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Saving for Retirement and a Child's Education at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child's education at the same time can be a challenge. But take heart--you may be able to reach both goals if you make some smart choices now.


Know what your financial needs are

The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started:

For retirement:

· How many years until you retire?
· Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what's your balance? Can you estimate what your balance will be when you retire?
· How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.)
· What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
· Do you or your spouse expect to work part-time in retirement?

For college:

· How many years until your child starts college?
· Will your child attend a public or private college? What's the expected cost?
· Do you have more than one child whom you'll be saving for?
· Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
· Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child's college funding needs.


Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you'll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you've come up with a dollar amount, you'll need to decide how to divvy up your funds.


Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you'll miss out on years of tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there's no such thing as a retirement loan!


If possible, save for your retirement and your child's college at the same time

Ideally, you'll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child's college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you'd have $18,415 in your child's college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)

If you're unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you're pursuing both goals at the same time doesn't necessarily mean that the same investments will be appropriate. Each goal should be treated independently.


Help! I can't meet both goals

If the numbers say that you can't afford to educate your child or retire with the lifestyle you expected, you'll have to make some sacrifices. Here are some things you can do:

· Defer retirement: The longer you work, the more money you'll earn and the later you'll need to dip into your retirement savings.
· Work part-time during retirement.
· Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
· Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
· Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss).
· Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
· Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don't feel guilty--a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
· Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.


Can retirement accounts be used to save for college?

Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child's college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you're under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you'll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

COBRA Premium Assistance Affects Employees and Employers

The American Recovery and Reinvestment Act (the Act) provides COBRA premium assistance, which offers a temporary 65% reduction in COBRA premiums for eligible beneficiaries. This new provision will affect former employees receiving or eligible to receive COBRA health insurance coverage and their families, as well as employers.

COBRA is a federal law that allows employees, their spouses, and dependent children who lose health insurance benefits due to involuntary termination of employment to elect to continue that coverage for up to 18 months. Qualified beneficiaries are obligated to pay up to the full cost of coverage plus a 2% administrative fee. However, under the COBRA premium assistance provisions, the employee's cost of COBRA insurance premiums is reduced to 35% of the total premium cost, including the 2% administrative fee. However, if the employer pays any portion of the premium, no subsidy is payable on that portion.

The COBRA premium reduction is available to assistance-eligible individuals (AEIs). These include the employee (and members of his or her family) whose employment is involuntarily terminated between (and including) September 1, 2008 and December 31, 2009, and is otherwise eligible for, and elects COBRA continuation coverage. The coverage subsidy is payable for a maximum of 9 months and is not available prior to February 17, 2009.

Other provisions applicable to AEIs include:

· AEIs who lost their jobs between September 1, 2008 and February 17, 2009, but either didn't apply for COBRA coverage or ceased coverage after a short time due to its cost have a new 60-day period within which to elect coverage and obtain premium assistance.
· The subsidy isn't taxable as income to the recipient, however it is phased out for individuals with adjusted gross incomes between $125,000 and $145,000 ($250,000 to $290,000 if married filing jointly).
· If an AEI pays COBRA premiums for March and April, the employer may either refund the amount of premium paid in excess of 35% or credit the amount against future premiums for the AEI.
· If the AEI becomes eligible for other group health insurance or Medicare, the subsidy is terminated. The Department of Labor has established a website (www.dol.gov/ebsa/cobra.html) that provides information to beneficiaries of COBRA insurance.

The premium assistance provisions also affect employers. Most importantly, the employer of the AEI must pay up to 65% of the premium to the insurer. The employer then gets credit for the amount of COBRA premium paid against payroll taxes. If the subsidy is greater than the tax liability, the excess amount is either paid to the employer or applied against future payroll taxes. The IRS has a website (www.irs.gov/newsroom/article/0,,id=204709.00.html) to help employers address COBRA premium assistance requirements. Other provisions important to employers include:

· Form 941 (Employers Quarterly Federal Income Tax Return) has been revised to address the payroll tax credits.
· Plan administrators must communicate the availability of the subsidy to eligible COBRA beneficiaries by April 18, 2009.
· Employers must maintain documentation of the AEI's 35% contribution and provide proof of payment to the insurer (if the plan is not self-insured).

Long-Term Care Insurance: How Does It Work?

Whether you've had a long-term care insurance (LTCI) policy for years or you're thinking of buying one, it's critical to understand exactly what set of conditions will trigger coverage. This information is the bread and butter of any LTCI policy. In addition, you should know how to file a claim, preferably before you're on the verge of needing care.

What determines if you're entitled to benefits?

LTCI policies differ on how benefits are triggered, so it's crucial to examine your individual policy. Here are some typical ways you can become eligible for benefits:

  • You're unable to perform a certain number of activities of daily living (ADLs) without assistance, such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed). Look in your policy to see what ADLs are included, the number you must be unable to perform, and how your policy defines "unable to perform" for each ADL, as criteria can vary from one company to another (e.g., does the definition require someone to physically assist with the activity or simply to supervise the activity?).
  • Your doctor has ordered specific care.
  • Your care is medically necessary.
  • Your mental or cognitive function is impaired.
  • You've had a prior hospitalization of at least three days (this is rare with newer policies).

An LTCI policy may contain one or more of these provisions. The more specific the language in the provision, the less room for disagreements about coverage.

Who determines if you're entitled to benefits?

Just as important as what triggers benefits is the question of who decides if you've triggered them. These gatekeepers are an integral part of any LTCI policy--after all, they're the ones whom insurance companies rely on before paying out claims. In some cases, a policy may have more than one gatekeeper.

The best policies let you qualify for benefits if your own doctor orders specific care, rather than require that you be examined by an insurance company physician. Similarly, it's insurance companies that define performance criteria for ADLs, as well as create and administer tests to see if you satisfy the mental impairment threshold. Make sure you know who the ultimate decision maker is under your policy.

When will benefits start?

Most LTCI policies have a waiting period, commonly known as an elimination period, before you can start receiving benefits after you're judged medically eligible. Common waiting periods are 20, 30, 60, 90, or 100 days. During any waiting period, you're responsible for paying for your care, whether it's in a nursing home, an assisted-living facility, or in your home.

Some LTCI policies have no waiting period--you can start receiving benefits on the first day you need care. However, this type of policy is more expensive than a policy with a waiting period. Generally speaking, the longer the waiting period, the less expensive the policy.

Keep in mind that the calculation of the waiting period can vary from company to company. Some companies may count the days cumulatively (e.g., adding up the total number of days you spend in a nursing home, even with gaps), while others may count the days consecutively (e.g., adding the total number of days you spend in a nursing home without interruption). Also, some companies require only one waiting period for the life of the policy, while others require a waiting period every time you apply for benefits (unless you become eligible for benefits again within a certain period of time, such as six months or a year, in which case only one waiting period will need to be satisfied).

The mechanics of filing a claim

Ideally, you should know how to file a claim before you actually need benefits--you don't want to lose coverage on a technicality. Typically, filing a claim means submitting a written notice to the insurance company, along with a proof-of-loss form (supplied by the insurance company) and relevant medical records.

Most policies require you to give written notice of a claim within a specific time after needing care (e.g., 30 or 60 days). In addition, you may need to verify your condition in writing every 30 to 90 days. The company may also require you to submit to an independent medical evaluation by a physician of its choosing to verify your claim.

Follow the instructions in your policy carefully. If you don't, your insurance company can deny you benefits, in which case your only recourse will be to make a complaint with your state insurance department or file a lawsuit (and most companies limit the period of time in which you can file a lawsuit). Don't let all those premium payments go to waste--take the time now to understand the claims-filing process for your policy.

@MitlinFinancial