I recently had the opportunity to share an evening out with some friends, new parents with six-month-old twins. The conversation centered on birthing, breastfeeding, and burping.
One topic we didn’t discuss was baccalaureate degrees. Most people might think it’s premature to consider college education while your kids aren’t even crawling.
Actually, that’s the perfect time to think about it, especially if you intend to fund all or a significant part of your children’s education. Don’t wait till kids are 17, 14, or even 11 to settle on a philosophy of “who pays what” toward their education. If you do, you risk becoming a financial burden to your children in retirement.
Most parents perceive paying their children’s college expenses as a loving act. They believe it will help give their children a good start on a career and chance to get ahead. The facts suggest it actually may accomplish just the opposite. The reason? Most American parents who fund their children’s college education underfund their own retirement.
Parents who fail to fully fund their own retirement may dearly cost their children later. Such parents often rely on their children to take care of them in their final years. Research indicates that looking after parents in their old age comes at a great financial price.
According to Alan Blaustein, the founder of CarePlanners, elderly parents who underfunded their retirement cost their children an average of 18 hours a week, $30,000 a year in hard costs, and a total of $300,000 in forfeited wages and benefits. Most studies put the total cost from $250,000 to $750,000, depending on the length of time the parents needed care.
Considering that the tuition at many four-year colleges averages around $100,000, most children would be much further ahead to pay for their own education while parents fully funded their own retirement.
Not only does paying for kids’ college education potentially hurt them financially, it also can hurt them academically. I reported last year on research that found children whose parents pay the tab for college have lower GPA’s than those who earn scholarships, borrow, or work their way through college.
Clearly, the logical and loving approach for parents is to focus on retirement first, even if that means letting children pay for their own education. Yet the average American parent recoils from the thought, finding it unloving, selfish, or irresponsible even in the face of clear evidence that the opposite is true.
Such “illogical” emotional responses to factual data actually make perfect sense. The Nobel Prize-winning psychologist, Daniel Kahneman, discovered that we make 90% of all financial decisions emotionally, not logically. Moreover, the more complex the financial decision, the higher the probability is that we rely on our emotions to make it. Sadly, evolution wired our brains to make poor financial decisions.
Do yourself and your children a favor and assess your ability to save for retirement when your children are very young. Fully fund your retirement first with maximum contributions to 401(k) plans or IRAs. If there is anything left over, start 529 college savings plans when kids are babies. This will allow the tax-free earnings to grow and multiply by the time they set off to college.
Remember, too, that college funding isn’t an “all or nothing” proposition. Many parents choose to pay some college expenses and help the kids find ways to fund the rest through scholarships, jobs, and loans.
In any case, early planning is the key to supporting both your kids’ futures and your retirement. Making logical college funding decisions, rather than emotional ones, creates a win/win for everyone.
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