How to Balance Spending on Your Kids vs. Saving for Retirement

Last Updated Jan 24, 2011 2:19 PM EST

Given the meager retirement savings of most boomers, you'll need to do everything possible to make each dollar count. This includes conscious choices about what's best for your children when it comes to their education.

As parents, one of the hardest questions we have to answer is, should we pay for our children's college education or fund our retirement? Most parents I know would choose paying for college costs, but there's room for a reasonable compromise. It involves deciding what type of college your children should attend.

A lot of parents have their hopes set on their children attending a well-known private college. But if you opt for a state college, the savings compared to the cost of private school tuition for four years can easily exceed $100,000 for one child (double or triple these numbers if you have two or three kids). You can realize additional savings if your child attends a community college for the first two years and lives at home rather than in campus housing. And the college tab can get even higher if you pay for your child to go to graduate school. That MBA may not be worth the high cost.

Depending on how many children you have, you could easily save anywhere from $100,000 to $300,000 or more by opting for them to attend good public colleges, and only paying for graduate school when there's a clear financial payoff for your child's future. This substantial savings can go a long way toward funding your retirement. And you'd still be giving your children a good start in life, offering them a strong chance for a job after college. And we haven't even talked about private vs. public schools for K through 12. That's another situation where spending thousands on private school tuition can jeopardize your retirement savings.

What about transportation? When your child is old enough to drive, should you spring for a car for them? The annual cost of owning and operating a car can easily run into the thousands of dollars. And how badly do they need their own flat-screen TV or computer? Will your child's life be ruined if they need to share these "necessities" with the family?

Finally, do you "owe" your children or grandchildren an inheritance? While planning to pass on a legacy is certainly noble, it will result in you having less retirement income compared to using all your principal to generate retirement income. If you're not planning to pass on a legacy to your children, don't think you're alone. You're not. According to Barclay's Wealth Insights: The Age Illusion, a recent study of affluent individuals, only 44 percent of respondents agreed with the statement "I am financially responsible for my children."

When I was growing up, I rolled my eyes at older people who started any conversation with "In my day, ..." But they had important advice to offer. For instance, when I growing up, our family owned just one TV, and I attended public schools all the way through high school. My parents could only afford to send me to a state university. So when I was in high school and college, I worked part-time jobs and bought my own car. I'm taking care of my own retirement without an inheritance, which includes working some in my retirement years. And my life has turned out just fine. In fact, I'd say it's been great.

Most parents put their children first, and that's usually a good thing. But that shouldn't translate to sacrificing everything for your kids, including your retirement. You can love your kids and take care of your own needs, and it's certainly OK to look for reasonable compromises. If you don't take care of your retirement, you might end up giving your children an unwanted legacy down the road -- moving in with them in your retirement years because you're broke!

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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