Monday, February 18, 2013

Our "Future Self" ... Making Good Choices Concerning Saving for Our Retirement v. Providing for Our Children's College Expenses ... Pay "Yourself" First

We all have to make choices continuously, some big and some small. But choosing by default is never a good choice. And that's why we must never neglect the legitimate concerns and needs of our future self when deciding what to do in the present.

Economics is largely about scarcity and choice. So let's be sure to adopt the "pay yourself first" method when saving and investing for the future.

We are required to establish priorities when time and money are limited, which they always are, and when there are several opportunities to choose from with respect to what to do with that scarce time and money, which there always will be.

In other words, if we choose to spend our time or money doing one thing, it's always at the expense of being able to do something different with that same time or money. The economists label that foregone choice as our opportunity cost.

That's also one of the foundations of economic thinking --- considering scarcity in the midst of finite resources along with the opportunity cost associated therewith.

So here's a question for you: What's a responsible parent to do when financially he can't do both -- (a) save for retirement or (2) save for his child's future college costs?

Balancing college and retirement planning contains sound advice from a financial adviser for such conflicted parents:

"This couple, Jack and Crystal, like many couples in their 40s find themselves dealing with competing priorities. As is frequently the case, there were two major topics of discussion, retirement and college. If we have available cash flow, where do we put the money? Do we put away more dollars towards college or do we save more for retirement?

In the best of all worlds there are enough resources to do both and we don't have to have an either or conversation. But what's the best course of action when there just isn't enough to handle both.

One of the difficulties that come with making the decision is not financial. In fact it's an emotional decision. I'm pretty sure that I noticed a little twinge of discomfort as Crystal contemplated the possibility of not fully funding the children's education.

Tending to your retirement first doesn't mean that you're a bad parent or that you don't love your children. In spite of how selfish it may feel to "pick yourself over your children," fund your retirement first. I promise they won't ship you off to a nursing home and forget about you when you get old.

There are a lot more options for funding your child's education than there are funding your retirement lifestyle. Let's play out this little vignette.

Imagine yourself retired and you find yourself short of resources to live comfortably in your golden years. You think to yourself "I can do a reverse mortgage." Oops!

It's 2008 all over again. Your house is underwater. All the equity you had is gone. "Well I'll go to the bank and get a loan."

Sounds good until you have to explain how you intend to repay the loan. This just is not a very pretty scene.

On the other hand, your child may be able to get scholarships, grants or do work study. If you're bound and determined to lighten the child's financial load there is always the option of student loans. There is nothing that prohibits you from re-paying these loans on their behalf if you are willing and able when the time comes.

More and more families are opting for community college for the first two years at an incredible savings. Take the time to examine all the possibilities for helping your child(ren) without digging a hole for yourself.

Yogi Berra is quoted as saying "When you come to a fork in the road, take it!" If you find yourself in the middle take the fork that leads to retirement."

Summing Up

Makes sense to me.

That said, lots of oldsters admit to having done a poor job of getting into the habit of setting aside enough money for their own retirement while there's enough time to do so and they're still early in their careers.

And that's a mistake that often comes back to haunt them later in their oldster years.

So to my younger friends I simply say this. Do yourself a favor and commit to making the effort to get retirement planning underway immediately upon entering the work world.

Then go from there with whatever else you can handle financially, both for yourself and your family as well.

When we're young, taking the opportunity to be able to enable us to choose from lots of available 'opportunities' later in life must be a high priority.

We'll be glad we did.

That's my take.

Thanks. Bob.

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