Which takes priority: Paying for your child’s college education, or putting away money for your retirement?
For parents everywhere, it’s a bit of an impossible choice. Yes, there is indeed no financial aid for retirement and there is financial aid for college. But it’s also true that the cost of all that debt – particularly if you are going to help your children repay it— adds up. “I did an analysis a long time ago that shows that if you don’t save for college and put all the money in retirement, you’re going to come out behind because of how much you need to borrow,” said Mark Kantrowitz, Publisher and VP of Research at SavingForCollege.com.
Plus – parents everywhere will tell you – that idea of putting money away for yourself while doing nothing for your kids just doesn’t cut it. You have to figure out a way to do both, and if you play your cards right you can. What it takes is a game plan to line up your cards so that juggling both doesn’t have to be an exercise in futility. “A proactive plan and time will be your best tools to achieve your savings goals for both your own retirement and your child’s education,” says Diane Wightman, CPA, and member of the American Institute of CPAs’ Financial Literacy Commission. “
Here are six strategies on how to strike the right balance between saving for retirement and paying for college:
1. Capture all the free money (and tax deductions) possible.
When you’re in your saving phase, it’s important to prioritize maximizing the amount of money you have to eventually put toward both challenges. The very best weapon you have in this fight are matching dollars you receive from an employer in a 401(k) or similar retirement account. Dollars you receive as an incentive for participating in a Health Savings Account or HSA are a close second. (No, you can’t use them to pay for college but once you’ve hit retirement, they can be used just like money coming out of a 401(k).) In addition to focusing on free money, it’s important to focus on tax advantages for putting your money away. That argues not just for putting money into tax-advantaged retirement accounts and HSAs, but also into 529 college savings accounts.
2. Preserve your flexibility to pay for both retirement and college later.
It’s very tough to look 20 years down the road (to college) and 30 or more years down the road (to retirement) and have a clear sense of what each endeavor is going to cost you. Perhaps your genius offspring gets a scholarship? Or maybe you’re one of those people who not only intends to work forever – but actually will. The point is you can’t know for sure. That argues for hedging your bets and putting at least some of your savings into a Roth IRA. With a Roth IRA, you pay taxes on the money going in, but not on withdrawals, granted you’re drawing down contributions, not gains. “If you want to take the money to spend on your kids’ education, you don’t have to pay penalties and you don’t have to pay taxes,” says Geoffrey Sanzenbacher, a professor at Boston College and research fellow at the school’s Center for Retirement Research. But, before you dip into your retirement savings, check to make sure you have a decent-sized nest egg for yourself, as you don’t want to sacrifice your future – or worse – leave your children financially responsible for aging parents. For many families, dipping into retirement savings to pay for college should be considered as a last resort.
3. Understand where those college dollars will come from.
Kantrowitz advises parents try to amass about 1/3 of the cost of college, while still saving for retirement. When the bills hit, another 1/3 will come from current cash flow while the final 1/3 can be borrowed by your student. To hit those marks, he notes that parents will need to save about $3,000 a year for a child to attend an in-state public school, $5,000 a year for an out-of-state public school, and $7,000 a year for a private school. “If you’re off track, either try to make a lump sum contribution equal to the difference or increase your monthly savings,” he says.
4. Choose a school where the price tag lines up with your savings.
This may be the most important piece of strategy in this story. Kantrowitz suggests that the total debt a student takes on should be no more than the average starting salary in their field of study. (This allows nursing students, for instance, to take on less debt than engineers, but more than journalists.). The total amount parents borrow for all of their children combined should be no more than they can afford to repay in 10 years (and if retirement is closer than a decade, parental borrowing should be adjusted downward so that all loans can be paid off before it hits.) You can shop around for flexible repayment plans and competitive rates at College Ave Student Loans.
5. Once college rolls around, soft-pedal retirement contributions.
Yes, you still want to try to capture any matching dollars. But beyond that, put your extra cash toward paying for college and minimizing student debt. “Every dollar you borrow will cost $2 by the time you repay the debt,” Kantrowitz notes. Also, don’t forget that you can still funnel money through a 529 college savings account to grab the annual tax deduction.
6. Adjust your plan – sooner rather than later.
Finally, there are a few financial levers you can pull to boost the amount of money you have to put toward both college and retirement. Your cost of living is a big one. Maintaining a budget that works while banking windfalls (tax refunds, etc.) can be a good long-term strategy. Additionally, many parents look to downsize shortly after their children graduate from college – perhaps that’s something you can escalate by a few years. You may also want to look at moving your proposed retirement date back even by a year or two giving you more time to keep earning, keep saving and keep the money in your accounts growing – while shrinking the amount of time you need to make it last.
