There may have been a time when parents were able to plan for a comfortable retirement while putting their children through college but with most workers now responsible for planning their own retirements, the picture has changed dramatically, a new study by Putnam Investments finds.
Figuring out how to pay for college without raiding the retirement nest egg or depleting the equity in ones home is the question that faces millions of today's parents.
In 1985, 60% of retirement assets were represented by defined benefit plans in which an employer put aside money on behalf of its workers to provide a guaranteed source of retirement income. These programs alleviated much of the financial need to save for retirement, thus freeing up funds for college and other expenses.
But today, nearly two thirds of all retirement assets are self-directed, meaning they are funded by individual contributions rather than employer contributions. As parents shoulder more of the burden of saving for retirement, less of their income is available for college savings.
Then there's the simple matter of age. Couples are having children later in life. The birth rate for mothers aged 30 to 34 has risen 83% since 1975. In fact, many women over age 35 and even many over age 40 are choosing to have babies for the first time. The result is that parents often find themselves confronting the dual challenges of saving for retirement and college at the same time.
There are many benefits to being an older parent, including maturity, focus, and financial security, said Elaine Sullivan, Putnams head of retail marketing. However, an important financial drawback to having children later in life is that the timing of saving for college often overlaps with the peak years of saving for retirement.
As a record 3.3 million students head off to college this fall, tightening student loan availability and declining home values are narrowing the number of options for parents seeking to cover ever-escalating college costs.
Roughly 50 private and nonprofit lenders have withdrawn from the student loan business in the past 10 months, creating what some describe as the worst loan environment in the history of student lending. At the same time, home prices have declined since 2006, leaving parents with less equity to borrow against to pay for college.
Now, the declining real estate market and credit crunch have combined to make an already-challenging situation even more difficult, said Sullivan. This puts increasing pressure on parents who are being forced to choose between a financially secure retirement and a higher education for their children.
Many savings strategies are available to help parents reach both goals. Sullivan encourages using a balanced savings approach that combines 529 college savings plans and savings bonds for college costs, and using tax-advantaged savings plans such as 401(k)s and IRAs to save for retirement.
The financial hurdles facing American families are indeed great, and the message is clear: We must assume the responsibility of both saving for retirement and college, Sullivan says. This new reality requires a new way of thinking about the competing needs we face, including a realistic assessment of our goals and a more creative and resourceful way to address saving.
