Savings Showdown: Retirement Vs. College
Last week we discussed the tough decisions involved with supporting an aging parent without putting your retirement at risk. This week? We’re going to tackle another money conundrum that can divide the generations – the choice between saving for your child’s college education or saving for your own retirement. These are two very expensive, life-shaping events to plan for. So what should be the priority?
The short answer is: retirement. Much like putting your facemask on before your child’s in the event of loss of cabin pressure, taking care of your own needs first is the best choice for your child in the long run. Traditional wisdom dictates that you can borrow money for college, but you cannot borrow money for retirement. I like to think of it like this: If your children take out loans to help pay for college, they will have the whole of their earning years to pay back those loans. If you fail to save for retirement, opting for college savings instead, your child may be able to graduate debt free, but may find him or herself struggling more during prime earning years if your retirement becomes their own financial and/or emotional burden. The later is far more damaging to your child’s future than the former.
That said, there is always a happy medium. Retirement savings should be the priority, but there are things that you can do now to make the expense of college more doable when the time comes. Here are some ideas:
Start Saving: Early and Often
Here’s what’s not news: the most valuable years to save for retirement are from your early 20s through your 30s. (Forgive me, but it bears repeating.) You would be wise to make saving for retirement your priority during these years. Whatever you save during these two decades will have three decades to compound – maximizing the power of your money.
Take Full Advantage of Employer-Sponsored Retirement Funds
Many employers offer the benefit of a 401K match if employees commit to putting away a certain amount every month. For all intents and purposes, this is free money. It is also money that you don’t have to come up with. Meaning, taking advantage of this offer may well give you some flexibility with other savings priorities such as college.
Open a 529 Tax-Sheltered College Savings Plan
This is an opportunity not to be missed even as you make retirement savings a priority. This savings account can be opened for as little as $25 in many states and the money you are able to accumulate in it can be withdrawn tax-free. Withdrawals are tax-free when used for qualified education expenses. Withdrawals for non-qualified expenses may be subject to taxes and penalties on earnings withdrawn. (In some states, you may be able to get a tax deduction for putting money into the account.)
Set Yourself Up For Success
Life is full of the unexpected and there will always be something to do with every last penny of income. I recommend making withdrawals to your retirement and college savings accounts automatic. If it never hits your bank account, you will not miss it and your savings strategy will progress on target, without interruption.
Be Real With Your Kids
Start talking with your children about the cost of college and your savings strategies as early as possible. Moreover, make them contribute to their college fund as well. A portion of the proceeds from birthday money, summer jobs, and more should be routed into a college savings plan. Moreover, start looking at financial aid options and strategizing together as to how you are going to afford college as a whole family early in the high school years. Sites like Fastweb, FInAid, and Federal Student Aid will get you started on your search.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. treatment at the state level may vary. Please consult with your tax advisor before investing.