Balancing saving for college with retirement savings is often a big concern for parents. According to a T.Rowe Price survey, 62% of parents are very/extremely concerned about saving for retirement and 58% have the same level of concern about saving for college. As with any other investment, planning ahead and understanding your options is the best way to achieve the desired outcome for both your retirement and your children’s education. While there is no one perfect solution for everyone, considering the following questions can help you balance saving for college with saving for retirement.
How much assistance do you want to provide?
About 80% of parents want their children to contribute to their own education expenses. Other parents want to fund their child’s entire college education, including room and board. Thinking about your desired anticipated level of support for your child’s education will help you set a savings goal.
Remember that there are many options for funding a college education beyond parental savings. Your children might earn scholarships, obtain advanced credits while in high school by taking Advanced Placement (AP) classes, borrow money, or work part-time while in school to cover some expenses. Although it is impossible to see the future, as your children get older it will be much easier to anticipate how much they might be able to contribute to their own educations.
How old is the child?
Assuming an initial $5,000 investment, a 6% rate of return, and monthly contributions of $100, parents who begin saving as soon as their child is born will have saved over $53,000 towards their child’s education in 18 years. That’s approximately half the cost of projected tuition & fees at an in-state school in 2036. Not bad.
However, if these same parents wait until 2028 to begin saving (when their child is 10 years old), they will have to set aside $370 per month to save the same amount. That’s a much bigger challenge, especially for families saving for more than one child.
Obviously, it’s much easier to balance saving for college with saving for retirement if both your retirement date and your child’s high school graduation date are many years in the future because you can set aside smaller amounts for each. However, there is one advantage for those who wait longer to begin saving – clarity. As your children get older, you will have a sense of their potential to qualify for scholarships, their ability to take AP classes, and you’ll know whether or not they’ve been able to save any money on their own.
What are the child’s career goals?
Your child’s aspirations will determine the amount of education needed to achieve their goals, as well as their ability to pay off any debts. A child dreaming of a career as an attorney will spend a lot of time in school, is likely to graduate with significant debt, but also be able to repay that debt due to a higher income potential. A child dreaming of becoming a teacher or a social worker might also seek an advanced degree but have much less ability to repay student loans due to a projected lower income.
Depending on when you begin saving, you might not be able to consider your child’s goals at first. However, as your children approach their high school and college years, you will want to revisit your college savings plan with help from your financial advisor to ensure you are saving for the education your child is likely to need.
What is your retirement plan situation?
If you are many years from retirement or have amassed savings that are likely to be sufficient for your desired retirement lifestyle, shifting funds to save more for your child’s education is not a problem. However, if retirement is near, or you haven’t saved enough to meet your own future expenses, saving for both retirement and college at the same time is a much bigger challenge. You might have to reduce the amount of support you provide to your children, or forego funding your child’s education entirely. It’s important to remember that there aren’t scholarships or federally-funded loans for retirement like there are for college. Although prioritizing your retirement savings over your child’s education might feel selfish, it’s not. If you don’t save enough for retirement you could end up becoming a burden to your children 20 years down the road. Remember, your retirement plan assets do not affect your child’s ability to receive financial aid.
In general, we advise clients to prioritize a secure retirement above their children’s education. If your employer offers a retirement plan, such as a 401(k) or a 403(b) plan, that’s a great place to start. You might also want to consider a SEP or Roth IRA, or a solo 401(k) if you’re self-employed. Once you’ve focused on ensuring your financial future is healthy, you can then consider saving for college. Plan for yourself first. After all, long term financial security is a gift to your children.