Retirement Savings or College Funding
If you have kids, money can be tight and you will have to make choices. If you’re planning on putting money away into your child’s college account while trying to also save for retirement, you may wonder about which one should be the priority? Should You Save for Retirement or Your Kids College Tuition?
They are hard questions. What is more important: your financial security at retirement or your child’s education and future? Don’t let emotions guide your decision making process.
Most financial advisers tell parents to prioritize retirement savings; this article explains why I agree with this position.
Two Schools of Thought
- “I don’t care what it takes, I don’t want my child to be in debt.“
This path could lead to you living with your kids in your old age.
- “Nobody helped me when I was young. My child will have to find a way.“
This path could result in your kid graduating with massive student loans and starting off life living in your basement.
Fueled by emotionally charged advertising, a lot of parents have decided that college savings should come first, and they’re dipping into their retirement savings to cover the costs. Additionally, the average amount parents withdraw from retirement accounts to pay for college has nearly doubled in recent years.
It is absolutely reasonable and sane to want to help your kids financially during their college years, but you need to be realistic about how you’ll do that and save to fund your own future needs.
Retirement Comes First
You’ll depend on your retirement savings to live, eat, and pay for shelter—the basics. If you’re not working, that money is your only source of income.
You could also help them make payments on their student loans, either while they are in school or after they graduate.
Retirement is a necessity because it’s going to happen. If you don’t have retirement money put away, then you’re working until you die. Build up until you are putting 15% of your income into retirement savings first, only then should you start saving specifically for your kids’ college.
Don’t guilt-trip yourself into doing something you’ll regret in a few years, like taking money out of your retirement. Your child will be okay—with or without your help. This isn’t child abuse. It’s wise parenting. Remember: College is a luxury. Food and shelter during retirement are necessities.
Most financial advisers tell parents to prioritize retirement savings because you and your child can borrow for college, while nobody lends for retirement.
Parents with little retirement savings and a limited number of working years left need to squirrel away more for their golden years than those who plan to work for another 30 years.
If you start planning early enough, you will be able to accumulate a decent pot of money, which will compound until your retirement. Then, when your kids go off to college, you can use current cash flow and redirect part of your yearly savings allocation to college costs.
Save in this order:
1. Save in your 401(k) up to your employer match.
2. Pay off high-interest debt.
3. Build up six-month emergency reserve.
4. Save in a 529 college savings plan for up to two years of your kids expected college costs.
5. Put money in a Roth IRA (if you qualify), since this money can be used penalty free for college besides retirement
For 2018, maximum employee 401(k) contribution limit was bumped to $18,500 after being stuck at $18,000 per year for the years 2015-2017.
If you are over 50 years of age you may contribute an additional contribution of up to $6,000 for a total of $24,500.
If your employer makes a matching contribution, contribute at least enough to get the max match. This is free money and doesn’t apply to your contribution limit.
Pay Down High Interest Debt
Simple math suggests it’s better to get rid of debt before saving for retirement or adding to your emergency fund. You typically won’t earn much interest on your savings, but you will be paying interest on your debt. If the interest you pay is higher than the interest you earn, you are losing money. That’s a fact. Managing debt is one of the hardest financial problems we face across the world today; even the government can’t get it right.
Working to pay off credit cards, mortgages, loans and other debt takes resolve and perseverance but it is worth it in the long run. The money you are giving to the banks in the form of interest can be used to fund your retirement, college savings and other expenses.
Sounds easy, hard to do. “Experts” recommend a stash of 6 months of expenses to cover emergencies like the loss of a job, but most of us would be lucky to put away about a month worth of expenses.
The main goal here is to have some savings put aside that isn’t marked for anything in particular, but that you don’t touch. But that money is available if something comes up like an auto repair or medical expense that you would typically use your credit card to fund.
But Let’s Get Real
Taken to the extreme, prioritizing retirement over college savings and other quality of life things like vacations, gifts, and such mean’s most parents would only put money in their retirement accounts and put aside nothing for anything else. That would be a mistake.
Saving for college is a luxury. Your child will have other ways to pay such as scholarships, grants, or part-time jobs. They can select a more affordable school.
Contribute to your child’s college tuition if you can, but remember that it’s not as important as retirement.
What Is Your Kid Going To Study In College?
Investor mind-sets are starting to change when balancing saving for retirement versus saving for their kids’ college education.
Start determining return on investment on the child’s vocational interests. For example, if the child is interested in teaching and all starting salaries are the same, is it worthwhile to go to an expensive school?
A young adult who is 100% certain on becoming a doctor, computer programmer, or an engineer might need less financial help from a parent since he or she would be likely to be able to pay off massive student loans with high-income careers.
On the other hand, if your kid has no idea what they’re interested in, spending money on expensive college tuition sounds like a high-risk investment. You might want to tell them to start off by discovering their interests at a lower cost. Community college, work for a year, information interviews with people in various industries, etc.
If there is no job associated with a major or degree, stop paying and hold the child accountable.
Parents and children are adjusting their attitudes and behaviors around college expenses, Sun said. She has observed the following trends among her clients:
1. Go to public colleges.
2. Go to college closer to home.
3. Taking advanced-placement in high school and community college classes over the summer.
4. Encourage your kid to work while in college. The financial aid office at your kids school can help them with this.
Final Thoughts On Saving For Retirement Or College Tuition
Retirement should be your first savings priority and saving for your kids’ college tuition comes second – assuming you aren’t rich and can easily fund both goals
The bottom line is that you can borrow for college; but you can’t borrow for retirement.
Your kid has the ability to apply for scholarships, grants, federal work-study programs and student loans, either unsubsidized or subsidized, to aid in the cost of education. The interest rates for student loans that your kids will take out are less than what you can make by putting money in investments, so invest your money now in accounts you control.
Your kid can also take a less expensive route to a college degree, and still get a quality education, by attending community college for two years and then transfer to a bigger university. In Virginia, there are guaranteed admissions programs to 4-year colleges if the student meets certain criteria while getting their associates degree in community college. This is also a great way to get a degree from a highly competitive, prestigious school (University of Virginia, William & Mary) that your child may not have been admitted to right out of high school.
Work to become financially healthy now and into retirement. You will be able to help your kids when they become adults (throw some money at their student loans as a birthday present?), or maybe even put away some money for your grandkids.