4. The Education vs. Retirement Debate
Many people consider making withdrawals from their retirement funds for their children's college education. this situation has inspired the great "Education vs. Retirement" debate. When resources are tight, what should you do? Help your child pay for their schooling or fund your retirement?
This is a personal decision, but the "rule of thumb" from the financial planning world is to NOT take money out of your retirement fund for your child's education expenses. This can seriously jeopardize your ability to retire.
The main idea is that retirement money should not be raided for other purposes, no matter what. Money saved in a retirement account (104k or IRA) is considered so "sacred" that it is one of the few assets protected if you file bankruptcy.
Other ways to help your children fund higher education:
Open a state prepaid account (go to www.myfloridaprepaid.com for more information); encourage friends and relative to make regular gifts toward it.
Encourage your children to live at home while they pursue higher education. This can save $5000-$1,000/year in room & board costs.
Encourage your children to attend a local public community college or university and receive in-state tuition. This can save 50%-75% on tuition. Starting at a community college and then transferring to a state college to finish can save even more.
5. Start saving for retirement if you are ready, but do not make any investments that you do not understand.
Retirement investments are complicated. Rule of Thumb: don't buy anything you don't understand. Before buying any retirement products, it is very important that you understand how they work, and what fees and risks are involved. If you have no debt (other than home or auto), an emergency fund saved up (3-6 months) and are ready to start investing extra money in your retirement, here's how to get started:
If your employer offers a 401K plan with a company match, enroll in this plan before looking at other options. A 401K plan with a company match means that your employer will also contribute money to your plan. You can think of this as "free money" but you only get it if you contribute too. Your contributions will be deducted regularly from your paycheck (pre-tax). You will be given investment options with varying levels of risk. An advisor can help you choose investments that are a good match for you, based on your personal risk tolerance and the number of years you have until you reach retirement age.
If your employer offers a 401K plan without a match, it is still a good idea to enroll. Your contributions will be automatically deducted from your paycheck (pre-tax). You will be given investment options with varying levels of risk. An advisor can help you choose investments that are a good match for you, based on your personal risk tolerance and the number of year you have until you reach retirement age.
If your employer does not offer a 401K plan (matched or otherwise), you can think about taking out an IRA. This stands for Individual Retirement Account.