Tuesday, January 25, 2011

Saving For Your Child's College While Balancing Retirement Savings?

At the beginning of every year since the first year we were married, Mr. ReddHedd and I have spent a good deal of time dickering over financial goals for the year, and how we did in the prior year.  And, most importantly, where we want to be financially 5, 10, 15, 20 years down the road.

As we've gotten older, those discussions have taken on more of a panicky tone at times when our day to day spending habits weren't gelling well with our annual goal setting, because we can both hear the retirement clock ticking loudly in the background at this point in our marriage.

The question we are always asking ourselves is whether we are doing enough to save so that we can live without fear or panic in our older age, as we've seen far too many people have to do the last few years.  

But we keep running into the same questions:  How can you plan having no idea what medical expenses are going to be over the long haul?  Especially since we have a 9 year gap in our ages, and thus will have an insurance gap in there somewhere unless real health care reform manages to occur by some minor miracle or I go back to work at a job which has health insurance that will not automatically be a pain for someone with a pre-existing condition, no matter how well she manages it.  Not a given.

Also, how can we know what our living expenses really will be, even using worst case scenario increases in utility costs, etc., for planning purposes?

How can we possibly know what The Peanut's college needs are going to be, given that she is 7 years old at the moment and has future goals that range from "being a scientist" to "being a member of the Scooby gang?"  How do your reconcile all of this with wanting to actually live and have fun in the now but not spending so much that you are jeopardizing saving for the future?

None of these are easy questions with ready answers.

Maybe the answer is that you just do your best and hope that it is enough in the end.  But I don't exactly fancy living my golden years on rice and beans if I can help it.  And so we try to hash out variables and solutions where we can.

This morning, we spent time discussing college savings for The Peanut, and how we can make any headway on saving to help pay for it when college costs are soaring and unpredictable:
From 1982 to 2007, costs of fees and tuition rose by 439 percent, while the median family income has increased only 147 percent in that time. The net cost for one student to attend a four-year public university for a year amounted to 28 percent of the median family income, while a four-year private university cost 76 percent of the median family income.

That is a LOT of increase in a short period of time.  Will it continue over the next 10 years?  If so, will we be looking at $400,000+ for a top shelf education for The Peanut?  That's insane!   

And don't even get me started on what those insane cost increases mean for kids who live in poverty, whose parents can't even begin to even think about this because they are worried about having enough money to feed their kids this week.  It's crazy, isn't it?

For our purposes, there are only so many ways to stretch our household budget to save money and we'd like to also save for retirement, and the fact that we have no idea whether she'll want to attend Smith College like Momma did (let's all cross our fingers) or somewhere else entirely. 

Our default position has been to try and plan for the most expensive college, and saving where we can in the hopes that we'll be remotely on track, but is that enough?  Neither of us wants to saddle her with substantial student loans if we can help it, because we're both still paying off our own and it's no fun to drag that around for a lifetime, frankly.

We've looked at 529 plans, but the state one is cumbersome and filled with the sorts of irritating requirements that you get when the state wants the benefit of your money and isn't overly concerned with you getting a paltry return on it.  The independent plan has more potential, but we aren't sold on it.  But would we really be better off just saving in a separate account, investing any returns and then having to deal with the tax consequences on the back end when we have to sell off an entire portfolio in order to finance our child's education?

How in the hell does anyone not rich as Croesus ever manage this?!?

I don't have answers as yet on what we, ultimately, will decide to do.  But I've started researching a bit and will let you know what I find out.  It's a conundrum, and one that is not easily solved in one sitting, I'm afraid.

And isn't that a big part of the problem for parents?  You want the best for your children, but you don't want to have to rob your retirement fund in order to provide it, but that is exactly the choice that far too many people end up making.  There has to be a better way.

(Photo via AMagill.)

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