Balancing Retirement and College Saving

From emergencies funds to vacation funds and funds for a new car or funds for a down payment, there are simply so many things we all should be saving for.

But if you’re a parent, there’s an even bigger cost on the horizon – college. With the average public college costing $9,970 per year and private universities coming with an even higher, $34,740 price tag, college is a huge expense. Multiply those numbers times four years (or more!) and you begin to see the scope of the cost for just one child. And it gets worse. The College Board reports that prices are rising at an average rate of 3% per year at public universities and 4% per year at private colleges.

As a parent, you want the best for your child, and you might think the solution is saving as much as possible for college. But what about your other big expense on the horizon – retirement? Saving for retirement is also an essential part of your future happiness and security.

So, how do you decide how to prioritize your savings? The key is understanding your needs and financial goals and finding a balance between saving for your child’s future and your own.

Understand Your Needs and Set Your Priorities

How is your financial health? Are you already a saver or do you tend to over spend?

If you’re not already saving, start now! Consider setting up a separate savings account for emergencies to ensure you always have money readily available for a surprise expense. While you’re at it, you may also want to set up an account to save for vacations and holidays in order to plan for those expenses in advance.

Next, take stock of your retirement savings. Do you already have a retirement plan set up? How well is it funded? Use a retirement calculator to ensure you’re on the right track and up your savings rate if needed. Compound interest will ensure that the money you save today will be worth more by the time you reach retirement.

If you haven’t started saving for retirement yet, get started. Open an account and set up direct deposit. The easiest way to save for retirement is to set it and forget it! You likely won’t miss a small amount out of your paycheck each month, but you will struggle if you have too little saved at retirement.

If you’re already on track to have saved enough for retirement, then start saving for your child’s education. If you’re behind, prioritize saving for retirement first. You can’t help your child if you’re not financially sound.

Focus on Your Retirement Fund

It may be tempting to sacrifice your retirement fund for your child’s education, but that is a bad idea. While your child can qualify for student loans to help pay for college, there is no real alternative when you don’t have enough saved for retirement. Your child may also earn a college scholarship, qualify for need-based financial aid, choose to delay schooling or select a career that does not require a degree, so educational saving isn’t your best choice.

Also, while college savings accounts are included in what you can afford to pay in calculations for financial aid, your retirement accounts are not. That means, that if you focus on retirement instead of college savings, you could actually qualify for lower tuition rates and more aid.

When to Start Saving for College

If you’re already saving at least 10-15% for retirement and have a 3 to 6 months’ worth of expenses in an emergency fund, then it might be time to create a college savings account for your child.

Consider opening a 529 plan for college savings or a money market account or certificate.

529 plans are tax-advantaged savings plans sponsored by states, state agencies, or education institutions which are specifically designed for education savings. The earnings on money invested in the account grow tax-free and withdrawals are also tax-free when the funds are used to pay for education expenses. Many states also provide an additional tax benefit for contributing to a 529, which can make them an especially attractive option.

Money market accounts and certificates are both good for medium to long-term savings and, unlike a 529, you are not penalized if you end up choosing to use the funds for something other than education. They’re a great option if you want more flexibility in your funds.

Talk About Money

While saving is important, the key thing you need to do is have continual conversations with your child about your finances and the costs of college. College is very expensive. As the student loan crisis amplifies, it’s clear that students have made some poor financial decisions to afford their degrees because they were uniformed. Don’t let this happen to your child.

Take the time to explain college expenses to your child and have continual frank conversations about college’s benefits, and costs. Explain what you can and can’t afford. While they may have their heart set on an expensive private university, perhaps you can only afford in-state tuition at a public college. While it may be disappointing for them to not be able to go to their dream school, graduating with low or no debt will surely benefit them more in the long run.

So, check your retirement accounts and then determine what balance is right for you and your family. And remember to have a continual dialogue about financing college with your future student. Being prepared is essential.