Emma Finnerty
Attending college or university is more expensive today than it has ever been. Unfortunately, post-secondary education will likely continue to get more expensive down the road. If you have children, you're probably concerned about how you or your kids will pay for these insane costs.
While there are plenty of options to set aside money for eventual education costs, there’s another major expense looming in your future that’s even bigger than your child’s future education: You need to fund your retirement, as well.
If you’re lucky, you may get a pension and Social Security income. However, most people are forced to rely on their own savings along with Social Security to fund their retirement lifestyle.
Sadly, few people are setting enough money aside for their own retirement. When people add the future education costs of their children, they are woefully unprepared.
So how should someone allocate their limited monetary resources between the massive costs of their own eventual retirement with their children’s future education? Here’s what we’re doing and what a couple of experts suggest.
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My Family’s Take on Saving for College and Retirement
The first thing my wife and I did when considering college savings options was to look at the tools available to us. Most of the college savings programs, such as 529 savings plans, prepaid tuition plans, and Coverdell Education Savings Accounts (ESAs), offered tax benefits, but nothing amazing.
College Savings Programs
The main benefit of these accounts is that your earnings grow tax-free. However, because we live in a state with no income tax, we don’t get a state income tax deduction or credit for contributing to these accounts like certain other states might offer.
While the tax-free earnings growth is nice, it isn’t an amazing benefit that would save us crazy amounts of money.
Unfortunately, there are downsides to these accounts, too. Should we have to withdraw the money for an unqualified purpose, we’d have to pay both federal income taxes and a 10-percent penalty on the earnings in the account. While the penalty isn’t huge, there's no way to know whether we’d use all of the money we would contribute for qualified expenses.
We understand the heavy burden of student loan debt. My wife graduated with over $80,000 of debt for a four-year nursing degree. In an ideal world, we would help our son avoid the same fate, but there is much uncertainty on how everything will be different almost two decades from now.
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No one has a crystal ball. While we hope our son decides to attend college, he may decide it isn’t for him. In this case, we’d be hit with the 10 percent penalty.
Sorting Our Priorities
So what did we decide to do? First, we decided to put our retirement savings at the top of our priority list. We make sure we were getting any 401(k) or other retirement plan matching dollars we can. Then we max out our Roth IRAs. After that, we consider contributing extra money to our workplace retirement accounts.
However, we don’t want to put all of our money in retirement accounts. If we decide to retire early or we are in fact able to help our son pay for college, we don't want all of our money sitting in retirement accounts that we might not be able to touch without penalties.
So once we’re happy with what we’ve contributed to our retirement funds each year, we contribute any remaining investment dollars to a taxable investment account.
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Playing It by Ear
When our son heads to college, we’ll evaluate our financial situation at that time. If we’re ahead of the game in our retirement accounts, we could slow down our contributions and use the money we would have otherwise set aside for retirement in those years to instead help our son pay for college. If our taxable investment account has done well, we could consider withdrawing some of those funds to help him, as well.
That said, we won’t stretch ourselves thin to help pay our son’s way through college.
We don't want him to worry about how his mom and dad will support themselves when they’re retired. While he can get student loans to pay for college, we can’t get loans to pay for our retirement costs. Rather than be a burden on our son financially, we’d rather have him figure out how to pay off student loan debt ahead of schedule as his parents did.
What Financial Advisers Have to Say
I reached out to a couple of financial advisers to get their perspective on the retirement versus college education savings dilemma. Naturally, they said that this decision has much to do with an individual’s personal situation. Dan Murphy, founder of Greater Good Financial, says, “Considering that many financial planning ideas are somewhat gray, I think education planning can be some of the grayest of the gray.”
“In the case of an airplane emergency, you should put your own oxygen mask on before you help those around you,” says Murphy.
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Along those lines, Murphy suggests that saving for your children's post-secondary expenses should be secondary to your retirement planning needs. By doing this, “You will have instilled the idea in your children that they have to pay for college. Any help from the parents is a bonus. In 18 years, if your children go to college, you can throttle back on retirement savings and help your kids if you’re able.”
I also spoke to Ann Kavanaugh, CFP and partner at iValue Financial Planning. Her advice is simple. “Always save for retirement first. You can borrow money for college, but not for retirement,” she says.
I asked what a person should do if they already have their retirement needs covered, and she brought up another good point: “I think it would be a very rare person who has retirement covered and still has children young enough to save for college.”
However, if you’re able to save for college expenses, Kavanaugh recommends using 529s with age-based investments.
Ultimately, the Decision Is Up to You
If you have plenty of money, go ahead and fund both your retirement and your children’s future college education. However, if you aren’t sure whether you can do both, I would personally prepare first for my future retirement. However, you should be the one to decide whether my philosophy works for you.
As always, meet with a fiduciary financial adviser before making major financial decisions such as whether to save for college or your own retirement first. These professionals can look at your entire picture and help guide you toward making the right decision for your family.
Working With a Dedicated CFP Can Help You Create a Holistic Financial Plan to Achieve Your Family's Financial Goals — Learn More >>
