Ask Lynn - This Week’s Column

Which is more important? Saving for your retirement or sacrificing to put your children through college?

This is a powderpuff question for most financial experts. They could answer that one while chewing gum and patting their heads and stomachs at the same time. Or something like that.

Here’s what they’d say: While it might go against maternal and paternal instincts, it’s best if parents make their future retirement priority No. 1. Nobody, after all, is going to lend aging parents money when they’ve retired with a nest egg that’s cracked and leaking. If you can only save for one goal, make it retirement. Kids, after all, can take out loans, work through college, pick up college credits during high school, earn scholarships and or enroll in junior college, the higher-education equivalent of a starter home.

The experts’ pragmatism is admirable, but it may strike some parents as excessively harsh and as unrealistic as telling a kid not to worry about studying for exams because he’s going to be Nike’s next endorsement phenom to emerge from high school. Obviously, there are many ways to juggle retirement without stranding the kids, which is why T. Rowe Price decided to take a look at some scenarios that parents might consider when saving for two of the biggest expenditures they will face in their lifetimes.

What T. Rowe Price did was examine four hypothetical scenarios during a 36-year investing window that would include saving for retirement and paying college bills. In the analysis, the number crunchers assumed that the sample couple earned a combined income of $100,000 a year and invested 6% of that income for 18 years prior to a child’s freshman year and 18 years afterwards. Money that was earmarked for college was invested in a 529 college saving plan. The cash for retirement was tucked in a 401(k) workplace plan that assumed a 50% company match, which is standard. In all four alternatives, the money earned a pretax 8% return and the couple’s income grew 3% annually.

Here are the four options the firm explored:

Option A: The couple saved exclusively for retirement for 36 years.

Option B: The parents stashed away retirement cash for 18 years. During the next decade, they diverted all their yearly savings to repay a college loan at 5% interest. For the final eight years, the couple reverted back to saving solely for retirement.

Option C: Mom and dad split their savings between college and retirement for 18 years and then spent the last 18 years stashing away retirement cash.

Option D: They dumped all the money into the college account for the first 18 years and then switched to building a retirement nest egg for the same number of years.

Using T. Rowe Price’s parameters, here’s what would have happened:

Option A: No surprise here. By ignoring the college years as they approached on the radar screen, the parents amassed the biggest retirement nest egg — $2,541,000.

Option B: Curiously enough, this strategy didn’t hurt the parents’ retirement security as much as you might assume. The couple ended up with $2,042,000 for retirement, which is only 20% less than what they’d have pocketed in the first scenario. What’s clear is getting that early start, which unleashes the power of compounding, is critical.

Option C: The college fund would have peaked at $126,000, while the retirement account would have topped out at $1,650,000. The parents would have accumulated more than twice as much for retirement compared to the Option D.

Option D: If a couple focused exclusively on college first, they would have saved $253,000 by freshman orientation. The strategy, however, would have left the couple with considerably less spending money for themselves. Their final retirement tally — $759,000.

There is no one right answer to the retirement/college conundrum. But it’s important to keep in mind the effects of the trade-offs most of us must make. There are ways, however, to stretch the money you do manage to stockpile. While we can’t control our investment returns, but we can all feel empowered about controlling costs. No matter what your financial goal, making the decision to only invest in inexpensive mutual funds should boost your ending account balances.

Ironically, in the world of college savings, many of the most popular 529 plans, which each offer a menu of mutual funds, are among the most expensive and/or charge commissions. Why are people so eager to pay too much? Most parents rely upon a stockbroker or financial advisor to pick a college plan. You can shrink these costs significantly if you skip the middleman and invest directly with an inexpensive 529 plan. One of the best is the highly lauded plan offered by the state of Utah (800) 418-2551, (www.uesp.org), which offers a lineup of index funds. Another excellent source of index funds is the state of Nevada’s 529 plan (866) 734-4533, (www.vanguard.com)

Parents should also get in the habit of finding veins of spare cash to tap into. Until college, kids are most expensive at the beginning of their lives, when daycare and preschool can annihilate a household budget. When moms drop their little dears off on the first day of kindergarten, they may be crying into wadded up Kleenex, but inside they’ve got to be thrilled that somebody else is going to be picking up their kid’s education tab for the next 13 years. When those monthly daycare bills disappear or at least shrink, don’t let this freed-up money get sucked into your checking account’s black hole. Set aside some of that cash for college and or retirement through an automatic savings program. But you don’t have to wait until your child is on the verge of reciting her ABC’s to find spare cash. For instance, when my son graduated from diapers 12 years ago–a milestone that in my darkest hours I thought would never happen– I figured I would spend $35 less at Target every month. Consequently, I increased what I saved monthly in his college fund by that amount. I bet you can find your own examples if you just start looking.

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