Prioritizing Retirement and Your Kids' College Savings

As parents, we’re accustomed to putting our children first. We tend to prioritize their needs because we want their lives to be better than our own. An example of this we see often is when clients prioritize saving for college over retirement. It’s easy to think this is the best thing to do for your kids; however, your retirement shouldn’t take a backseat.

Why Retirement Should Be Your Priority

Prioritizing college savings over retirement isn’t only detrimental to your future well-being, but it can impact your children as well. If you don’t have enough money saved for your basic needs in retirement, your children will likely have to help you financially when they are adults. Not prioritizing retirement is also problematic because retirement is a necessity. You’ll need that income to pay for your basic living expenses, and once you retire, it can be difficult or impossible to earn more money for yourself. Additionally, it’s important to note that you can take out a loan for education but you cannot get a loan to fund your retirement.

It’s Possible to Save for Retirement and College

Fortunately, this isn’t an all or nothing problem. There are many strategies to plan financially for retirement and college. To get started, determine how much you’ll need in retirement for the lifestyle you desire. At a minimum, you need to make sure your basic living expenses are covered by social security and your savings before you start funding college. You can forego excess, like traveling or buying a new car, but your essentials must be covered. If you’re already contributing to a 401(k) and your employer offers a match, make sure you’re getting the full match amount. This is free money for your retirement fund that will help you reach your goals that much sooner. Once you know you are saving enough for your retirement needs, you can begin to contribute additional money to the college savings fund.

Additional Options to Pay for Education

There are several financial tools available to help save for college. A 529 savings plan is a great option that can be especially beneficial if you start contributing to it when your children are young. 529 savings plans are investment accounts that provide tax-free growth and withdrawals for qualified education expenses like tuition, books and room and board. Brokerage accounts, cash value of life insurance and even Roth IRAs (if you are disciplined and have already funded your retirement) are also good options.

Evaluating additional sources of income is another way to help pay for college. For example, if one parent currently stays home, returning to work full- or part-time is one way to earn extra income that can be earmarked for your children’s education. When your children are old enough they could also get a part-time job or do a work study to help pay for college expenses.

Reducing or eliminating the cost of education is another option. Encourage your children to apply for scholarships they may be eligible for. You can also ask your child’s high school guidance counselor about available scholarship opportunities. If your child is attending a school in the city you live in, having them live at home during part or all of college is a great option to save money. When evaluating schools, it’s also important to choose a school that’s appropriate for what your child is studying and your budget. Additionally, taking prerequisite classes at a community college or lower cost university before finishing a degree at the school of their choice is a great option to reduce the cost of education.

Lastly, student loans aren’t a bad option when used in moderation. When taking out student loans, a good rule of thumb is to keep total loan balance less than your child’s first year’s anticipated salary.

Helping your children pay for college is a generous gift but it’s important to not do so to the detriment of your own retirement. When you think about it long-term, college lasts 4 years but your retirement may last 20-30 years.  And who knows? Your children may appreciate the value of their education more by helping earn their way through school.

About the Author

Barbara is a Certified Financial Planner (CFP®) and Director of Financial Planning with the Private Client Advisory and Financial Planning teams at First National Bank Wealth Management. She specializes in providing comprehensive and personalized financial planning that incorporates investment, retirement, tax, protection and estate planning strategies.