Saving for the Future
Six short years ago, with one daughter in elementary school and one in middle school, I was sure I had the children’s future covered. My investments were going to pay for Ana and Laura to go to the colleges of their choice. Their father, my ex, was on board for half the expenses, meaning that we could handle any unexpected problem or a jump in inflation. Best of all, my current husband’s investments were going to take care of his and my retirement, which was looking almost cushy.
That was then. This month, as I see Ana off to her freshman year, I bear the financial burden for the girls’ education myself, as well as the responsibility for a good part of my retirement, if that day ever comes. Ours is a tale of a burst market bubble, a death, and the financial fallout of denial.
Bad Decisions & Rotten Luck
In a life of much good fortune and many satisfactions, I have usually played the optimist, and it has served me well. But this fall, as I turn 50, I have learned that the worst occasionally does happen. I will pay for everyone’s bad decisions — and rotten luck — for the rest of my life.In 1998, when I married him, Mark had a high-paying Internet job and a hefty portfolio of stock options. But when the tech market cooled, many of the options became worthless. In 2001, he was downsized and after 9/11, he decided to opt out of the corporate world for good. A big chunk of his investment portfolio financed our living expenses while he went back to school in a slightly less lucrative field: landscape design. Five years and many tense discussions later, he is still getting his new business off the ground. I am the only one with a 401(k), health insurance, and a regular paycheck that keeps cash pulsing through our home.
But there was more to our perfect storm. Just as Mark’s and my investments were tanking, the children’s father was diagnosed with cancer. He died in 2004. For years, I had believed that, no matter how my ex felt about me, he would provide for his children. He had always spent lavishly on them — luxurious vacations, expensive restaurants. But when I saw his will, I found that the money he left for college was… well, let’s say it won’t go far.
That same year, I lost my job when my company went through a management shake-up. As our financial fortunes continued to spiral down, I spent many nights staring at the ceiling, cursing my own and others’ mistakes. It took months to get past the anger and be grateful for my family, my friends, and my health.
Fortunately, while I was whining, I was also working. I’m a journalist with years of experience. Even when I had a full-time job, I had moonlighted. Freelance writing jobs paid for summer camps; speaking engagements covered the psychologists who counseled my kids while their dad was dying. When I lost my job, I kicked those activities into overdrive and kept hunting for a new full-time gig. Last year, I got my current job, editing a magazine for financial advisers.
Don’t Sacrifice Retirement for College
Yes — personal finance is my field of expertise. I’ve been drilled in the realities of saving and investing for years, and writing about retirement since I was in my 20s, when the idea seemed pretty abstract. I remember once joking on television that, because I was part of the generation that might see Social Security tapped out, my own retirement home could be a refrigerator box along the highway. But I was joking.
The High Price of College Tuition & Promises
When things began to go wrong, I was knowledgeable enough about finances to realize just how badly I was missing my goals. Three years ago, with Ana already in high school, I had only $4,000 in a college savings plan, and the other funds we had counted on had dwindled. At the same time, I began tuning in to the real, updated cost of college. I remember marveling with some friends at a college reunion that the cost of tuition in 1977, our senior year, had been $4,500. "You know what it is now?" asked one. The staggering answer: $29,000. Since then, of course, costs have continued to escalate. This year, the bill for tuition, room, board, and fees at an elite private university will surpass $40,000. Many parents figure that, once they’ve added in everything from dorm-bed-size sheets to airfares home, they’ll spend closer to $50,000. Having also edited stories about financial aid, I knew that my husband and I made too much to qualify for it in any significant way.
Still, I couldn’t imagine breaking the promise I had made to my children, the same one my parents had made to me: You get into a top college, and we’ll pay for you to go. Stepping back from this idea would completely go against the grain. In 17 years of raising children, I’ve learned what is most important: I would leave my friends at the dinner table to sing to a fretful baby; I’ve embraced the humiliation of having a preteen "help" me shop for clothes. Didn’t the same maternal attitude suggest I should dip into my retirement money to help them launch their adult lives?
It had been easy, before, to adhere to financial planners’ gospel about college: Never, ever sacrifice retirement for college. But that was when we had — or thought we had — enough money for both. Now Mark and I are envisioning a less glossy version of the golden years. His portfolio has recovered somewhat. But even with my savings, we can’t pay for years of comfortable living. And I’ve had to push for major adjustments in our lifestyle, such as owning one car, not two, and forsaking expensive vacation travel.
Stuck between two imperatives — sacrifice for your children; don’t sacrifice your retirement — I’ve decided to cheat a bit and save for both goals: About 75 percent of my saving now goes to retirement, and the rest of it goes to college funds. That’s not a scientific decision; it’s part strategic, part gut feeling. And I’ve put my own spin on other elements of the conventional wisdom. Here are my five basic principles.
5 Basic Rules of Saving for College & Retirement
RULE 1: Don’t focus on today’s trade-offs; think long term. The experts’ advice — put retirement first — has compelling logic: It’s far easier to borrow for education than for retirement. When I get to that fateful day, if I’m short of funds, I know I’ll have few options. I’ll have to keep working longer than I want, cut back drastically (will I be able to keep our house, travel to visit my children?), or ask my kids for help. None are palatable for me. So even if I don’t observe the planners’ law to the letter, I am following it in spirit. Giving the kids too much today will hurt me — and possibly them — later.
RULE 2: Remember that times have changed. Retirement today is altogether different from when my parents were promising me that college money. Our parents’ retirement system was described as the three-legged stool: a company pension, Social Security, and personal savings. Today the company pension has almost disappeared, and the Social Security system is under great pressure. The last leg is the only one we can count on: savings, such as 401(k)s, IRAs and the equity in our houses. Rather than a sturdy stool, we’re balancing on one stilt. And because we’re living longer, that stilt has to support us for even more years.
Why dwell on all this? Because it consoles me a bit to know that I’m not alone. And it comforts me most of the time to believe that society won’t abandon an entire generation. Finally, I try to remember that our culture pressures everyone to spend too much, and that’s something I can resist.
RULE 3: Don’t give in to 401(k) temptation. My 401(k) is my primary retirement savings investment, so I’m trying to observe another financial planners’ dictum: This account is sacrosanct. Some employers allow you to borrow against your account, and a lot of parents do. Interest rates for such loans tend to be low, and the repayment can be deducted from your paycheck, so it’s almost painless. But this approach is dangerous. If you leave (or lose) your job, you must usually repay the balance of the loan (typically within 30 days) or pay income tax and penalties. Don’t go there.
RULE 4: Hold tight to home equity. It’s tempting to turn to your house as a source of college funds. Home equity loans are cheaper than unsecured debt, and you can deduct interest costs for the first $100,000 you borrow. What could be better?
Here’s what: Owning that home outright when you want to retire, or at least having enough equity to buy a smaller home without a mortgage. After years of a real estate boom, many Americans think of their houses as cash machines. But interest rates are up, and home prices in many places are flat or down. So borrowing against your house isn’t the deal it used to be. Think twice.
RULE 5: Level with your kids. If they’re going to have to work their way through college and take out loans, or live at home and go to a state school, tell them. Be honest. They’ll be more likely to take this news in stride if it doesn’t contradict everything they’ve come to expect from you. And if you have to make a major policy change, the sooner the kids know it, the better.
When our finances took a dive, I told my girls that they needed to think about scholarships and loans, but that I would help repay the loans. My older daughter took up the challenge, applying to a selective school where her tuition would be covered by a full scholarship. When she got in, we both felt as if we’d won the lottery. Our deal now is that I’ll cover room, board, books and expenses for her first year, and she’ll work during the summer to earn more. Sophomore year, she’ll get a part-time job. If necessary, we’ll borrow. It’s heartening to see how resilient Ana and Laura have become, and how Mark and I and the girls have pulled together. We’ve given up some luxuries, but often felt liberated in the process. I do have moments, especially when I’m paying the bills, when anger surges up. But I know we’re going to make it, to college and beyond.
Originally published in MORE magazine, September 2006.