Should you pay for college or save for retirement?

There’s a disconnect between parents and college-hopeful kids. More than 60 percent of the kids expect their parents will pay for their college, while more parents than that say they will only be able to foot some of the bills.

Stephanie Mackara, president of Charleston Investment Advisors in Charleston, South Carolina says, “Without hesitation, this is the most challenging financial planning issue my middle-aged professional clients face, including myself.”

Although clients’ circumstances are different, Mackara says her advice is always the same: “your first dollar of savings should be in your retirement account, preferably a 401(k) that has a match, next is debt repayment and finally is college savings.”

“College savings is last on the list for many reasons because most people don’t consider that a portion of college costs can be paid out of cash flow during college years,” she says. “Do you get a bonus each year at work? Earmark those funds for college costs. For a spouse that has been out of the workforce, take on a part-time job to pay the college costs.”

If the college funds fall short, “your child can take out a loan and you can help him or her pay down the loan,” Mackara adds. “Retirement is typically 15 or so years away for most parents with children entering college, and saving for it must remain a priority. There are no loans for retirement.”

The only thing I can add to Stephanie’s analysis is: “Parents, give your kids clear expectations.”

Will we get the lifetime income disclosure act?

Congress looked at a bill requiring employer-sponsored retirement plans to provide participants with an estimate of how much monthly income they could generate if they were to take all their retirement savings and purchase an annuity. The LIDA is heavily endorsed and lobbied by the Insured Retirement Institute (No surprise there).

Employees would receive an annual statement of how their savings would reflect monthly income payments through an annuity.

The IRI said, “At a time when American savers are shouldering more of the burden of planning for their retirement themselves, legislation which increases consumer education is vital to ensuring financially secure retirements.“

The legislation introduced by Representatives Luke Messer (R-IN) and Mark Pocan (D-WI) and Senators Johnny Isakson (R-GA) and Chris Murphy (D-CT) is said to require employers to provide a picture of how much their current savings will provide in their retirement years.

Maybe it will provide them with more options, rather than just annuities? It could be a platform for goals-based lifestyle account management.

Is there a need for financial literacy, or are we better off not knowing much about it? Let’s look at more conventional wisdom.

Putting all your eggs in one basket and then eating the chicken

Sure, diversification is overrated and only works until you actually need it, but still, buying only one stock is like buying only one cow and hoping it grows to 62,500 pounds. Keep emotions out of your investing strategy. You don’t put your whole IRA in a Disney stock because you love Space Mountain. Of course, if you want to go to Disney World and ride Space Mountain, you’ll have to skip this year’s IRA deposit. Emotion is the enemy of success.

Overreacting to short-term volatility

All markets go up and down, except maybe the farmer’s market. You have to keep your gut in check and not bail out when security prices are going down. That’s the time to buy, not sell. You buy stocks when the stock market is going down. When it goes up (hopefully higher than the level at the time of your purchase), then sell. Will Rogers said, “If you want to invest, buy some stock and when it goes up, sell it. Of course, if it doesn’t go up, don’t buy it.”

Misinterpreting past performance

Don’t let the past price history influence your future investment decisions. The only prices you need to know are the current price and the future selling price (let me know if you find a way to know that with certainty in advance). Past performance is an unreliable predictor of future performance. Consistency, process and discipline are more important than recent performance. Specifically: don’t buy last week’s winners, don’t buy last month’s winners, don’t buy last year’s winners. In fact, buying past winners because they were past winners is like betting on Savvy Shields (Miss Arkansas, August 2016) to win the Miss America contest again in 2017. My motivational speaker buddy, Nick Murray, said it best: “She doesn’t win twice.”

Do this

If you’ve already made investing mistakes, don’t repeat them. It’s never too late or too early to begin investing. If you want to do your six-year-old a favor, forego the latest PlayStation and buy the kid a savings bond. She’ll thank you later. That is if she’s still speaking to you.

—

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.