Spring is here, the May flowers are all in bloom and this is the season for college and high school graduations. As I think back all too fondly, of my excitement about going into the next chapter of my life. All I could think was now I am officially an adult. I had my first job all lined up and was heading to the Washington DC Metro area to make my mark.
All this reminiscing has me thinking ahead about my daughter, her future, what I hope for her life and the dreams I have for her. But for me, I feel all those things cannot be accomplished without a plan. I anticipate that she will go to college and will retire. So I am starting now to focus on her later years. When I start a plan, I focus on as far into the future as I can. One of my ideas for her is to have her work for me as a teenager and in college and I will use a portion of her earnings to open and fund a Roth IRA. I feel this will give her a sense of responsibility and will be a learning tool to further explain finances and investing to her at a younger age then I learned. This is something I feel is very important to do to prepare children for their futures.
Many years ago, I listened as a colleague of mine shared her personal story with me about what her parents did to prepare her for her future. She shared with me that her parents decided to have one child because when they factored in the finances for their family’s future, they felt best limiting the growth of their family because they wanted to ensure their family’s financial security.
Initially, when I heard the story I was intrigued. It really fascinated me that her parents thought so far in advance about the dynamics of their family and what that would consist of for them financially. She even shared how they had started planning for her retirement in college. Her father set up an IRA for her in college. He must have figured that by starting this retirement account at age 18, with at least $2,000 per year, earning an average rate of return of 7% until age 65, she could accumulate over $700,000 in retirement savings. If the amount is $3,000 per year, the accumulation is well over $1MM. Talking about starting your child off on the right foot, I thought this story was amazing and it definitely planted the seed for me to do the same for my child/children.
Well, I cannot talk about post graduation planning without talking about college planning. Now for as much as I want our daughter to go to a wonderful college and obtain a great education, my husband and I, agreed that we will not forgo our plans for retirement to fund her college. People may not agree with our approach. But as I heard someone say recently and I agree with the sentiment, I cannot get a loan to retire but my child can get a loan for her education. Therefore to alleviate retirement savings concerns, we decided to prepare early for college expenses by starting an educational account immediately after she was born. Again, a lesson I learned from someone I know. A friend of mine invited me to his son’s dedication. At the dedication, he asked everyone to give a donation to his son’s college savings account and forgo any physical gifts. I thought that was a fabulous idea and share this idea with clients.
There are many savings options available to parents. So to simplify the presentation of the various vehicles, I will show it in a chart:
(Please note that this is a high level summary and does not include all the specific details of each option.)
(Information obtained from AXA Equitable (http://www.axa-equitable.com/plan/education/529-plans/529.html), www.savingforcollege.com, and 4th Edition of Financial Planning (Process and Environment), Chapter 8.)
In deciding which option is best for you, consider talking with a financial and tax professional prior to finalizing any decisions. Have your goals prepared so that all your desires can be evaluated as you discuss the various choices. Here are a few questions to think about first:
- Do you want your child to attend an in-state or out-of-state institution?
- Is this institution public or private?
- How much have you accumulated thus far?
- Are you going to pay for all or a portion of the costs?
- What amount are you planning to pay?
- Are you going to pay for graduate school?
- Is there additional funding coming from grandparents?
As for me and I am sure for you, your child/children are very important and planning their futures is a high priority. Take some time, consider your options, and develop your strategy. Their success is our success.