If your clients are complaining about the increasing difficulty of both saving for their kids' education and putting funds away for retirement, pay attention. A June 2008 research paper by Elaine Sullivan, head of retail marketing at Putnam Investments in Boston, spells out the reasons clients feel so squeezed. Sullivan identifies several trends and recent events that are making it much harder for families to achieve these twin goals:
Pensions have given way to 401(k) plans. In 1985, 60 percent of retirement assets were represented by defined-benefit pension plans. Today, nearly two-thirds of all retirement assets are self-directed, meaning that workers rather than employers are putting funds away for workers' nest eggs. As workers shoulder the burden of saving for retirement, less of their income is available for college savings.
Parents are having children later in life. The birth rate for mothers aged 30 to 34 has risen 83 percent since 1975. In fact, many women over age 35 and even many over age 40 are choosing to have babies for the first time. An important drawback to having children later in life is that the timing of saving for college often overlaps with the peak years of saving for retirement.
College costs have risen three times as fast as incomes. Thirty years ago, the cost of tuition for in-state residents at the average public university was $655. Today, it is over $6,000.
What's different about college costs today is that they are much greater as a percentage of the average worker's income. For example, that tuition bill in 1977 represented just 4 percent of the average $15,000 salary. By comparison, today's public tuition bill of $6,185 is 10 percent of the average salary. Once room, board, and other expenses are figured in -- an additional $7,404 on average, according to the College Board -- the bill rises to 23 percent of the average income.
Students are graduating with unsustainable debt loads. As a consequence of college costs rising faster than family incomes and available savings, student borrowing has doubled over the past decade to over $53 billion. The average debt level for graduating college seniors has more than doubled to nearly $20,000. Many students graduate owing $100,000 or more.
In addition to these longer-term trends, Sullivan highlights three recent events that have further contributed to the problem: Student lending has stumbled and made it more difficult for students to borrow funds. Home equity has declined, reducing the amount parents can contribute from this source. Real income has stagnated while the inflation rate for college expenses has remained high.
"The financial hurdles facing American families are indeed great, and the message is clear: we must assume the responsibility of both saving for retirement and college," Sullivan says. "This new reality requires a new way of thinking about the competing needs we face, including a realistic assessment of our goals and a more creative and resourceful way to address saving."
The research report identifies several strategies to help clients balance these competing needs. Readers can view the full paper, "College or Retirement? How to balance two of life's biggest savings goals," by clicking here.