The Big Squeeze

Your Boomer clients don’t have to choose between saving for retirement and saving for a child’s college education.

By Lucretia DiSanto Jones

When Baby Boomer parents have to choose between saving for their kids’ college educations and saving for their own retirement, it seems that retirement often comes out ahead.

Despite constant messages targeted at them, most Boomers don’t truly comprehend the number of dollars it takes to put a student through college.

According to Allstate’s annual Retirement Reality Check survey, when asked to best describe how saving for college impacts their ability to save for retirement, 49 percent of Baby Boomers say they are saving equally for retirement and college; 32 percent are saving mostly for retirement and putting only a little toward college costs.

Covering the bases
Amy Floyd, director of Allstate Advanced Planning and Support, provides assistance to agents who sell Allstate products. She can attest to the struggles that Boomers face in covering all the savings bases. “Our economy has gone through some unusual ups and downs in the last 10 years,” says Floyd. “Boomers in particular are feeling like they just don’t have enough money to retire—let alone save for college.

Here are some ideas on how to help your Boomer client focus more closely on college funding.

A wake-up call
The first step might be to issue a wake-up call about the cost of a college degree. Despite constant messages targeted at them, most Boomers don’t truly comprehend the number of dollars it takes to put a student through college. “They don’t understand it until the kid is getting ready to apply—junior or senior year in high school when they’re getting different books about colleges, admissions applications and tuition information,” she says. “I don’t think they’re the least bit prepared.”

Once Boomer parents are beyond the tuition sticker shock, advisors can turn their attention to the many available college-funding options.

Floyd suggests that advisors help their clients look at tax-advantaged ways to save for retirement. She points out that clients can borrow from their retirement funds—for example their 401(k) plans—to pay the tuition bill, then pay it back. Well-funded retirement plans won’t jeopardize a student’s chance of qualifying for financial aid, she explains. “We like to point out that when they’re applying for financial aid, the money in their retirement plans are not included in assets looked at. So, if they’re putting more in retirement, they have more availability for financial aid to come in and cover the shortfall,” she says.

For clients who are taking maximum advantage of their 401(k)s, 529 plans are the next thing to consider. 529 plans are state-sponsored college-savings plans. Unfortunately, says Floyd, 529s are not as popular as many thought they would be. Many parents are concerned that 529 assets also could hurt their child’s chances of receiving aid. Only a certain percentage of 529 assets are considered “available” to the student each year, however, so a healthy 529 plan may not necessarily knock a student out of the running for aid.

Many Boomers, pulled from one end by their children and the other by their parents, are cash strapped. A more manageable approach to saving for college for some is often a mutual fund that requires only a small initial investment. The small monthly contributions may be more palatable for squeezed Boomers, and the funds’ compounding interest will help the client see growth.

Advisors might also suggest a life insurance policy that will build inside cash value. Still protected from taxation, this cash value can be borrowed against to pay education expenses.

Don’t sacrifice shelter
There are other ways for Boomer parents to prepare for the cost of a college education, including Coverdell Education Savings Accounts and IRAs opened in the student’s name.

One route that Floyd tells advisors to caution clients against, however, is falling back on their home to pay for tuition. She suggests the advisor ask: “What would happen if you lost your job and needed to put a large mortgage on the house until you found another job?” With this question posed, Floyd says, most clients are not so sure they want their house to be a part of their college-funding plan. “If they don’t have an emergency fund, they’re putting the roof over their heads in jeopardy. The house is the last possible asset we ask them to go to,” she says.