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  • Retirement vs. Education Savings

    The question of whether to fund my own and my husband’s retirement or our children’s education is a very significant one for me. We really want the option of sending the boys to private school in a few years, so our current financial priority is saving as much as possible before our oldest heads off to middle school.

    We still save for retirement, but not nearly as much as we could be saving because of our other priorities. So I read this Daily Worth article on retirement vs. educations savings with great interest. It didn’t say anything new, but it did remind me of the justifications for putting retirement ahead of education:

    • There’s no other provision for retirement – You might have a pension or even Social Security, but your retirement planning and saving is all on you. If you don’t provide for your future, you might well end up becoming a financial burden on your child in retirement – and that would be worse than not being able pay for all of their educational expenses.
    • There are other means of funding an education – A student can get scholarships, grants, and loans, and maybe even work while in school to help pay for tuition and living expenses. You won’t have options like these to fund your retirement.
    • Discussing how to fund college will instill a sense of responsibility in your child – As much as I would love to present my children with fully paid-for college educations, I think a lot of good can come from this. In retrospect, I think my parents spoiled me too much by paying for my college education and not discussing how I could contribute more. Not that I don’t appreciate all that they did for me, but I’m sure I would have been more responsible with money if I had been raised a little differently.
    • There are more “upfront” tax breaks for retirement savings – I wish the article went into more detail on this, but I’m thinking that it means you get to deduct most retirement contributions from your taxable income when the contributions are made (as with 401(k)s and traditional IRAs). With college savings plans like 529s and Coverdells, you’re putting in taxed income, but the earnings are not taxed upon withdrawal.

    Ideally, of course, I would love to be able to fully fund everything – our retirement, the kids’ education, and maybe a nicer house and a timeshare in Hawaii. 🙂

    But that’s not our reality, which is made more complicated by the fact that alternatives like scholarships, grants and loans aren’t really options for middle and high school, which is what my husband and I are saving for. So for us, saving is a difficult balance that’s all too common for our generation.

    Personally, I think a doable, balanced approach is to figure out a minimum for retirement savings. And then the remainder can go toward education. (This approach assumes that other savings needs, like your emergency fund, are already met.)

    For example, if your employer matches 401(k) contributions, the minimum retirement savings could be the maximum that will be matched. Or maybe it’s 5% of your gross salary. If you feel you have very little to save, then maybe with each paycheck, half of what can be saved goes toward retirement and the other half goes into a Coverdell or 529 account.

    I do think that making the money difficult to touch is important, especially if you would have a tendency to touch it if it were accessible. To that end, retirement accounts like 401(k)s and IRAs, and education accounts like 529s and Coverdells, can be very useful.

    How do you balance retirement and education savings? Or do you not even try?

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    Reacting to the economy again: Cutting back on retirement savings in favor of reducing debt

    As I mentioned last week, I’ve been thinking about reducing my retirement savings and using the money to pay off debt instead. We’ve decided to go ahead with the plan, and I’m very excited about it.

    It wasn’t an easy choice to make. The standard advice during tough economic times – especially for folks like us who have decades until retirement – is to keep up with retirement savings. And we are big believers in saving for retirement. We are committed to not being a burden to our children in our old age, and to retiring with enough years and money to fully enjoy ourselves.

    However, I’m confident that the choice we’ve made to reduce our retirement savings for a year is the right one for us. The money will be redirected toward paying off my student loans, which will be paid off in full in a year – leaving us with only the mortgage as our debt.

    One reason I say this is the right choice for us is the psychological benefit. I can’t tell you how excited I feel about having zero non-mortgage debt.

    Another reason this is the right choice for us is the financial freedom we’ll gain from paying off my loans. The monthly payment we make is pretty substantial, and we’ll be able to redirect all of those funds into other financial goals. Like retirement. Or saving for college. Or paying for private school, should we decide to go that route.

    A third reason to opt for paying off my loans right now is the guaranteed 4.5% rate of return. In this economic climate, that’s pretty tough to beat.

    And the fourth reason for paying off my loans is the strong likelihood that any money we invest in the market right now will lose value. And there’s a very real possibility, if not probability, that it will not have regained its value by the time my loans are paid off. As Janette mentioned on my last post, I could park the money in a money market fund until the market recovers, but by then, I will have paid off my loans and be in a position to invest more than the contributions that I won’t be making.

    There are a couple of points I want to make, though. First, we’re still saving for retirement. We’ll just be saving a little less.

    And second, this is what’s right for us. As demonstrated by the comments of Mercedes, Janette and Tony’s Mom on my last post, it’s not the right decision for everyone. The retirement vs. pay off debt debate is one that’s frequently addressed in the personal finance blogosphere, and for good reason. The decision on how to prioritize is an individual one.

    I know one thing, though: I can’t wait to be debt-free!

    Image credit: Yahoo! Finance.

    The Economy: How are you responding?

    I haven’t talked about it much, but that doesn’t mean I’m unaware of the current financial crisis our country is going through. I was initially planning to write about how I’m ignoring the meltdown and plugging along because I have faith that eventually things will turn around. But then I realized that it’s not quite true.

    I do have faith that things will eventually get better. That much is true. But it does appear that in the short term, things are going to stay bad and probably even get worse.

    What isn’t true about my original statement is that I’m ignoring what’s happening in the economy. For one thing, I’ve already reacted by spreading my money around. Instead of keeping almost all of our funds at one bank, we’ve transferred enough money to cover a couple of months’ expenses to two other banks. I hate the added complication to keeping track of our money, but the peace of mind is worth it.

    Another thing I’m thinking of doing is stopping some (not all) of my monthly retirement contributions and using that money to pay off my student loans instead. It would accelerate the payoff date to sometime next year, which is tantalizingly soon. It would mean a guaranteed return of 4.5% after taxes. But it would also mean risking a (small) percentage of my retirement savings if the market turns around in the next year (although I could cut the payments and increase my contribution whenever I want to).

    I’m also keeping a close eye on mortgage rates again. With the Fed rate cut earlier this week, I’m hoping that rates will go down enough to make refinancing worthwhile. We’ve been in our house for long enough and have a low enough rate that rates would have to get absurdly low for us to benefit while still making the regular monthly payment. But if we are able to refinance to a lower interest rate and continue making the same payment that we’re currently making, then we would be able pay off the mortgage faster and save tens of thousands of dollars in interest over the life of the loan.

    Are you doing anything to respond to current economic conditions, and if so, what?

    Image credit: Yahoo! Finance.