By Scott Hannah
Q: My partner and I are the proud and new parents of our first child. We delayed having a baby until we paid off our student loans and bought our first home, a townhouse with enough space for a second child when the time comes. We still have four years to go before our SUV loan is paid in full but we’re making progress. We’re in our mid-thirties and realize that we need to get on track with our two most important money goals, saving for retirement and saving for our new daughter’s future education costs. The challenge is that I don’t think we have the ability to do both which is really frustrating. I’ve done a lot of research online and for every article that says saving for retirement should be our top priority another article takes the opposite position. When I look into our daughter’s eyes all I can think of is doing everything we can to help her be successful in life. My husband brings me back to earth by telling me that Freedom 75 doesn’t sound very appealing if we delay our retirement savings. Help! ~Meghan
A: This is a tough decision facing a lot of families today. In many cases it comes down to deciding which option feels right and that’s exactly the problem. Financial decisions based on feelings instead of facts tend to turn into regrets at some point. In a perfect world you would save for both, which may not be an option today based on the very limited information you have provided.
Two Often-Overlooked Considerations
- Have you considered, if you put all of your available financial resources into your daughter’s future, and did the same for baby number two down the road to the point where your own retirement income was severely impacted, how would your child/ren feel? My best guess is that they would feel obligated to support you financially, as many parents are supporting their aging parents today. Is this the “successful life” you envision for your kids and what you want for you and your partner? Probably not.
- Time is on your side. Keep in mind that your future financial situation will continue to change; your income will rise over time, you’ll pay off your car loan and eventually your mortgage. The challenge you are facing is your desire to accomplish everything at once instead of taking a longer-term perspective and looking at other ways to support your daughter’s future education costs.
To help guide you towards a solution, let’s start by considering all of the ways you could support your daughter’s future education costs.
How to Help Your Kids Fund Their Post-Secondary Education
When it comes to exploring ways in which parents can save towards their kids’ future education costs, and later help their kids contribute towards their own post-secondary education, there are a number of options to keep in mind:
Encourage Family to Consider Alternative Gifts
Encourage grandparents and other family members to contribute all or a portion of the money used to purchase birthday or Christmas gifts to your daughter’s Registered Educations Saving Plan (RESP). Keep in mind that currently, the federal government will provide a grant equal to 20 per cent of deposits made to an RESP up to a maximum annual grant of $500. This is free money which will really help build educations savings.
Adjust Your Budget When Your Car Loan is Paid Off
Consider contributing all or a portion of the monthly funds used to repay your vehicle loan to your daughter’s RESP once your loan is paid in full. If baby number two is around by then, talk to your financial advisor about making it a family RESP rather than one per child.
Build Money Skills Early
Help your daughter build her money skills from a very early age and learn to save and spend money wisely. Strong money skills can go a long way to learning how to live within a tight budget and save for future goals like a post-secondary education.
Get Ready to Apply for Grants and Bursaries
It probably seems like it’s too early to think about this, but many of those who receive the most non-repayable funding for post-secondary education start early; allow me to explain. Scholarship, grant, and bursary applications come in many shapes and sizes. They are based on grades, sports abilities, volunteering and activism, musical and artistic talents, or any number of other criteria. It takes time for kids to find their passion, develop their skills, and accumulate hours dedicated to an organization or a cause.
When your daughter is within two years of attending university, college, or a trades or technical school, explore which grants, bursaries, and scholarships to apply for based on her unique set of skills and abilities. It’s amazing how many opportunities there are to apply for funds to help cover post-secondary costs.
Part-time Work and Earned Income
Once she starts working part-time, encourage your daughter to contribute to her own RESP or to a separate savings account if other loved ones are contributing the maximum to the RESP to get the 20 per cent grant.
Cut Costs and Help Kids Keep Expenses Reasonable
Offer to provide free room and board while your daughter is working her way through her post-secondary education. By attending local universities and colleges, students can drastically cut post-secondary costs for every year that they are able to live at home without paying rent.
Determine How Much You Will Need in Retirement
With options around ways in which you can help your daughter fund her post-secondary education costs, let’s change direction and look at your other savings priority; retirement. I want to start by stating that you can never start saving early enough for retirement. Based upon the hundreds of thousands of clients we have helped over the years, the one common statement we hear from our clients is that they just didn’t realize how fast time goes by. With 30 or so years to plan for retirement now is the time to get busy and put your planning into action.
The challenge for most people is having a good understanding of how much money they will need to fund their retirement. Without this understanding it is impossible to know how much they will need to save. Using an average of 50, 60 or 70 per cent of your pre-retirement income isn’t good enough as we are all different and have different expectations in retirement. I would strongly encourage you to work with a financial planner to help you gain a good understanding of your future financial needs in your golden years.
Keep in mind that as your financial circumstances change, your ability to save towards your retirement goal will also change. Here are some things to keep in mind:
Find the Money to Save
Increases in income will enable you to increase your retirement savings in future years and need to be factored into your savings cycle.
Company retirement matching/pension plans need to be considered as part of your retirement planning. A matching plan is like getting a guaranteed 100 per cent return on your money instantly, not to mention the interest you will keep earning on your portion as well as the matched portion, once you invest the money.
In your 20’s and 30’s, you still have a long retirement planning cycle. Consider taking on additional risk to maximize retirement savings returns as opposed to playing it safe with low return safe investments that barely keep up with inflation.
Seek Information from Qualified Sources
Increasing your knowledge regarding the different types of investments and their associated risks will go a long way to helping you reach your financial goals and avoid the mistakes many people make as a result of selling off their investments in a downturn in the economy.
Create and Live According to Your Budget
Establish a monthly budget and maintain it by tracking your expenses. This is a great way to control your spending and expenses, which allows you to maximize how much you have to save towards retirement and other goals.
The Bottom Line on Prioritizing Retirement or Post-Secondary Savings
Saving for retirement or for your daughter’s future education costs doesn’t have to be a one choice decision if you have a long planning horizon and you take all factors into consideration. The common problem most people face is that they fail to plan and to consider all of their options. By expanding your viewpoint, you will likely discover that you can meet your retirement savings goals and make a significant contribution to help your daughter and future child manage their post-secondary education costs.
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