Many boomers waited to have children until relatively late in life, studies show, and experts point out this raises the likelihood of a conflict between two key financial goals for boomer parents: saving for retirement and putting the kids through college.
Advisors often tell boomers that saving for retirement comes first, trumping college education and most other savings goals. However, a recent study jointly sponsored by Vanguard Group Inc. and Upromise Inc. suggests parents don’t agree. Where there is a conflict, the kids’ college education generally is holding its own in the battle for a share of the parents’ savings.
Although the study was not limited to boomers, about half of the participants were over 40, notes John Heywood, a Vanguard principal who runs the company’s education markets group. Moreover, findings were not much different among various parent age groups.
There were some distinctions among those in the boomer population, though. For instance, those aged 40+ were more likely than under-40s to rank saving for retirement as their greatest concern.
In addition, 40+ people were more likely to be saving for their children’s education and were also more likely to expect their children to contribute to their own education by earning money while at school.
Overall, the study found, 95% of parents expected to send a child to college. Of those, about 64% currently were saving for it.
In addition, 37% said saving for their child’s higher education was a primary concern, compared to 34% who identified saving for retirement as primary.
Among those actually saving for retirement, 75% said they were very concerned about saving for college.
Among those actually saving for a child’s higher education, the same percentage, 75%, said they were very concerned about saving enough money for the purpose.
Of college savers, the average amount put aside was close to $4,700 per child, or about $7,000 per household. That would cover about a year in tuition, room and board, and other costs of attending a public college, notes Heywood.
Parents’ anticipated sources of funds for education consisted of grants, scholarships and financial aid (85% of those with children 12 and up, and 83% for those with younger children); savings and investments (86% and 90%, respectively); and loans and other outside financing (82% and 80%).
The most striking differences among survey respondents were between parents whose children were getting close to college age and those with younger kids.
Only 18% of those with kids 12 and up were in a 529 college savings program, compared to 30% of those with children under 12.
“Parents who started saving earlier didn’t have the benefit of 529 plans being popular at the time,” explains Heywood. “529 plans were introduced in 1995 but didn’t become popular until the 2001 tax bill, which made withdrawals exempt from taxes.”
Less than 40% of all parents were familiar with 529 plans, which provide tax-advantaged ways to save for college. Among those actually saving for college, however, 51% were at least somewhat familiar with the plans, Vanguard says.
Parents are the primary contributors to their children’s 529 accounts, but grandparents and other relatives contribute to 32% of these accounts, the study found.
Differences also were seen in reasons for investing in a 529 plan among parents of different age groups.
Among those with children over 12, 84% gave federal tax-free withdrawals as the principal reason for investing in a 529 plan, followed by ease of setting up an account (69%), low cost (60%) and state tax advantages (64%).
Among those with children under 12, 90% cited federal tax-free withdrawals, 69% cited ease of set up, 54% cited low cost and 50%, state tax advantages.
For advisors of boomers with kids headed for college, a fundamental lesson of the study is that clients aren’t salting enough away for the purpose, says Heywood. Saving through tax-advantaged plans such as 529s would be the smart way to go about this goal, he suggests.
Another essential lesson is how strongly parents feel about sending their kids to college, he observes.
“Financial planners would suggest to boomers that saving for retirement comes before saving for college, but parents say they don’t care–their kid’s going to college,” Heywood says. “That’s a pretty important message. When we talk to clients, we can expect to get the same reaction.”
The Vanguard Group, Valley Forge, Pa., manages a number of state-sponsored 529 college savings plans, and Upromise, Needham, Mass., offers services to help parents save for their children’s education.