Saving for retirement and education at the same time

 

It’s a familiar balancing act for many U.S. families: saving for retirement and college, two of life’s most important milestones.

Arguably the most sizeable and emotionally significant goals, retirement and college often arrive around the same time. As a result, parents might feel they have to choose between saving for retirement and paying for college. This doesn’t have to be an either/or decision. Your advisor can help you define what you want for yourself and understand the tradeoffs so that you can make informed, practical decisions.

Financial attitudes and behaviors are shifting

According to our Modern Money study, today’s parents are helping children with more financial milestones than past generations, including college. 

Perhaps because just over half (51 percent) of respondents believe it will be harder for the next generation in their family to feel comfortable financially — and 53 percent believe children should be financially independent at a later age than they themselves were — 33 percent of parents have delayed their own retirement or would do so to help their children pay for college.

Give yourself flexibility and the best chance of success

It’s key to prepare well and find the right balance for you and your family. Your advisor can provide clear, objective advice to help you:

  • Prioritize your retirement and other goals.
  • Understand the benefits and tradeoffs of funding college for your kids.
  • Maximize your savings and investment opportunities.
  • Talk openly with your family.
“You only get one shot at saving for retirement, so it’s critical to keep it front and center. Develop a plan so you don’t sacrifice your financial future to fund other priorities.”
-Marcy Keckler, Vice President, Financial Advice Strategy, Ameriprise Financial

Here are steps to get started:

  1. Establish your priorities and take action

    • Prioritize saving for retirement, if that is most important to you. You can use loans for education, but not for retirement.
    • Put time on your side. Start saving as early as possible during your working years to maximize the time horizon and opportunity for your assets and investments to grow. Automatic payroll deductions through your employer’s 401(k) plan, for example, can help you save consistently over time.
  2. Maximize savings and investment opportunities

    • Save more than you think you may need for retirement. Later in life, you could consider reducing your savings rate to allocate more money for college.
    • Maximize your retirement savings through vehicles such as your 401(k) account (consider contributing at least the amount your employer will match) and, if your employer’s 401(k) plan allows, set your contributions to increase automatically every year. If you’re able to do so, also consider funding a Roth IRA or traditional IRA annually.
    • Establish college savings accounts such as a 529 plan or tax-advantaged account that provides access to broad investment choices.
  3. Have a money talk with your family

    • Help your children think strategically about college. Discuss the majors and careers that interest them, and which schools may be the best fit. Encourage cost-effective options like completing required courses at a community or online college before transferring somewhere else for advanced coursework.
    • Be open about the cost of college, your family’s budget and your student’s potential income after college. Regularly talk with your children and check for understanding: Do they know what’s at stake, for example, with student loans, including how and when these need to be repaid and who is accountable for repaying them?

Talk with your advisor

Regardless of when you start, it may be possible to save for retirement and college simultaneously. Your Ameriprise advisor can provide you with the insights and personalized advice you need to make informed decisions that balance these two life priorities.

Disclosures

The Modern Money study was created by Ameriprise Financial, Inc. and conducted online by Artemis Strategy Group December 11-25, 2018 among 3,008 U.S. adults between the ages of 30-69 with at least $100,000 in investable assets. For further information and details about the study, including verification of data that may not be published as part of this report, please contact Ameriprise Financial or go to Ameriprise.com/modernmoney.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

3 strategies to help reduce investment risk

History shows that when people invest and stay invested, they’re more likely to earn positive returns in the long run. When markets start to fluctuate, it may be tempting to make financial decisions in reaction to changes to your portfolio. But people who base their financial decisions on emotion often end up buying when the market is high and selling when prices are low. These investors ultimately have a harder time reaching their long-term financial goals.

How can you avoid making these common investing mistakes? Consider these investment strategies, which can help you reduce the risks associated with investing and potentially earn more consistent returns over time.

Strategy 1: Asset allocation

Appropriate asset allocation refers to the way you weight the investments in your portfolio to try to meet a specific objective — and it may be the single most important factor in the success of your portfolio. 

For instance, if your goal is to pursue growth, and you’re willing to take on market risk to reach that goal, you may decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how you’ll divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class.

Risks and rewards of major asset classes

Stocks

  • Can carry a high level of market risk over the short term due to fluctuating markets
  • Historically earn higher long-term returns than other asset classes
  • Generally outpace inflation better than most other investments over the long term

Bonds

  • Generally have less severe short-term price fluctuations than stocks and therefore offer lower market risk
  • Can preserve principal and tend to provide lower long-term returns and have higher inflation risks over time
  • Bond prices are likely to fall when interest rates rise (if you sell a bond before it matures, you may get a higher or lower price than you paid, depending on the direction of interest rates)

Money market instruments

  • Among the most stable of all asset classes in terms of returns, money market instruments carry low market risk (managers of these securities try to keep the per-share price at $1 and distribute returns as dividends)
  • Generally don’t have the potential to outpace inflation by a large margin
  • Not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency (there’s no guarantee that any fund will maintain a stable $1 share price)

Different asset classes offer varying levels of potential return and market risk. For example, unlike stocks and corporate bonds, government T-bills offer guaranteed principal and interest — although money market funds that invest in them do not. As with any security, past performance doesn’t necessarily indicate future results. And asset allocation does not guarantee a profit.

Strategy 2: Portfolio diversification

Asset allocation and portfolio diversification go hand in hand. 

Portfolio diversification is the process of selecting a variety of investments within each asset class to help reduce investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.

How portfolio diversification works

If you were to invest in the stock of just one company, you’d be taking on greater risk by relying solely on the performance of that company to grow your investment. This is known as “single-security risk” — the risk that your investment will fluctuate widely in value with the price of one holding. 

But if you instead buy stocks in 15 or 20 companies in several different industries, you can reduce the potential for a substantial loss. If the return on one investment is falling, the return on another may be rising, which may help offset the poor performer.

Keep in mind, this doesn’t eliminate risk, and there is no guarantee against investment loss.

Strategy 3: Dollar-cost averaging

Dollar-cost averaging is a disciplined investment strategy that can help smooth out the effects of market fluctuations in your portfolio.

With this approach, you apply a specific dollar amount toward the purchase of stocks, bonds and/or mutual funds on a regular basis. As a result, you purchase more shares when prices are low and fewer shares when prices are high. Over time, the average cost of your shares will usually be lower than the average price of those shares. And because this strategy is systematic, it can help you avoid making emotional investment decisions.

How dollar-cost averaging might work in rising and declining markets

In the illustration below, the cost of the investment ranges between $10 and $25 from January through April. A fixed monthly investment of $100 buys as many as 10 shares when the price is lowest but only four shares when the price is highest. In this example, dollar-cost averaging results in a lower average share price during the period, while the market average price — for someone who bought an equal number of shares each month — is higher.

Dollar-cost averaging at $100 per month

Rising market
 
 
Month
When the price is
You buy
January
$10
10.00 shares
February
$15
6.67 shares
March
$20
5.00 shares
April
$25
4.00 shares
Declining market
 
 
Month
When the price is
You buy
January
$25
4.00 shares
February
$20
5.00 shares
March
$10
10.00 shares
April
$5
20.00 shares

Your Ameriprise financial advisor can help you feel more confident about your financial future, so discuss these strategies with your advisor to see if they may be right for you.

Disclosures

Asset allocation, diversification and dollar-cost averaging do not assure a profit or protect against loss.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities.
Stock investments have an element of risk. High-quality stocks may be appropriate for some investments strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with stocks before investing, as they can lose value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.