 for education is met, while retirement is delayed until age 68. The goal in the third scenario: balance both retirement and education. So, $720 is saved for retirement and the rest, $180, goes to education. The result: retirement comes a little later (age 67) and $70,000 is saved for education (2/3 of the original $105,000 goal).
Assumptions: Retirement portfolio must provide $50,000 in income, using a 4% initial withdrawal rate. Retirement savings assume 7% annual return. Education savings assume 7% annual return to age 10, 6% to age 16 and 3% to age 18. Past performance is not a guarantee of future results. Graphic is for illustrative purposes only and does not reflect any currently available investments. Results do not take into account taxes or transaction fees. Results rounded to the nearest $5,000.
In our example, the Thompsons had to make some trade-offs. You may or may not need to do the same. Your answer lies with how you prioritize your goals.
Importantly, we don't recommend putting off saving for retirement because you're putting money away for college. This could put your retirement goal in jeopardy. Time is a very valuable asset, so don’t delay saving for one goal over the other – view them together. Use our retirement calculator and see the impact small changes can have on helping you reach your retirement savings goal.
How we can help
At Edward Jones, we understand your life is a series of overlapping decisions. Your financial advisor will ask questions and really listen to understand your situation and develop a strategy to address what's important to you. Call your Edward Jones financial advisor today to get started saving for college and retirement.