So many parents struggle with the dilemma of whether they should prioritize saving for kids’ college or their own retirement. Some parents believe that children benefit the most from being responsible for their own college funding through personal work, savings, scholarships, and borrowing to get hrough college. Other parents have a strong desire to fully fund at least an undergraduate degree for their children because they believe their children will enjoy college the most and be best positioned for success in life by not being responsible for these costs. Both viewpoints are valid. Which category you fall into seems to have a lot to do with your personal experiences and the affect you feel they had on you — if you worked your way through college and felt it contributed to your personal responsibility and character, you probably think it would be good for your kids too. If you worked your way through and felt like you missed out on parts of college life or graduated with crippling debt, you probably want to help your children have a different experience. Or if your parents supported you through college and you felt that support made an important difference in your later success, you probably want to do the same for your children. But regardless of your motivation, if you want to help fund your children’s education, you are likely faced with a dilemma.
So how do you juggle the two?
First, know what your financial needs are for each goal. If you’re working with Keener Financial Planning, we will go through a series of questions and projections with you to help assess the cost of each goal. But if you’re working on your own, answering the following questions can help you get started.
- 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. However, if you’re under age 55 now, you may wish to count on a lesser amount than your statement indicates.)
- 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?
- 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?
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.
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.)
Help! I can’t meet both goals
If the numbers say that you can’t afford to fund your child’s education or retire with the lifestyle you expected, you can choose to scale back your goals or make some sacrifices now to fund additional savings. There are lots of financial levers you can pull. The trick is figuring out which option is the least painful for you. Options for your consideration:
- 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.
Retirement takes priority
I can not emphasize this strongly enough. Though funding college is extremely important, it should not be paid for at the expense of your retirement funds. With generous corporate pensions mostly a thing of the past and social security under-funded, the burden is primarily on you to ensure a secure retirement. 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! And the biggest gift you may be able to give to your children is being financially secure in your retirement so they don’t worry about your well-being.
Can retirement accounts be used to save for college?
Yes. Should they be? NO! This is almost always a bad idea. However, if you decide to go this route, know the consequences. 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.)