We all have a tendency to compartmentalize different areas of our life, and this is no different when it comes to financial planning. Most of us think that paying for college and planning for retirement are our two biggest financial goals; and logically, we prepare for each one of these individually knowing this fact.
However, college planning and retirement planning are directly linked. Even if we prepare for these two major goals in silos, the fact remains that they are directly tied to each other. Think of it this way – if we didn’t have to pay for college, then our retirement income could be bigger, right? Seems simple, but this is often forgotten or overlooked. In fact, the underlying principle remains that money is a limited resource and so the more efficiencies we can create with our dollars, the more our dollars can actually do for us (in this instance, pay for college and spend/enjoy in retirement).
Now that we have a fundamental understanding that college planning and retirement planning are directly linked, here are 4 guidelines we can follow to help put us on the most efficient path to reaching both of these goals.
Start Your Accumulation Cycle as Early as Possible:
Ok, this is not rocket science. The earlier we start saving the longer we have for total savings contributions to increase and for compounding to occur. Below is a chart of a 40-year accumulation cycle, and you can see the impact compounding has on the back end.
Avoid Having to Start Your Accumulation Cycle Over:
Everyone has a growth / accumulation cycle that is about 30-40 years long. If we deplete our savings at any point in the process for large expenses (down payment on a home, nice cars, home renovation, etc.), then we lose our position on the accumulation cycle. As you can see above, the overwhelming majority of growth happens at the end of the accumulation cycle. So, starting over at any point can compromise our ability to actually reach the end and reap the rewards of those final years. When we pay for college — and deplete a significant amount of savings by sending money off to a college or university — we must start that accumulation cycle once again. Said differently, we have fewer dollars compounding for us, and therefore, must save more or save longer to accomplish the same result. See Below. This is a chart of someone who saved the exact same amount of money as the chart above but had to start their cycle over halfway through.
Build a Strategy That Will Accumulate AND Distribute Your Money Efficiently:
Most financial strategies focus only on the accumulation of money and not the distribution. However, getting cash from your financial products easily, efficiently, while minimizing risk, expenses and taxes is of critical importance. Ask your advisor how well any product will accumulate and how well it will distribute.
Have a Volatility Buffer in Your Strategy. This Will Serve You Well Both While College Payments Are Occurring and While You Are Creating Retirement Income.
One of the most difficult risks for which to prepare is called sequence of return risk. Meaning, we don’t know what returns our portfolios are going to achieve until after the fact. This unknown makes ANY strategy more complex. The market will go up and the market will go down. During the distribution phase—whether distributing for college or during retirement—for any down years that occur, having a bucket of money that is not tied to the market becomes a very powerful tool. A “volatility buffer” enables us to use another bucket of money without touching our market linked investments; and therefore, allowing our market linked investments time to recover and likely to last longer.
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