Parents can only shake their heads and dig deep, as the cost of college tuition relentlessly crawls skyward.
A case in point - the number of parents losing sleep over saving for college is up to 42 percent, from 28 percent two years ago, according to data from T. Rowe Price.
With retirement, emergency, and college savings plans all vying for attention (and adequate funding), how can financial advisors keep clients on track with their college savings plans? More specifically, with college saving anxiety at an all-time high, how can advisors make sure their parental clients are stashing the right amount of cash into their college savings plans?
Job one is start this process to conduct a regular “check-up” on your client’s retirement savings plan, said Ed Snyder, a Certified Financial Planner for Oaktree Financial Advisors in Indianapolis.
“Start with a retirement income analysis to see how much money the client will need in retirement and if they are on track or not,” Snyder said.
Parents saving for college shouldn’t do so at the expense of their retirement, even though they might feel an obligation to cover more college costs than they can afford, Snyder added.
“In the event of an underfunded retirement, convincing your clients to get back on track is important,” he said. “It’s far worse to be underfunded in your retirement than not have enough for college.”
Snyder reminds advisors they can get loans for college, but they can’t for retirement.
“Although it’s not ideal, those loans can be paid back over a long career if need be,” he said.
Others say the calendar always favors prioritizing retirement saving over college savings, if push comes to shove, financially.
“If you get to retirement and don’t have enough money, your options are very limited. Retirement in many cases is four to six times longer than college,” said Scott Cody, a financial planner at the Latitude Financial Group in Denver.
Review the Plan
Like Snyder, Cody also advises a thorough review of a retirement plan when discussing college savings.
“You can pull parents back if they get too aggressive about their college savings, primarily by showing them the analysis or simply discussing the cost of college versus the cost of retirement,” Cody said. “Retirement should take precedence."
Once you know your client’s retirement fund is on track, you can look back to college savings plans. Admittedly, that can be a gray area.
“It’s different for each client,” said Marcos Cordero, CEO and co-founder of the Miami-based Gradvisor, a financial planning firm. “Some parents want to be able to pay every cent of their child’s education, while others have more modest goals. By openly communicating with clients, you can be confident they are on track, but not over-shooting the mark.”
A family with one child will have a different savings goal than a family with three children, he said.
“While some parents will want to pay the entire tuition cost, others will just aspire to make a dent in the future costs of college,” he said.
Because of this wide family-to-family college savings variance, clearly mapping out goals on a client-by-client basis is vital. Open, informative communication is key.
“By educating people about how much college actually costs, you can ensure that clients are saving enough -- but not too much -- for their children’s college,” Cordero said.
Develop Own Instincts
A final factor to consider is good parenting instinct.
“Remember that parents will do anything for their children, even if it means things like their retirement fund suffers,” Cordero said.
Consequently, advisors need to develop their own instincts on when to firmly push back if clients are ignoring the balanced college savings game plan you’ve established.
“Clearly explaining that they are on the right track simply by saving the amount you’ve suggested will decrease their need to stash money away without telling you,” Cordero said. “Give them regular updates not only on the amount they have saved, but what that means for their savings goals.”
Prioritizing retirement plans and defining savings goals are the easiest ways to make sure your clients aren’t over-saving. If you can show your clients that they’re meeting their college tuition goals, it will help keep their college saving in line.
Additionally, it will also allow your clients to sleep more soundly at night.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]