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The Ready.Set.Retire! Blog

Retirement Versus College: Where to Save First

Abigail Walker, CFP®

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Should I Save For My Child’s College Education or For My Own Retirement?

This is an excellent question, and one that we get a lot at Guidance Point Advisors! Parents want to be sure that they are preparing their children for the future, however they also know they need to be preparing for their own future, and saving for retirement.  So, what do you do when faced with opposing savings goals?  Retirement versus college?  Let’s look at the facts.


Social Security Will Probably Not Be Enough to Live On

As we all know, Social Security has come under a lot of scrutiny lately.  A recent study by the Government Accountability Office (GAO) has reported that Social Security recipients can count on just $17,000 per year in retirement, and that fund could be insolvent as soon as the year 2034.


You Don’t Want to Live with Your Kids (And They Don’t Want That Either)!

Retirement savings need to be the ultimate priority when determining how you are going allocate your savings.  Once in retirement, your savings are your main source of income.  This means that you will need to rely on your savings to pay your mortgage and car payment, to eat, to travel, etc. The less retirement savings you have, the more you will need to rely on Social Security, or other sources of income to make your budget work.


College Savings Should Be Viewed as a Luxury

The decision to prioritize yourself over your child’s college education can be a difficult, emotional decision.  However, you should view saving for college as more of a luxury than a necessity.  If you have additional money left over after putting away 10%-15% of your gross annual pay, then you can consider ways to help your child in saving for college.  It’s also important to keep in mind that your retirement assets, such as 401(k) plans, 403(b) plans or IRAs, are not included in the Expected Family Contribution calculation when determining financial aid.  So, you can save for your own retirement, without detracting from your child’s financial aid package. However, there are still options for prioritizing your own retirement, and preparing your children for the future.


Roth IRAs Can Help Both Causes

Roth IRAs (for families who qualify) are a great option to save for both retirement and college.  Any contribution made to a Roth IRA may be withdrawn, tax and penalty free, at any time.  However, any earnings that are withdrawn before 59.5 years old will be taxed at your normal tax rate, with an additional 10% penalty from the IRS.  This allows families to save for retirement and, if necessary, families can withdraw principal contributed to a Roth IRA for college expenses.  Just keep in mind that withdrawals from Roth IRAs may detract from financial aid packages.


Open a 529 Plan and Ask for Family Assistance

Parents are not the only ones who can contribute to college savings. A contribution to an account such as a 529 college savings plan, makes a great alternate gift idea for birthdays, holidays, and other momentous occasions.  This will allow grandparents, friends, and other family members to put away college money for their loved ones. 


Overall, It Is Important to Remember to Take Care of Your Own Savings First

Retirement will come whether you are ready for it or not!  It’s much better to be prepared, and have your own financial affairs in order before over-stressing yourself to pay for your child’s college.  By demonstrating that you are saving and taking care of your future, you are also showing your children how responsible saving and planning looks.  Financial education is an important tool for children to learn, understand and utilize as they mature.


Topics: Families & Individual Investors, Saving For Retirement, Young Professionals, Saving for College