Retire First, College Later

Today's post is part of our series on saving for your children's education. The topics we'll be covering are:

• Ten things to do before saving for college
• Retire First, College Later
• Reasons to Save and Not to Save for College
• 529 Plans Debunked
• Five ways to pay for college if you haven't saved

Retire First, College Later

We were recently out with some friends of ours and had a discussion about when to save for our kids' education. Some people start saving for college when their child is in the womb or earlier. In some cases that's a good plan, in others its not. My approach is to focus on our retirement needs before funding education for kids. We won't have access to loans in retirement. Our kids will be able to get a loan for school.

The question I ask myself before saving for college is whether we have saved enough to survive in retirement given a conservative growth rate? To answer this question, we turn to time value of money again. The financial calculator we've used in the past can help us decide if our current retirement savings will grow to enough to "get by" in retirement.

Plug the following information in the calculator.

1. Present Value (PV) = everything currently in your retirement accounts.
2. Rate (i)= a conservative number like 5 or 6-percent per year (this is the percentage you expect your savings to grow at)
3. Payment (PMT) = However much you are contributing to your retirement per year
4. Periods (n) = Number of years until retirement. We're trying to estimate a conservative worst case scenario here. In my case, I used 38 since that's when I'll be 70. Seventy seems like an old retirement age, but we're being conservative.
5. Future Value (FV) = blank (we're solving for this variable)
6. Click on "FV". The number in the FV field is how much your savings will grow to by the time you retire. It will show as a negative number, which is fine at this stage.

Knowing your total savings is a key step. Now you should determine if that savings will create enough annual income to survive.

1. Copy the FV amount into the PV field.
2. Leave Rate alone since it's a conservative number.
3. Change Periods to the number of years you expect to survive in retirement. My family has a history of passing in their 70s and a history of living into their 90s. We're being conservative, so I expect to live to 100.
4. Click on the PMT button.
5. You now know how much your current savings could give you in savings each year of retirement.

If you're close, but not quite there, play with the calculator. Insert a bigger payment (savings) amount you could continue saving while saving for college while doing the first calculation above. Could you shrink your current annual savings enough to start a college savings fund and still make your survival retirement goal?

If you've saved enough to achieve your "getting by" retirement, then take a look at "Ten Things to do Before Saving for College" as a guide to see if you're ready to start focusing on college.