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How to Plan for Your Children's College Education

How to Plan for Children’s College Education

We all know that there is a big difference in the cost of education depending on where you send your children to college. Much of the decision on where to go, and therefore the expense, is dependent upon a realistic matching of your child/children to interests, capacity, and innate capability.

Also, there is the very real possibility your child is not wired to either enjoy or benefit from a 4-year college degree. Matching applicable education with the appropriate expense only makes sense. Our culture and sometimes our pride get in the way of making good decisions.

There are new apprenticeship programs popping up, particularly in high-tech manufacturing areas. In another career direction, great education leading to a teaching degree can be found across the spectrum of colleges with the associated range of tuition. Regardless of the cost, the same time-and-money crunch applies to college savings that applies to retirement savings.

Also, the amount of student loan debt in our country is appalling. We need to be better stewards of our resources in this arena. So often we let a false pride get in our way when we say we want “only the best for our kids.” Perhaps we need examine what is best from a stewardship of time, money, and outcome. 

Start Early

Compare the difference between starting a college fund when your child is a toddler versus waiting until he or she is 13.

Starting earlier, you would have to save $345 a month to cover 75% of the cost of a public college education, according to Savingforcollege.com. Because you waited—you delayed saving for five years—you’ll have to save $646 a month. That’s almost twice as much!

Rather than regret the past, recalibrate the present. If you are on track for retirement but short of the needed education savings amount, you can always redirect 1% or 2% of your gross income from one pot, retirement, to the other for a few years. Recognize that this can result in you working a year or two longer before retirement or boost the savings for retirement after you’re done paying the college bills.

Loans

Or consider borrowing—judiciously of course. Parent PLUS loans, sponsored by the federal government, carry a fixed 7.9% rate. PLUS loans let you borrow up to the cost of tuition minus any financial aid. However, remember that borrowing on behalf of your student can jeopardize your own financial security in retirement. If the gap is a chasm, not a crevice, find a less expensive school.

Another way to get cash for college is to borrow against the equity in your home. With a home-equity loan, you pay a fixed rate (recent average: 6.4%). If you decide to go that route, borrow the entire amount upfront if the interest rate is low and fixed. With a line of credit, you pay a variable rate (recent average: 5.1%) and then borrow as needed. With both, you can generally deduct the interest on amounts borrowed up to $100,000, no matter how you use the money.

Determine the Amount You Are Willing to Spend

Other smart alternatives include making a fixed amount of money available to your child (children) for college. For example, an amount that will cover four years at a local college or only one year at an out of state school. For most, a college degree is what is important not the school’s name written on the diploma. 

Talk honestly with your kids. Let your kids know what you are prepared to contribute for college expenses before they make up a college wish list. Be clear that if the net price after financial aid doesn’t end up at your number, it has to go off the list. Without this conversation, you’ll be hard-pressed to say “no” when the acceptance letter from an expensive university comes. Make sure only clear, straight, truth is in play when it comes to making these hard choices about “higher” education for your children. It is hard, but necessary, to isolate the issues when there are multiple personalities and emotions in the decision-making room.

Discuss Options With Family Members

Often grandparents are financially able and want to contribute to the costs of college. Speak frankly with them a year or so before college selection process starts. Transparency and clear communication will yield the best for you, them and  the grandchild.

Tips on Setting up a Successful Retirement Plan

Do you wonder if you’re taking the right steps towards a successful retirement plan? Here are some tips that can help you make sure you’re on track.

Know your starting point

  • What are the balances in your existing 403(b), 401(k), IRA, or savings accounts?

  • Do you own other assets which may be convertible to cash in the future?

  • What is your current income level?

  • Do you currently have or follow a household budget?

  • Does your employer offer a retirement plan?

  • What are you currently contributing toward retirement?

  • Are you taking full advantage of any possible employer match?

  • How much experience do you have with investing?

  • What is the current asset allocation of your investment portfolio?

Set realistic goals

  • How long do you have to save before retirement?

  • Do you know how much money you need to save for retirement?

  • How much risk are you comfortable taking with your investments?

  • Do you expect major future changes to your income or expenses?

  • How much can you realistically increase your contributions?

Avoid Pitfalls That May Reduce Savings Today and in the Future

  • Set aside and maintain an emergency fund for unexpected expenses.

  • Do not wait until late in your earnings years to start saving—start early.

  • Once you start saving, continue the habit, even if it is a small amount.

  • Avoid withdrawals during earning years, including loans and hardship distributions.

  • When you leave an employer, rollover your assets—don’t cash out your account.

You do not have to do this on your own

  • Discuss financial goals with your spouse and family.

  • Review potential budget changes and opportunities to increase contributions.

  • Read and learn to understand your account statements.

  • Utilize professional advice from your investment providers when it is available.

Explore the various tools and resources you have access to through Envoy.

6 Basic Retirement Rules

As a Christian, you are called by God to serve. This calling does not end when you stop receiving a paycheck.  Retirement is not only a reward for past service but a stepping-stone to future ministry. We call this your Future Funded Ministry! When you successfully construct and fund a retirement plan, you are creating a source of money to fund your future ministry activities. What an exciting way to live!

The following Retirement Rules will equip you with basic strategies to help you achieve your Future Funded Ministry plan!
 

Rule 1:  Save at least 10% of your income towards your Future Funded Ministry plan

This provides a simple target for you to work towards as part of a disciplined savings approach. You may start at a lower level and then focus on increasing your contributions over time to get to this percentage.

Rule 2:  Plan on living 20-25 years in retirement after age 65

People who live to age 65 have a 50% chance of living to age 85 and a 25% chance of living until 92.

Rule 3:  Plan on needing 70% to 80% of your income in your Future Funded Ministry years

Certain expenses will likely disappear or be reduced once you leave the workplace.

Rule 4:  To make your savings last, withdraw less than 4% a year

This simple formula has proven very accurate over time. It provides a guideline for how much to withdraw each year without exhausting your Future-Funded Ministry savings.

Rule 5:  Rebalance your asset allocation at least once per year

Rebalancing is when you adjust your portfolio back to an appropriate asset allocation mix. This keeps your investments aligned with your risk tolerance and goals.

Rule 6:  Bonds percentage of your portfolio equals your age

This rule is a reminder that your portfolio needs to change as you age, becoming gradually more focused on avoiding risk and providing income.

5 Factors That May Affect Your Retirement

Inflation

  • Reduces how much you can buy today, compared to last year

  • Historically, inflation averages 3% annually

  • Your investments need to keep pace with or outpace inflation

Investment Risk

  • Determine how much potential gain you are aiming to achieve with your investments, understanding that also means you may potentially lose a similar amount

  • More risk equals more volatility in returns and account values go up and down more

  • Diversify your portfolio by allocating money to multiple asset classes so you are not totally exposed if one asset type (such as stocks) drops dramatically

Healthcare and long-term care expenses

  • A number of studies show that the average 65-year-old couple can expect can expect to spend hundreds of thousands of dollars on healthcare in retirement

  • The combination of increasing life expectancy and growing medical treatment costs can have a huge negative impact on savings

  • Consider obtaining Long Term Care insurance

  • The premiums can be significant, but having the coverage in place may help avoid disrupting your overall retirement planning strategy

Taxes

  • Employer-sponsored and individual pre-tax accounts offer a variety of ways to receive tax breaks when making your retirement savings contributions

  • Pre-tax contributions provide a current reduction in taxable income, and therefore a reduction in the taxes you pay each year as you are adding to your accounts

  • Roth contributions are done on an after-tax basis, which does not provide a current year tax advantage but does allow you to make withdrawals on a tax-free basis in retirement

You

  • Set goals for what your financial needs will be in retirement

  • Evaluate your personal risk profile and asset allocation strategy

  • Take full advantage of any employer matching contributions you may be eligible for

  • Roll over assets from former employer plans rather than cashing out those accounts

  • Seek out trusted professional guidance or use available self-help tools