April 2015

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Kids’ College Trumps Parents’ Retirement

Parents have spoken: paying for college is affecting their retirement planning.

Two new surveys indicate that the surge in college costs is impinging on Americans’ retirement finances.  One survey, by the research firm Hearts & Wallets, found that boomer parents who support their adult children are more likely to delay retirement than parents of financially independent offspring.  The second survey, by the mutual fund manager T. Rowe Price, found that half of parents are willing to delay retirement or dip into their retirement savings to fund college.

college grads chartThe surveys included young, idealistic parents as well as parents staring down the barrel of the retirement gun, and parents whose children achieved financial independence years ago. Nevertheless, these responses consistently show a willingness to trade retirement security to pay for their children’s college education.

The findings aren’t shocking, since parenthood is defined by sacrifice. But financial planners offer some tough advice about parental financial obligations, especially for clients zeroing in on retirement. Parents – as opposed to their offspring – have relatively few years left in the labor force to save for retirement.

“There’s going to be a day when you can’t work anymore,” said Kelley Long, a financial planner with Financial Finesse, which provides independent financial education programs and a financial helpline for U.S. workplaces. …Learn More

Grads With Student Loans: Rent or Buy?

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Some college graduates are so overburdened with student loan payments that they struggle just to stay afloat.  But for those who can make their payments and even save some money, the logical next question might be: when can I buy a house?

This is a weighty question for 20-somethings new to the labor force and carrying unprecedented levels of student debt, which puts them at greater financial risk than previous generations of graduates.  Squared Away asked two financial planners from the sensible Midwest – Danielle Schultz and Mark Zoril – to help young adults work through the difficult financial tradeoffs they’ll face as they juggle student loan and car payments, retirement saving, and homeownership.

Here’s their advice:

Danielle L. Schultz, a financial planner in suburban Chicago, believes buying a house should be a 20-something’s lowest priority.

The highest priorities are building up an emergency fund and contributing regularly to an employer’s retirement savings plan.  The minimum emergency fund for a young, healthy adult who earns, say, $36,000, is around $6,000 – $10,000 would be better. [The standard emergency fund equals at least three months of necessary living expenses, excluding splurges like vacations or restaurant meals with friends.]

Schultz feels strongly about the emergency fund, especially if buying property is the goal. When something goes wrong – a car accident, a job loss, a house fire – renters “can always move in with mom and dad or a friend, but when you’ve got a mortgage, it’s not easy to get out of,” she said.  Schultz also is not wild about real estate as an investment, since property values aren’t rising appreciably in many areas.

After the emergency fund is established, it’s wise to knock down the student debt first by paying off the loans with the highest interest rates, she said.  Many graduates have multiple loans, so don’t sweat the loans with interest rates at, say, 2 percent – that’s effectively “free money” when inflation is running at 2 percent. …Learn More

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