By the time your grandparents were your age, they were living beneath their means, pinching a bunch of pennies, and talking about that sweet condo life in Boca Raton. There’s a decent chance that you, on the other hand, are barely making rent and breaking even on diapers. So while millennials may not be as bad at saving as boomers (about 8% of their paycheck, compared to 9% their parents are saving), they’re not in the hole that gen X’ers have dug (7% of their peak median income will get them to a comfortable sum—never). Between college debt, the death of pensions, and a sinking suspicion Social Security won’t be around much longer, is there any way to make sure that you’re set for life?
Alex Benke is director of advice products for Betterment and someone trying to save something for his own two children. He says you can’t always get what you want, but you can get what you need (well, he didn’t say that, Mick Jagger did, but it’s paraphrasing). The steps for saving—whether it’s for college tuition or someone to change your colostomy bag in 60 years—are the same. The amount you need to be saving is staggering. So you either start selling meth to the cartel now, or use Benke’s financial wisdom to put yourself in the best position possible.
Benke’s single best piece of advice is: Start early on both college and retirement. And if you’ve passed the point of what would be considered “early,” lower your expectations of retiring in Fiji.
“The rule of thumb is wrong for most people,” he says. That means the middle-class family of five is going to have a very different investment strategy than an upper-class family of three. “They say you should save 15% of your income. But, if you live 10 years past retirement, it’s too much. If you live 30 years, it’s going to be too little.”
- Use this to see how much you should save for college.
- Use this see how much you should save for retirement.
And a note on inflation: If you think you know what college will cost in 2033, you have no idea. Say you’re sending your daughter to Harvard (or the alma mater of your choice). Tuition now is roughly $60,000 a year, including the dorm room and meal plan. At a crazy 7% inflation rate, by the time your kid finishes a degree in space philosophy, you will have spent $900,000. If you have more than one kid, just pick the most promising.
[Related: What It Feels Like To Regret Having Kids]
It sounds counterintuitive, but you should really be planning on taking care of your post-retirement years first. “You don’t want to depend on your kids in old age,” says Benke, who points out that high school graduates have the whole world in front of them, while you will slowly become a burden on society. So unless you want to un-retire to become a Wal-Mart greeter, better save up.
“Get the most out of your returns, and use tax-optimized accounts,” says Benke. “It reduces how much you need to save.”
- If you think your tax bracket will be higher in the future, save in a Roth IRA
- If you think you’re earning the most now, save in a traditional IRA or employer plan
- You’ve heard it before, but take risks while you’re young. These products are more volatile but with higher returns. As you get older, settle on something that has lower returns but more stability.
First, ask yourself how many kids you have (it’s not a trick question). Now, how far apart are they in age? If you have three that are two years apart, that’s going to be a decade of paying for school—and some incredibly tough years when they’re all in at the same time.
Open a 529 account. “For college, it’s great because the money grows and comes out tax-free, as long as it’s for educational expenses. And you can contribute $14,000 per year per donee.” Since each state controls its own plan, you can shop around for the best one (which Morningstar says is currently Maryland).
Your family can contribute to a 529 account. If your parents are looking for a place to put their money when they kick (with all due respect), point them toward this plan.
Take out a student loan. We all have them, and we’re all still paying them off. The best that can be said of student loans is that at least the interest rates are reasonably low while your kid takes a decade or more to pay it off.
Don’t put all of your money in one bucket, because the way that you’re going to spend your retirement money (i.e., slow and for a long time), and the way you’re going to spend your kid’s college tuition (i.e., a lot and quickly) is very different.
“The investing piece is hard for humans in general,” says Benke, who advocates allowing automatic deductions to save for you (yes, such as Betterment). This will save you from your human instinct to spend money on ridiculous crap, instead of on the future.
This article originally appeared on Fatherly and is reprinted with permission.