My How Time Flies!
Last week I helped my daughter move into her college dorm room. It was a rush of emotions as my thoughts drifted from college bound freshman to tiny infant. Eighteen years flew by much faster than I thought possible. It seems like yesterday I was teaching her how to swim and ride her bike and in a blink of an eye she’s a college student.
Time marches on and waits for no one. Time is equal to all and doesn’t discriminate. Procrastination will cost you dearly when raising a child or saving for retirement.
When my daughter was born I couldn’t wait to get her Social Security number so I could open her college savings account, a Uniform to Minors Account (UTMA). The UTMA allows for the purchase of stocks, bonds and mutual funds. Today parents can open a UTMA, a 529 Plan or both. A 529 Plan will invest in mutual funds based on your risk tolerance or your child’s age. The money inside of a 529 plan grows tax free if it’s used to pay for college.
The parents of a young child born today can expect to spend $300,000 for their child to attend a four-year public university. If their child attends a private university, they can expect to pay twice the amount of a public institution. The parents of a new born have eighteen years to save for college. If they start saving today, they’d have to invest $8,823 per year to meet this goal. If they waited ten years to start saving for college, their annual savings amount rises to $29,240 per year. This is an increase of 231%!
In eighteen years from today a forty-nine-year-old worker will turn 67, the normal retirement age for many when it comes to collecting Social Security. A 49-year-old may think they have many years to save money for a comfortable retirement but this is not the case. Let’s say this young person has $250,000 in a retirement account with a saving goal of $1 million dollars in eighteen years. If they earn 7% on their investments, they must save $4,559 per year to hit their target. Waiting ten years to start saving money for this goal will now cost them $55,600 an increase of 1,119%!
What can you do if you have not started saving for college or funding your retirement? Is it possible for you to make up lost time? Let’s look at some options you can employ today to give your savings a passing grade.
1. Start saving today. It’s imperative to start saving any amount you can towards your college and retirement goal as soon as possible. The long you wait, the more you must save.
2. Automate your savings. If you establish an automatic link from your checking account to your college and retirement accounts, you’re more likely to remain committed to your goal.
3. Buy stocks. An allocation to stocks will give your money the best opportunity to grow faster when compared to bonds and cash. The historical growth rate of large company stocks from 1926 to 2015 has been 10% per year.[1]
4. College or retirement? What if you have to make a choice between saving money for college or saving money for retirement? Well, retirement wins. It’s possible to get a loan or a scholarship for college but you can’t get one for retirement.
When caught in the daily grind it’s easy to lose focus of the future. On the surface eighteen years seems like a long time from now but it’s not. Today you’re holding your child in your arms and tomorrow your dropping them off at college. If you’re in your 20s, 30s or 40s, don’t wait to start saving your money because eighteen years will fly by in a blink of an eye!
Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. James 4:14.
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. www.parrottwealth.com
August 20, 2016
[1] Dimensional Fund Advisors Matrix Book 2016, page 14.