Funding Your Next Step With A Plan
OCEAN CITY -- The current economy has created double challenges for many midcareer professionals: Not only are they saving for their children's college education or helping their children to repay their college loans, they may also be reinventing themselves to improve their employment prospects.
While an advanced degree can offer abundant rewards, including intellectual satisfaction and entrée into a new, potentially higher-paying field, it can also mean a temporary drop in income and a big jump in expenses — with profound financial implications that can ripple out all the way to retirement.
If you're thinking of going back to school, you can pursue your dreams without putting your kids' future at risk or sacrificing your own retirement. The key: make the most of the assets you already have and rework your long-range plans.
To cover these tuition costs, first off "you want to stay away from raiding a 401(k) and IRA because that money compounds tax-free and you'll likely incur steep early-withdrawal penalties," says Chuck Toth, Director of Retirement Product Management for Merrill Lynch. Although your employer may allow loans from a 401(k) without penalty, if you lose your job or leave it — to go back to school, for example — you must repay the entire amount immediately.
So with retirement accounts off the table, what sources of funding do make sense? Toth encourages clients to approach the process entrepreneurially.
"Think of yourself as a business investing in R&D," he says. "You want to decide which option gives you the easiest access to capital with the lowest financing and opportunity costs and the least disruption to cash flow."
Tapping savings, for example, might be a good short-term solution, but not if that would mean greater difficulty in meeting ongoing household expenses. Similarly, you might want to think carefully before liquidating stocks, bonds or other investments.
Doing so in a less-than-strategic way can end up triggering capital gains taxes or may mean walking away from considerable upside potential. "Ideally, you want to liquidate investment positions when it makes the most sense from an investment perspective," Toth says.
Re-examine your goals too, remembering that retirement plans are fluid and spending priorities shift. You could, for example, push your retirement date out several years.
And once you get your new degree, be sure to reset your retirement goals once again. Not only might your post-degree income spike higher; a new job might also allow you to strike a better work-life balance and stay employed for a longer period.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)