Get connected now
Viewing article within:
Be Wise With Money
Get connected now: Contact me
How To Save For College And Retirement
October 5, 2017 | Amy Merrick; excerpted from Thrivent magazine
Even on a limited budget, this family found a way to set aside savings for the
Nicole and Richard Brown of West Palm Beach, Florida, faced a challenge common to parents of young children: a lot of priorities on a limited budget.
For one, the Browns wanted to start college savings funds for their daughters, who are 6 and 4 years old. The Browns are still paying off their student loans, and they want their children to have less of a financial burden when they grow up. “We haven’t had anything set up for them,” Nicole says. “With the cost of everything going up, now is a good time to start thinking about it.”
They also knew they ought to increase their retirement savings. But Nicole is a stay-at-home mom with limited earned income. And it was hard to know where to start and difficult to find extra room in their monthly budget to work toward both of these long-term goals.
The Browns turned to Shanell Foster, a Thrivent Financial representative in West Palm Beach. With Foster’s guidance, the Browns took the steps needed to create a financial strategy.
Set up an emergency fund
Foster started by asking the Browns about their goals. She then broke down the Browns’ larger goals into concrete actions. Her first recommendation was something the Browns didn’t have on their list: an emergency savings fund covering at least three months of their typical expenses.
Review retirement strategy
With a strategy for emergency funds established, they turned to their retirement goals. The family has a good start: Richard already has a sizable accumulation in his company’s 401(k), and he is expecting to receive a pension from his employer when he retires. To increase their savings, Nicole will eventually start contributing to a Thrivent spousal IRA, which is an individual retirement account tied to her husband’s income.
With these steps in place, the Browns felt more comfortable turning their attention to saving for their children’s college education.
Create a college savings strategy
But where would the Browns find the money for these priorities? Sometimes the answer to making room in the budget is simply to reorganize. Foster found that the Browns both had universal life insurance contracts, each with a death benefit of a little more than $200,000. This type of permanent insurance contract builds up a cash value benefit. The Browns could have used these contracts as part of their college funding strategy by accessing the cash value when it came time to pay for school.* However, in the event of a premature passing, this death benefit was insufficient to cover their household debt and replace some income.
Foster explained that they could replace their current life insurance contracts with 30-year term contracts. Monthly premiums for a term contract are typically less expensive, in part because the contract doesn’t build up a cash value. The two contracts provided a much higher death benefit that would address debt and guard the family against lost income if one parent died unexpectedly, right up to retirement age. Their insurability would be maintained and smaller contracts could be obtained later, if they needed them to address final expenses or leave a legacy for the kids. To do the replacements, however, the contracts did need to go through underwriting.
Find money for savings
By changing the type of contracts they held, the Browns reduced their premiums by $150 a month. They also were able to find another $50 to save from their monthly budget, allowing them to contribute $100 a month to each daughter’s college fund, once they’ve adequately built up the emergency fund.
After weighing several options, Foster recommended that the Browns put their college savings in 529 plans** rather than generic savings accounts. A 529 plan can be invested, which means it may earn a higher rate of return over time as compared to a savings account. (However, that return is not guaranteed in a college savings plan, and there is a chance you could lose money.) Also, the federal government does not tax earnings in 529 plans if they are used for eligible college expenses. (Because every family’s situation is different, talk with your financial representative about your options for college and retirement savings tools.)
“Their goal is not to fully fund the college experience but to save as much as they can because they have competing goals,” Foster says. “By the time their kids get into college, they will be about 10 years from retirement, so they’re balancing their retirement contributions with saving for college.”
Creating a strategy to save for retirement and for college gave Nicole a sense of reassurance, she says. “We may not see it instantly, but we have something in place that we’re working toward,” she says.
Get help creating a financial strategy for college with Thrivent’s uPlan.
Get connected now! Contact me
* Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs, which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.
** Offered through a brokerage arrangement with Thrivent Investment Management Inc. Funds invested in 529 college savings plans have no bank guarantee, are not FDIC insured and may lose value.
The Browns’ experience may not be representative of the experience of other clients. This story is also not indicative of future performance or success.
Insurance products issued or offered by Thrivent Financial, the marketing name for Thrivent Financial for Lutherans, Appleton, WI. Not all products are available in all states. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent. Thrivent Financial representatives are registered representatives of Thrivent Investment Management Inc. They are also licensed insurance agents/producers of Thrivent. For additional important information, visit Thrivent.com/disclosures.
You are advised to consider the investment objectives, risks, and charges and expenses associated with 529 college savings plans before investing. More information on 529 college savings plans is available in the issuer’s official statement. Read the official statement carefully before investing. You should investigate whether your state or your beneficiary’s state offers a qualified tuition plan for its residents and consider what, if any, potential state income tax advantages or other benefits it offers. Please consult with a tax professional to receive tax analysis of the investments.