Juggling Retirement and Grandchildren’s College Expenses

Knowledge is power! Even in today’s fast-paced, interconnected world, the prominence of a college education is more apparent than ever. The cornerstone upon which dreams are built, talents are honed, and a brighter future is embarked on, it’s no wonder why an impressive number of high school graduates are enrolling in colleges and universities to continue their educational journey. But with inflation affecting nearly every industry, higher education costs are only increasing. So, what’s a recent high school graduate to do? For more than half of these students, the solution is simple – call their grandparents. According to a Fidelity investment report, 53% of grandparents help or plan to help pay for their grandchild(ren)’s higher education.1

As college tuition continues to climb, grandparents are increasingly stepping in to help. It’s a trend that shows no sign of slowing down as retirees of the Baby Boomer generation continue to become grandparents, and gift what’s estimated to amount to trillions of dollars over the coming decades.2 With many of these grandparents having gone to college themselves, they’ve gained a firsthand perspective of the value of a college education and want to help their grandchild(ren) graduate without exorbitant student loan debt.

According to a survey by the Society of Actuaries (SOA), about 66% of participants of the Baby Boomer generation report they are actively saving to help fund their grandchild(ren)’s college education.3 But, it’s evident that doing so is often a financial balancing act. Another 63% of survey respondents between the ages of 58 and 77 report that their ability to save for their grandchild(ren)’s college education was impacted by needing to save for retirement at the same time.3

For grandparents wishing to contribute to their grandchild(ren)’s higher education costs, it’s important not to lose sight of other costs you may face in retirement. So how can you help your loved ones without derailing your own financial well-being? Perhaps the best place to start is by understanding the costs.

A Look at College Expenses
While higher education has always come at a cost, these costs have only grown over time. In fact, data shows the average cost of college has increased at an annual growth rate of 2% over the past decade and has more than doubled in the 21st century.4

The latest figures show the average cost of in-state tuition at $9,678. And for students looking to study a bit further from home, the average out-of-state tuition runs nearly 3 times higher at $27,091.4 Factor this in with additional expenses such as books and supplies, room and board, and daily living expenses, these costs only swell. With these aggregated expenses amassing tens of thousands of dollars per year, it’s no surprise that over 30% of students borrow money to pay for college every year.4 What’s more, the average federal student loan debt is $37,787.4 And when you consider the interest on student loans, coupled with loss of income as a student, the ultimate cost of a bachelor’s degree can quickly surpass $500,000.4 Ka-ching!

A Look at Retirement Expenses
Many people imagine retirement to be a time of rest, relaxation, and a time to enjoy the lavish things in life. As such, you very well may incur some large expenses in retirement, such as jet-setting on the trip of a lifetime, purchasing your dream car, or even enjoying a day at a luxurious spa or golf club – you’ve certainly earned it! But you may be surprised to learn that these are not necessarily your largest retirement expenses. Instead, some of the largest expenses you can expect to face in retirement are similar to, if not the same, as those you faced pre-retirement. After all, even in retirement, life goes on – and so do your regularly scheduled bills.

  • Housing
    Likely to be your largest cost in retirement, there are several housing-related expenses you’ll need to account for in your planning. From mortgage payments to property taxes and insurance, to general home maintenance and repairs – it’s easy to see how housing-related costs can quickly add up. In fact, the average retiree household pays approximately $17,472  on housing expenses annually – translating to $1,456 per month.5 This represents nearly 35% of total retirement spending annually.5 While these expenses can vary based on location and housing type, you’ll want to be prepared to manage this wide array of home-related costs in retirement. After all, as a homeowner, you know there’s always something to be done.
  • Healthcare
    It’s no secret that healthcare expenses have the potential to be  big-ticket items in retirement. From supplementing Medicare coverage to paying for prescriptions, to funding long-term care needs, there are plenty of healthcare-related costs you can expect to face in retirement. Unfortunately, inflation surges in healthcare continue to outpace the rate of general inflation – so they may consume a sizable portion of your retirement budget. In fact, according to a study from Fidelity, the average couple will need roughly $315,000 to cover medical expenses in retirement, not accounting for long-term care.6
  • Entertainment
    Retirement means more time for the things you love. In fact, according to data from the American Time Use Survey, retirees enjoy over seven hours of leisure time per day.7 So how do you plan to spend this newfound time in retirement? In all likeliness – entertainment. From taking in the latest movies at your local theater, to sampling various cuisines at nearby restaurants, or even trying your hand at a new skill or hobby, there are plenty of ways you may choose to fill (and enjoy!) your days in retirement. But like all other things, these activities come with a price tag. In 2021, seniors aged 65 and older spent an average of $2,889 on entertainment.8 And in 2022, retirees reported that on average, 8% of their monthly spending went toward entertainment expenses.8 Retirees just want to have fun! And preparing your budget to account for these activities is paramount to making sure you can enjoy your retirement to the fullest.

“Can I afford to help my grandchild(ren) with college tuition?”
Great question! Now that we’ve outlined the costs of a college education today, plus some of the biggest expenses you’ll need to budget for in retirement, you may find yourself wondering if you are financially prepared to help pay for your grandchild(ren)’s college tuition. And in order to make a responsible, informed decision, there are several factors that you should first consider.

  • Assess Your Financial Stability
    Before making the commitment to help pay for your grandchild(ren)’s college tuition, you’ll first need to take stock of your own financial situation. Like all other spending areas, creating a budget is key. First, account for your savings, investments, pensions, and any other sources of retirement income and cash flow. Next, weigh all your expenses against these resources. Be sure to account for regular monthly bills, like your mortgage, car payment, insurance, and utilities, as well as other expenses such as groceries, clothing and personal care, dining out, and entertainment. With a clearer picture of your overall income and spending habits, you’ll have greater insight into your financial stability. Of course, it’s also a good idea to discuss your financial situation with a trusted advisor, who can help ensure you’re allocating resources in a responsible way – without jeopardizing your future.
  • Consider Tax Implications
    While educational gifts are widely exempt from the federal gift tax, it’s important to be aware of any tax implications associated with gifting money for educational purposes.9 Most notably, you’ll want to pay attention to the annual gift tax exclusion limit, as well as the lifetime gift tax exemption limit. To minimize tax liabilities, it’s crucial to consult with a tax professional or financial advisor. They can outline the specific tax laws in your state, as well as any recent changes in the tax code that may pertain to your situation. Tax laws are complex and can vary, so personalized guidance is key in making significant financial decisions, like opting to help a grandchild with college expenses.
  • Establish Open Lines of Communication and Boundaries
    Like all financial decisions, the decision to pay for your grandchild(ren)’s college tuition is a big one. As such, it’s important to have the right conversations with the right people. Once you’ve determined you’re in good financial standing to contribute to your grandchild(ren)’s higher education expenses, you’ll want to have key conversations with your family. Having open lines of communication with both your grandchild(ren) and their parents is critical, and you’ll want to clearly communicate what you can comfortably contribute, as well as any limitations you may have. Discussing financial boundaries and setting expectations from the get-go can help avoid misunderstanding and mitigate the risk of strain on family relationships.
  • Explore Ways to Contribute
    While some grandparents choose to gift money earmarked for college expenses outright, there are plenty of other ways to contribute towards your grandchild(ren)’s education. Many grandparents prefer to make their contributions via a 529 education saving plan, an investment account that offers tax benefits when used to pay for qualified education expenses. A favorable option among grandparents, a 529 plan encourages their grandchild(ren)’s educational pursuits, while also boasting estate planning benefits. A 529 plan is a flexible option and funds can be used to cover not only tuition – but also fees, books, supplies, and in some instances, room and board. It can be used at eligible educational institutions, including universities, colleges, vocational schools, and even some international institutions. As noted previously, it’s a smart idea to work with a trusted financial advisor to determine the contribution method best suited for your unique financial situation.

A Smart Alternative: Leveraging Home Equity
If you wish to help your grandchild(ren) pay for college but are worried about sacrificing your own financial well-being or retirement lifestyle, there is another alternative – right in your home. As mentioned earlier, housing has the potential to be your most expensive cost in retirement. But did you know your home could also be your largest source of wealth? With seniors now accounting for $12.7 trillion in home equity,10 you may be surprised to learn just how much wealth is built up in your home. And tapping into this home equity with a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, could provide an additional source of retirement cash flow to use for what matters most to you – such as paying for your grandchild(ren)’s college expenses.

How it Works
Reverse mortgages work by allowing you, as a homeowner, to convert a portion of your home’s equity into cash without having to sell the home or make monthly mortgage payments – as long as you keep up with property taxes, insurance, and home maintenance. Unlike a traditional “forward” mortgage, where you must begin repaying the loan right away, funds received via a HECM do not have to be repaid until a maturity event occurs, such as when the final borrower no longer lives in the home. And with no monthly mortgage payments required,11 you can free up even more cash each month to spend as you wish.

“How much money can I receive with a reverse mortgage?”
There are several variables that are considered in determining just how much of your home equity you can access with a reverse mortgage. The amount of proceeds, known as the “principal limit” accounts for factors such as your age, home value, and current interest rates. But typically, the range of funds you can qualify for ranges between 50% to 70% of your home’s value. To get a real-time estimate, crunch the numbers with our reverse mortgage calculator – it’s free and there’s no obligation!

Financial decisions are important ones. And if you’re considering a reverse mortgage, it’s important to consult with a responsible, honest lender. At Longbridge Financial, reverse mortgages are all we do. We’re committed to helping homeowners reshape their financial future by educating them on reverse mortgages – and helping them unlock the power of their homes. And we can help you, too!

At Longbridge, we’ll get to know you, your goals, your home, and your finances as we discuss your options. Isn’t it time you take the step and learn more? See why over 1.3 million Americans have already made a reverse mortgage part of their retirement plan.12 For more information, contact the Longbridge team today.

1 Fidelity-529-Holiday-Gifting-eBook.pdf
2 How Grandparents Can Help Grandchildren with College Costs | IAG Wealth Partners
3 Society of Actuaries Research Finds That Americans Making Significant Trade-Offs Among Those Saving for Both Retirement and College | SOA
4 Average Cost of College [2023]: Yearly Tuition + Expenses (educationdata.org)
5 5 Biggest Expenses for Retirees & How to Minimize Them — Vision Retirement
6 Retirement Planning: Health Care Costs | Fidelity Institutional
7 12 Ways Retirees Spend Their Newfound Free Time | Aging | U.S. News (usnews.com)
8 Average Retirement Spending in 2023 + Budgeting Tips – RetireGuide
9 Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
10 Senior-held home equity rises in Q2 to $12.7 trillion – Reverse Mortgage Daily
11 Keeping up with real estate taxes, homeowners insurance, and property maintenance required.
12 Annual HECM Production Numbers – NRMLA (nrmlaonline.org)

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