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How to balance retirement, kids' college costs

Many young parents think they should put their kids' education before their own retirement, but experts say parents should put themselves first.
/ Source: Forbes

When trying to balance retirement planning with their children's education, most parents put the kids first.

Big mistake.

"Many young parents think linearly," says Duane Meek, senior vice president for retirement plans at Nationwide Financial Services in Columbus, Ohio. "Get a job, move up, buy a house, start a family, educate the children — and then think about retirement. But once they've taken care of the kids, there's not enough time to benefit from the compounding of earnings over 30 or more years."

Meek urges young parents to balance retirement planning with college expenses. For starters, he suggests young parents participate in their company's 401(k) Retirement Plan and make a contribution large enough to secure the maximum match from the employer. To do less means leaving money on the table.

Do the math: Assuming retirement at 67 after a starting salary of $35,000 that increased 3 percent per year until the final year of work, a 30-year-old parent who began saving for retirement at the birth of his first child could have saved about $750,000. This assumes the parent invested about 6 percent of his salary in a 401(k) Plan and received a 3 percent employer match and earned an annual return of 7 percent on retirement savings.

But a parent who began saving for retirement after putting his children through school would have saved just over $185,000 for retirement, or 300 percent less than the parent who started early.

Many parents support their children after college graduation and continue to help out when the kids get married. The desire to help is understandable, but it can punch a hole in your retirement plans. If you start saving for retirement early, but save nothing for ten years or so during your children's education and the early years of their marriage, you'd have about $550,000 for retirement. That's a sizeable chunk of change, but it won't give you the freedom another $200,000 in retirement would provide.

"You can borrow money for college," Meek says. "But you can't borrow for retirement."

A 529 Plan can be a valuable tool in saving for college, but it shouldn't drain money away from your retirement savings plan. Do some research, and you'll quickly discover scholarships and financial aid packages you never dreamed existed.

Some who have flubbed retirement say, "I'll work forever." But health problems may make that impossible, underscoring the need to make regular, continuous contributions to a retirement plan.

Social Security should be viewed as a supplement to other retirement savings and can't be counted on as the only source of retirement income. While President George W. Bush's modest reform of Social Security has vanished into Congress, the need for an updated plan remains. As things now stand, retirees can look for smaller monthly payments or working several years past 65 — and probably both.

There are many Internet sites offering financial retirement information, including Nationwide, A.G. Edwards & Sons, T. Rowe Price, Merrill Lynch, Goldman Sachs and Morgan Stanley. Major banks also offer solid information, including Wells Fargo, JPMorgan Chase, Bank of America and Citigroup.

Meek urges young adults just launching a career to start thinking about retirement. He recommends starting a 401(k) Plan with small contributions and gradually working up to the maximum.

"It doesn't look like much in the beginning," Meek says. "The power comes in the last ten years from compounding the money saved in the previous 20."