When you first bring children into the world your concerns are on the immediate: keeping them alive, keeping them fed, and every once and a while trying to clean up the house.
College seems a long, long way off and there are more pressing issues in between now and then like soccer practice and birthday parties.
Before you know it college isn’t too far off and your retirement is right behind. You bravely check the college education saving coffers and find nothing but cobwebs.
Is it too late to start? What can you do? Will your kids fail at life and be trapped in student loans forever? Will they not be able to get in to the best schools?
Take a deep breath for me. This is fixable.
How to Start Saving for College Late
You can still get your child off to college without losing your mind. Here are some things to consider.
Keep Retirement First
Not occasionally. Not just when you’ve been diligently saving for college throughout your kids lives.
Here’s why: there are no loans for retirement. Once you hit retirement age or grow to be an age where you cannot work any longer, that’s it. There is no more waiting to save another dollar or for your investments to grow a little more this year.
Putting yourself first, especially over your children, runs counter to your parenting instincts. Plus the soccer Mom in the carpool line might judge you if you dared put yourself first in anything over your kids.
It’s great to want the best for your kids and it can seem like saving for retirement instead of their education goes against that. Yet if you take the time to think long term, putting yourself first just this once is actually better for your children in the long run. The last thing you want is to be a burden to them once they have a family of their own.
Setting up your retirement savings right before tackling college saving is a critical aspect of the education savings pie. If you can’t afford to save for both, then you come first. Your retirement will not wait once it is here. Your kids can always get student loans.
Accepting the Balance of Risk and Reward
If you are blessed enough to be able to set money aside both for retirement and college savings, get going. When your kids are older you have less time for the portfolio to gain any growth before you begin withdrawing the funds to pay for tuition.
There are three main variables to any kind of investing:
- how much you contribute
- how much your contributions grow over time
- how long your contributions are invested
Since we’ve already determined the third piece – time – has been shortened, you’ll have to make up the difference with the first two.
That means contributing as much as possible, but you probably figured that.
Set aside as much as you can into a 529 or Educational Savings Account. Once you’ve done that you will need to pick investments for those funds to be placed in, and that’s where things get a little tricky.
That second piece in our list above is rate of return. Obviously you want your rate of return to always be high. If you are starting late on saving for college you need your rate of return to be as high as possible to help make up for lost time.
However, that is balanced with risk.
If you put 100% of the savings into risky investments like stock index funds you should see a higher return over a long period of time. Note that is over a long period of time; there can be serious fluctuations in the market in the short term. Since you got started saving late for college those short term fluctuations can have a dreadful impact on the savings.
For example, take someone who delayed saving for college until 2006 for a student entering college in 2010.
From January 2006 to August 2010 the S&P 500 went down 11.75%. That probably wasn’t our investor’s total return because they would have been dollar cost averaging as the market’s value went down. Nonetheless the returns would not have been great and the 50% drop in market value from September 2008 to March 2009 would have tested our investor’s limits.
In a typical college savings portfolio you start off with nearly 100% of your allocation in stocks because you have 18 years (or longer) to bounce back from any ups and downs as the market. But just like with retirement savings, as you get closer to the date you need the funds you begin to scale back on stocks and beef up bond and cash investments. You accept a lower return to avoid the risk of having your child’s college fund take a 50% hit right before they need the money for college.
So, What Do I Do?
It’s simple: save as much as you can and invest the funds in a way that you are comfortable.
That may mean taking on more risk to try and achieve higher growth of the portfolio in a shorter period of time. Don’t take unreasonable risks; you don’t want to wipe out the portfolio right when you need it.
Your child can always get student loans and other financial aid from the school. You can assist them in paying off the student loans as well. Just remember: your retirement comes first. There are no loans for your golden years.