Balancing College and Retirement SavingStephanie Yates Rauterkus, PhD

•Agenda Families & Finance

How Did Our Parents Do It?Hint: Things were different!

What’s More Important?Sending the kids to college or retiring comfortably.

How Do We Get the Kids Involved?Rev up those college fund engines!

How Exactly Do We Get the Ball Rolling?We can do this the easy way or the not so easy way.

FAQ #1

FAQ #2

FAQ #5

FAQ #3

FAQ #4

How Do We Do Both?We’re all in this together!

• Purchasing power increased dramatically from the 1950s to the 1970s.

• Many people had pension plans entirely funded by their employer.

• College tuition was much less expensive then.• Parents tended to start families at a younger age

Hint: Things were different then!•How Did Our Parents Do It?

In 1980, the average tuition at 4-year institutions was $3,499 in

today’s dollars.

The average college tuition at a public, 4-year institution is $7,605.It is $27,293 at private institutions.

IVY LEAGUE SCHOOLS• The most expensive schools cost

more than $30,000 a year.• If you choose this option, you will

possibly spend most of your money on college instead of retirement.

• A few years into retirement, you may run out of savings.

• If you cannot make ends meet on Social Security and retirement, what do you do?

• You’ll need about $700,000 to retire at 65 with $40,000 in annual retirement income.

• If you choose this option, your children may have to go to a less expensive school.

• Your retirement savings should be enough to keep you from living in poverty and/or turning to your children for help.

RETIREMENT

•What’s More Important?Send the kids to college or retire comfortably?

• Make it clear early on that your children are going to have to pay for pert of their college expenses themselves.

• Explain that you need to plan for your own retirement so that you do not become a burden on them when you get older.

•How Do you Do Both?Remember that you’re all in this together!

• Have children allocate a portion (25-50%) of their income (babysitting, gifts, etc.) to a college fund.

• Set up a bank account for each child specifically for their college fund.

• Ask that friends and relatives consider making donations to your children’s college funds at gift-giving times.

• Review the college fund statements with your children regularly.

•How Do you Get the Kids Involved?Rev up those college fund engines!

• Put every dollar you can into tax-deductible retirement plans.

• The contribution is tax deductible so the earnings are tax-deferred.

• You can withdraw funds for your child’s college education penalty-free.

• You are less likely to spend money that is invested in a retirement plan.

• Financial aid calculations do not consider retirement plan assets to be available for college expenses.

•Consider SimplicityWhat to do if funds are limited . . .

PROS• You can typically borrow up to 50%

of 401k funds at a low rate (prime + 1-2%).

• Paying college expenses with 401k loan funds has no impact on a student’s eligibility for need-based financial aid.

• IRA withdrawals for college expenses are exempt from early distribution penalties.

• Limiting IRA withdrawals to only your contributions eliminates income taxes.

• Withdrawing retirement funds reduces the long-term productivity of your retirement account.

• If you borrow from a 401k and you quit your job or are terminated the loan must be paid back in full usually within 60 days.

• IRA withdrawals may be subject to income tax.

• Withdrawn IRA funds can negatively your child’s financial aid eligibility in the following year.

CONS

•The Pros and Cons of Paying for College with Retirement Funds

• If you have extra money to save beyond your retirement plan limits ($16,500 or $22,000 if you’re over 50), you may not want to put it in your child’s name.

• The tax benefits are outweighed by the impact on your child’s financial aid eligibility.

• Funds in your child’s name are under your child’s control . . .

Think twice!•Putting Funds in Your Child’s Name Only

6% of your assets are considered to be eligible for college expenses

every year.

35% of your child’s assets are considered to be available for college expenses every year.

• No federal taxes when earnings are used for qualified expenses like tuition, room and board, books and more.

• The money can be used at thousands of eligible schools nationwide.

• Anyone can make contributions regardless of their income.

• Contributions can be as low as $15 per month.

•Saving for College Through 529 PlansSomething to consider after you address your retirement needs.

• Savings – work like a 401K or IRA.• Direct Sold – investors purchase

directly from the plan manager. No sales charges.

• Broker Sold – investors purchase through a financial adviser but may pay sales charges or incur other fees that are used to compensate the adviser.

• Prepaid – allow you to pre-pay all or part of the cost of an in-state public college education and can be converted to private and out-of-state colleges.

•Types of 529 PlansNot all are available in Alabama. . .

• Contributions, including rollover contributions to an Alabama 529 plan of up to $5,000 per year by an individual and up to $10,000 per year by married taxpayers filing jointly who each make their own contributions are deductible in computing Alabama taxable income.

• Plans (managed by Union Bank & Trust Company):

• CollegeCounts 529 Plan• CollegeCounts 529 Fund Advisor Plan• Prepaid Affordable College Tuition

(PACT) Program: closed to new enrollments

•529 Plans in AlabamaWhat you should know about Sweet Home Alabama.

Questions?Ask them now or drop me anote:Stephanie Yates Rauterkussrauter@uab.edu