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SPREADING IT AROUND. So how do you follow the rules to provide the most benefit to everyone in your family? Mary Ann and Stan Armstrong of Smithville, Mo., learned some lessons about this recently when they sought advice from Todd Shepherd, a financial planner in Leawood, Kan.
"I knew we didn't have anywhere nearly enough saved either for retirement or college," Mary Ann explains. Yet she had recently received an inheritance from her father. Mary Ann, 45 and Stan, 48, have two children, Sean, 8, and Noah, 3. Mary Ann, a nurse, does occasional part-time work but mostly stays home with the children. Stan is production manager of a food-processing company.
Shepherd's advice to the Armstrongs: Put as much as possible into retirement accounts, but continue to make small monthly contributions to Missouri Most, the state-sponsored higher-education plan, so that they can feel they're not neglecting the children's education.
CASH FLOW COUNTS. In general, Shepherd suggests, parents trying to save for the future "should ensure their retirement needs are met, then try to save some in a tax-advantaged educational savings vehicle, and expect to fund some educational expenses out of their current cash flow, taxable accounts, or Roth IRAs." His point about cash flow is important. In the Armstrongs' case, Mary Ann plans to return to full-time work, so they'll have more income in the future.
Many parents are likely to be at their earning peak when their children are in college, and they should be able to afford to pay some education bills from cash flow. And if parents are retired or almost retired when the kids matriculate, they may be able to use IRA money or borrow from their 401(k) without paying early-withdrawal penalties.
So how much will you need to save in retirement accounts if you may want to tap them for higher education as well as for retirement? I asked Muldowney to make a very conservative calculation. Here's what he came up with for a hypothetical couple: Two years before their son Tommy is even a gleam in their eyes, our couple starts contributing $300 per month to their retirement accounts. They continue to do so for 20 years, receiving an 8% annual return -- until Tommy is ready for college.
CONSTANTLY CHANGING. When Tommy starts college, our couple's retirement account is worth nearly $178,000. While he's in school, mom and dad stop making contributions and withdraw $12,500 each for four years to help him with school expenses. Yet, through the magic of compound interest, assuming a continuing 8% return for those four years, their account will still be worth $181,176 when young Tommy graduates. Then his parents up their retirement contributions to $500 per month until they retire, 15 years later.
At that point -- again, assuming an 8% return -- their retirement account will be worth a very respectable $773,310. (This example does not account for paying income tax on the withdrawals before age 59 1/2.)
The rules for both retirement and education accounts can morph at any time. Just look at all the changes in tax law enacted by Congress and the White House over the last three years. But Warren McIntyre, a financial planner in Troy, Mich., says keep this in mind: "There are many ways to pay for college. However, with retirement, you get just one chance. If you have neglected retirement funding, you could be out of luck in the future."
Smart couples will pay heed, and adjust their portfolios accordingly.
In addition to writing Your Retirement for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement With Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com Edited by Patricia O'Connell
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