College or Retirement? How to Save When You're an Older Parent
For the first time in seven years, more Americans are busy making babies.
The National Center for Health Statistics recently reported that the birth rate rose 1% in 2014, the first time since 2007. The seven-year decline has been attributed to the deterioration of the economy during the Great Recession—unsurprising when you consider that the U.S. Department of Agriculture estimates you'll spend $245,340 to raise a child to age 18.
Women in their 30s and 40s have led the baby bounce-back, with birth rates rising 3% year-over-year for women ages 30 to 39. Birth rates for women in their early 40s rose 2%.
While the uptick suggests parents are feeling financially secure enough to start raising a family, later-in-life pregnancies do come with their own set of financial challenges.
Resetting Your Priorities
One of the hardest things for couples to do when they have kids later in life is to re-evaluate their budgets, says Mitch Kraus, a financial planner in Santa Monica, Calif. "Most people struggle in their 20s to get by, then in their 30s they're in a decent career and making some money and they get used to the niceties in life," he says. All of a sudden, money that went to spontaneous weekend trips or eating out has to be allocated towards child-care expenses and diapers.
Having had his first child when he was 38, Kraus knows that resetting those financial priorities can be easier said than done, especially if you've grown accustomed to a certain lifestyle.
"I hadn't made dinner two nights in a row in 10 years," he laughs. "It's hard to transition back to some of these things."
Of course, the demands on your money will vary depending on your kids' age—and your own.
If baby is already on the way, start budgeting during your pregnancy. Many parenting sites have baby cost calculators to help you wrap your mind around just how much Junior will bite into your vacation fund. Pre-delivery is also a great time to revisit your life insurance policy to make sure your family would have the financial resources they need if you're not around.
Once the baby is born, one of the most pressing concerns (especially for working couples) is daycare. A report last fall by Child Care Aware America found that in some states, the cost of full-time childcare is more than a year of in-state college tuition. (Exhibit A: New York, where daycare can cost $15,000 but in-state tuition and fees at a public college is about $7,500 a year.)
Andy Tate, a financial advisor in Minneapolis, Minn., reminds parents to view the cost of childcare and education as a fluid expense instead of separate costs. Once Junior goes to elementary school, you can reallocate most of the daycare money to a college savings account. Socking away some of the money you had been spending on daycare can help you catch up on college savings.
Balancing Your Own Needs
But what about saving for you? Perhaps the trickiest financial issue for older parents is finding a way to fund ever-approaching retirement and a child at the same time. Someone who has a child at 35 or 40 will find tuition bills coming just as they may be preparing—and saving in earnest for—retirement. A recent poll by T. Rowe Price found that 52% of parents prioritize college savings over their own retirement. While that may make sense emotionally, it's not always a good move financially. "You can take out loans for college," Tate explains, "but you can't for retirement."
One strategy to consider: don't put too much money into 529 college savings plans, Tate suggests. Though they are great options for younger parents with a longer time horizon, older parents need more liquidity and may be better off putting their money into other options such as a typical, non-qualified brokerage account. You'll miss out on the tax-deferred status of a 529, but Tate argues that a well-managed account can help you minimize tax consequences while providing greater flexibility to use the funds for other expenses (such as your son or daughter's wedding).
What's more, putting your money into retirement savings instead of a dedicated education fund could help your child get more grants and low-interest loans. Many financial aid programs don't take retirement accounts into consideration when calculating your expected family contribution, but they almost all will check on how much you have earmarked for education.
"Throwing money into retirement lowers income and takes money out of taxable accounts where schools will count it against them," says Kraus.
Still feel guilty about directing some of your money into your retirement fund instead of the college fund? Remember, if you shortchange your own retirement and run into money or health problems in your 60s or 70s, your kids might not be established enough in their own careers to help you out financially. Or, even worse, they might have to quit school to help you pay the bills.