The Savings for College Challenge – Part Four – Saving for College vs. Saving for Retirement

In our last three blogs we have discussed tangible topics like learning about options for college savings, how to choose a good 529 plan, and how much you can contribute to a 529 plan. This blog explores a more personal and less tangible topic—balancing your desire to save for your children’s education vs. saving for your own retirement. Because this topic is a personal one, our objective is to give you some things to think about so you can make a decision that works for you.

It is helpful to remember that, for college, there are many financing options available: student low-interest loans, grants, scholarships, and work study. However, for retirement there are no loans, grants, or scholarships. As pensions disappear and Social Security’s ability to pay benefits becomes less reliable, increasingly, retirement will need to be funded by your own personal savings. On the other hand, college costs are soaring and students are having a harder time graduating in four years, also increasing the total cost of higher education.

So what is a parent to do? First, remember that this is not an all-or-nothing decision; it is a balancing act. A good place to start is understanding the costs of college and how much savings is needed to pay 100% of your children’s college tuition. In our last blog, we gave some examples based on different ages and colleges. For a scenario specific for your own situation, you can find a college cost calculator online and change the assumptions to fit your needs. Here is one you might explore:

Next, find out if your company offers a retirement plan with an employer match. If this is the case, then contributing money to the company retirement plan increases your retirement savings at no cost to you—a gift you may not wish to turn down. Lastly, look at your budget and figure out how much in total you can afford to save each month and how much you are willing to allocate for your retirement and how much you would like to allocate for your children’s education. If you find yourself with little remaining monthly discretionary income for college savings, remember you can enlist your family and friends’ help by asking them to contribute to your 529 plan for your children, instead of giving gifts of toys and clothes. As stated in a previous blog, anyone can make contributions to a 529 plan.

If you find yourself still struggling for the right allocation of savings, your personal values and priorities can help you make a final decision. Ask yourself if you believe strongly that by funding your children’s total cost of education you will allow them to concentrate fully on their studies so they will be better prepared for the workforce. Or do you believe your children will learn more responsibility if they are required to either pay for some of the costs and/or work hard to secure scholarships? If it is your decision to pay for as much of your children’s education as possible, then the trade-off may be that you might need to work longer and delay your retirement or work part-time in retirement. If you decide to have your children pay for some of their own expenses, then have a talk with them about the costs of college, how much you are willing to pay, and how much you expect them to contribute through part-time work, financial aid, scholarships, and/or loans. You can also talk to a college admissions expert, like Creative Marbles, to help you and your children find the right college, help you understand the Free Application for Federal Student Aid (FAFSA), and identify the full cost of a college education.

College and retirement are two of life’s important milestones and also two of the most expensive. The sooner you start to save for each event, the less you will have to save each month. Ultimately, there are many options to pay for your children’s education and to save for your own retirement. Thinking about the pros and cons of saving for each objective and how to balance them will help you gain a sharper understanding of how you should save.

This concludes our Savings for College Challenge series. We hope you learned something new and we wish you and your children the best on their journey to college! Please feel free to contact us with questions.