PLANNING for retirement often takes second place to planning for children’s education. This can lead to potential problems of having little or no pension for retirement.

There are no retirement loans or retirement scholarships for retirees. Parents who put their children’s education first are likely to struggle to catch up on retirement savings as they draw nearer to retirement. The consequences of delaying planning for retirement can be a case of “too little too late”. It is highly recommended to start planning for retirement from your very first pay cheque. This is important as workers will get accustomed to making regular pension contributions before they start raising children of their own.

Investors or pension contributors benefit from a tax-deferred status, which means that interest earned on pension contributions is accumulated tax-free until retirement. Since workers may spend as many as 40 years of their working life contributing to a pension fund, the tax savings can be substantial due to years of compounding the returns. Compound interest ensures that your money is working for you. Even if you are not able to make regular pension contributions or stopped making payments for long periods, having your funds invested for decades can lead to exponential growth for retirement. The key, therefore, is to get an early start on retirement planning. This advice, however, has gone unheeded by some members of the workforce as some employees believe it’s best to delay planning for retirement as it seems so far away.

Education scholarships

The time horizon for an education fund for one’s children is of much shorter duration than the time horizon for retirement, therefore investing in education is more susceptible to unstable market conditions which can strike just as the child is ready for university. Should that occur, there is not much time to recover from market shocks, unlike retirement funds which have more time to recover.

With regard to family planning, as early as possible, parents should seek to ascertain the types of grants and scholarships that are available for their children’s education. At the same time, an education plan should be devised to cover the cost of university education, and funds should be invested to support the educational and other needs of the child or children. Emergency funds should also be in place for family emergencies.

In some cases, the children may need to work part-time while attending universities if grants or scholarships aren’t enough or not available. But, parents should not sacrifice retirement plans for educational goals. It’s a balancing act, and resources should be allotted to each need.

A long-term investment is, therefore, critical in funding educational goals. It’s a good idea to start a long-term investment even before the first child is born. Plan ahead and divert savings and investment funds for educational goals as necessary; it is like parents fitting their own oxygen masks before helping their children if there is an emergency while flying. Travel expert Angus Kidman said, “airlines want parents to fix their own oxygen masks first because they don’t want a plane full of unconscious parents with unsupervised toddlers”. Parents would then be better able to assist their children.

Loans

Whereas financial institutions are eager to provide education loans, there is none offering a retirement loan. A 2019 Federal Reserve report showed that in addition to Social Security, eight in every 10 retirees had one or more sources of income. This shows how saving for the retirement years is important in order to maintain or enjoy a good standard of living.

The report also revealed that 50 per cent of university students under age 30 funded their education by means of student loans. Parents who fail to save for retirement run the risk of being a financial burden to their children. Retirees, also, should avoid acquiring debt in retirement, including the use of the equity in their homes as collateral for loans, which can increase the risk of losing their homes. Adult workers, pre-retirees, and retirees should be careful about increasing indebtedness as this can jeopardise their long-term investments which will be needed during their retirement years.

Credit card debt can be a financial nightmare for students as well as retirees. Seek professional advice from financial advisors who have the expertise to assess your financial situation and make suitable recommendations.

A 65-year-old retiree may spend more than 25 years in retirement. Regardless of the number of years you live, it is the quality of life that counts.

Grace G McLean is a financial advisor at BPM Financial Limited. Contact her at: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com