Retirement vs. college: What wins?

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Q. I max out my 401(k) and so does my husband. It doesn’t leave much left for college savings. How do I balance these goals? Our kids are 10 and 12.
— Mom

A. Congratulations on being such diligent savers. Yours is not an easy question.

Let’s look more closely at the timing and the price tags for these two big-ticket goals.

The cost of a 25-year retirement can far exceed the expense of eight years of college, assuming both your children attend for four years, said Gene McGovern of McGovern Financial Advisors in Westfield.

On the other hand, college is only six years away for your older child, and eight years away for your younger one, while retirement may be 25 or more years away.

McGovern offered this example to put the numbers and time frames in perspective.

Assume that you’ll retire in 25 years, and then live for 25 more years in retirement. Further assume that in retirement, you and your husband will need $3,000 per month ($36,000 per year) in living expenses, in today’s dollars, over and above any Social Security benefits or other income you’ll receive. You’ll want this amount to increase each year with inflation during retirement, McGovern said.

“If inflation averages 2.5 percent overall, by the time you retire in 25 years you’ll need nearly $67,000 per year in living expenses,” he said.

Assume you can earn 5 percent on your money and that your effective tax rate in retirement is 20 percent. To fund that income for 25 years, as well as pay the taxes due on your withdrawals, you’ll need to have accumulated about $1.5 million in your 401(k) plans at retirement age, McGovern said.

Turning to college, those costs can vary dramatically depending on where your children attend school and the type of school they attend.

McGovern said they’re also increasing faster than the general rate of inflation. He said tuition, room and board at the average private school can total nearly $47,000 per year in 2017, according to The College Board. At the other end of the scale, sending your child to a four-year in-state public school can cost about $21,000 per year on average, or $10,000 if they live at home and commute to school. If both of your children attend college for four years, the total cost could be anywhere from $100,000 to $500,000, he said.

Both are expensive, but retirement is clearly the larger expense of the two, even though it’s also farther away in time, McGovern said.

“Keep in mind also that your children can potentially qualify for scholarships, grants, and work-study opportunities, all of which can reduce the cost of attending college,” he said. “Federal and private student loans are also available to finance college over time.”

To begin balancing these priorities, you and your husband should start by asking some key questions: Do you want your children to attend public or private schools? Would you want them to reside at school or at home? Should they first attend a community college for two years? To what extent do you want your children to share in the cost of college (through work-study, scholarships, and loans) versus your paying the cost? Do your children have any special academic skills or talents, such as sports or music, that might make them eligible for scholarships?

Asking these questions now can help you get a sense of how much and what type of college expenses you can afford, he said.

“Once you have at least partial answers to these questions, you may well want to sit down with a financial planner to work out detailed projections of both your retirement and college expenses,” he said. “Quantifying both of those needs will help you to answer the question whether to redirect some of your 401(k) plan savings to a college savings account, such as a 529 plan, and how much to devote to each.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.