OCEAN CITY — Writing that final check for your children’s college tuition should be enormously satisfying on several fronts. First and foremost, it means your youngest child is about to reach one of life’s important milestones. And with tuition alone running nearly $30,000 a year on average for a private college, it also means bidding farewell to a hefty expense.
"You’ve achieved a major financial goal," says Chuck Toth, Director of Personal Retirement Product Management for Bank of America Merrill Lynch. "Now it’s time to assess your situation and refocus on your next objective: retirement."
But the road ahead may not be as easy as it looks. There could be surprising hidden costs, as well as the possibility, thanks to a depressed job market, that your proud new grad may soon be moving back in or needing financial assistance. To help ensure that the transition from one financial goal to the next goes smoothly, Toth suggests a five-step process:
1. Pay it back. Many parents take out personal loans or home equity lines of credit to help their children get through college. Toth advises developing a disciplined payoff strategy, such as consolidating debt to reduce costs and automating an accelerated repayment program.
2. Resist the urge to splurge. After living leaner during the college years, it can be tempting to go all out. In fact, a recent study by the Center for Retirement Research at Boston College showed that the average household increased nondurable consumption by 51% after adult children moved out relative to households that never have children. "Sometimes parents feel a sense of freedom to finally spend some time and money on themselves," Toth says. "There’s nothing wrong with that, but be judicious. As you reallocate your discretionary income, balance the need for immediate gratification with the longer-term need for retirement funding."
3. Be ready for the kids to return. Many parents are discovering that college degrees no longer promise financial independence — if, in fact, they ever did. Your son’s college degree doesn’t necessarily mean you won’t still be footing the bill for some — maybe even most — of his living expenses.
"You need to be prepared for that possibility," Toth says. "And if kids do live at home or need help with a car payment or a credit card bill, find ways for them to chip in to fund the household or take on responsibilities in exchange. They need to understand that this is not a free lunch — both for your sake and for theirs."
4. Look at your household situation. If your children are no longer living with you, it might be time to ask other questions: Do we still need a house this large? Or do we have to continue living in this town or neighborhood?
5. Assess your allocation. This new stage in your financial life warrants a review of your investment mix. "Maybe you were keeping higher cash levels to make tuition payments and want to revisit that conservative stance," says Toth. "Or you were contributing to a 529 college savings account and want to redirect those funds toward retirement savings."
Your financial advisor can help you nail down a retirement savings strategy, outline a risk progression for the coming years, and choose appropriate retirement savings and investment vehicles.
It’s fulfilling to see your children graduate from college — and it can be a big advantage for you as well. The sooner you shift your focus to your next financial goal, the faster you’ll accomplish it.
Preparation, Toth notes, begins with a well-defined target. "Starting to visualize the where and when of retirement can help you clarify how to get there," he says. "And generally, the earlier you start, the easier it can be."
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)