“Pomp and Circumstance” plays at colleges and university campuses across the country as thousands of students receive their diplomas and look ahead to future careers. At the same time, many parents are breathing a collective sigh of relief because, with this graduation ceremony, they’ve paid their last tuition bill and now have extra income available for something else.
What should they do with that income?
The estimated cost for tuition in the 2016-17 school year was $9,650 for public schools and $33,480 on average for private colleges, according to the College Board. Even if families only covered a portion of their child’s four-year degree, at that rate, tuition bills can be a significant financial hurdle to overcome.
“Some families will pay the child’s tuition from their normal income, others will have saved for years to cover tuition,” said Diego Quiroz, investment relationship manager with U.S. Bancorp Investments. “Now that there is no need for that savings bucket, or dedicating that income toward tuition payments, parents should review their financial goals to determine the best use for that money.”
Quiroz likes to meet with his clients to not only discuss where they are with their retirement planning, but also their ideas about helping their children with wedding planning or first home purchases. He also takes the opportunity to bring forward discussions about potential risks in their family’s future that they might not have considered.
“Everyone wants to talk about retirement,” he said. “Most couples miss out on long-term care planning. People are living longer, and they should plan for that. Also, very rarely do couples pass away at the same time. So couples should include financial planning for their spouse after they’re gone.”
There are many options for couples to choose from, and Quiroz recommends families meet with their advisors to discuss what will work best in their situations. Here are some options:
· Planning for unexpected events/risks
Families who are interested in taking steps to protect their finances from unexpected events such as health concerns or the sudden death of a spouse may be interested in exploring different insurance options like long-term care insurance or life insurance.
· Investing in retirement funds
Couples who want to expand their retirement funds have options to set up retirement accounts such as IRAs or Roth IRAs. Keep in mind, these accounts have set annual contribution limits, and if the couple already was investing in these types of accounts, they’ll need to explore other options such as investing in stocks and bonds within their portfolio.
· Gifting to children
Many families would like to help their children out with big expenses that traditionally follow college graduation. The purchase of a first house or paying for a wedding are two Quiroz frequently helps his clients plan around. Since these expenses can happen in a shorter time frame than some expect, he recommends partitioning some assets and setting them up an allocation that is appropriate for a shorter time horizon, such as money markets, cash, or a conservative mix of stocks and bonds for those willing to take on some risk. Time horizon is just as important of a factor in investing as seeking return.
Keep the big picture in mind
It’s very exciting to have extra income available, and it can be tempting to use funds previously connected to college tuition payments to splurge on fun purchases. But Quiroz likes to advise his clients to keep the big picture in mind. Are retirement plans up to date and on schedule for the retirement goals that had been set? If so, are there other financial goals where additional funds are still needed? These questions are not quick and easy to answer. And if a couple does want to splurge on something fun, Quiroz recommends creating a new budget item listed as the “fun account.” Instead of contributing 100 percent of the now available income into that account, his suggestion is to set up a 50/50 or 40/60 income split between the fun account and big picture investments. And once the couple achieves the funds they need for the item on which they want to splurge, they can then make a decision on how to reallocate funds toward another goal.
Financial planning goals will change over time, especially as life events occur – for example, paying that last college tuition bill. The key point to keep in mind is that when a life event does happen, it’s a good idea for families to review their financial goals to determine if changes are needed.