Ask an Advisor: What are the best strategies for financially preparing for the education costs of young children while maintaining retirement goals?

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Ask an Advisor: What are the best strategies for financially preparing for the education costs of young children while maintaining retirement goals?

Wealth accumulators have a myriad of opportunities and challenges to make the most of their wealth building years. Imagine this, you’re 38, you have two young kids, you have double income, and an ever-growing list of expenses. Childcare costs, tee ball, dance, vacations, etc. are all adding up! You think to yourself, “Managing my family’s finances is not part of my day job.” Below are steps you can work through as you navigate saving for your and your spouse’s retirement, your kids’ education costs, and the growing list of expenses.

Step 1: Get clear on your priorities.

You and your spouse should define what “financial success” means to your family. Some questions to ask are: 1) When do we want the option to stop working and 2) Is college 100% on our tab? Finance is deeply personal so this will look different for every family.

It is also important to revisit your plan as your priorities change. Maybe one child doesn’t want to go to college. Maybe you start your own business and want to work until you’re 75. All these factors substantially impact the financial path you and your spouse should follow.

Step 2: Figure out your cashflow.

Know what comes in every month and what goes out every month. Count your monthly fixed expenses (rent, mortgage, car, etc.). Subtract that number from your monthly take home pay and the result is what you can split between savings and your variable spending.

Step 3: Prioritize retirement savings first.

After subtracting fixed costs, take care of yourself. You can’t borrow for retirement. Allocate a significant portion of your monthly net income to your retirement accounts! Now is the time you get to trade your human capital for your investment capital. Don’t miss these prime years to get in the market and let compounding interest do the rest for you. After all, Albert Einstein did refer to it as the 8^th wonder of the world.

Step 4, Plan for education expenses.

After accounting for your fixed spending and your retirement savings from your monthly net income, consider how much you want to invest for education costs. Small monthly contributions add up over 18 years!

529s are a great savings vehicle for this goal. They grow tax free and are withdrawn tax free if used for qualified education expenses. Try not to overfund them since withdrawals for non-qualified expenses are taxed as ordinary income AND they are penalized an extra 10%. If you do overfund, you can move the account under another child’s name. You may also be able to roll the excess investments into an IRA in your child’s name up to current limits.

Step 5: Don’t forget to PROTECT what you are building.

Both parents should have adequate life insurance coverage, disability insurance coverage, and a comprehensive estate plan to protect your family from a catastrophe. One unfortunate instance could ruin the entire plan.

For insurance, be sure to work with a fee-only advisor. Fee-only financial advisors CANNOT be paid insurance commissions. They are fiduciaries so they can help you navigate what policies are best for your family. Too many insurance brokers are compensated in the wrong ways, and they are NOT incentivized to put you and your family first.

Managing your finances is not part of your job description. Hopefully this list takes work off your family’s plate.

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.