Should I save for my retirement or my child’s college education first?

At some point, most parents have to answer a difficult question, “Do I save for my retirement or my child’s college education?” With the cost of college skyrocketing (doubling almost every nine years), saving for college and retirement can feel like an impossible task.

Most advice will tell you that the choice is clear: your retirement savings should always be your priority. When almost 70% of parents say they would take money out of their retirement accounts to pay for college, the only thing that’s clear is that most parents would place their child’s education ahead of their retirement.

The issue is that you can save for part of a college education and still find ways to make it affordable. If you only save for part of your retirement, you may find yourself making some very difficult decisions and with limited options to choose from.

Your decision to prioritize saving for retirement or college will have lasting financial implications for decades. With so much on the line, it’s important to make the right choice. Here’s what you need to consider and how to make the right call for you and your family.

How to decide whether to save for retirement or college first

For most parents, the decision to prioritize retirement or college savings is not strictly a financial one. There are other factors influencing the decision. Here are a few of those factors, both financial and not, that you should consider when making the choice for your family.

• Your personal experience: Your experience with college – how you paid for it, whether or not you had student loans, how it affected your early career – will influence your choice. This isn’t a good or bad thing, but you should be aware that your past may be influencing your future.
• The value you place on an education: The value you and your family place on an education should be part of the equation. It shouldn’t be the only factor, but aligning your financial decisions to what matters most to you will generally lead to better outcomes.
• Know your trade-offs: Everyone has to make trade-offs. If you prioritize retirement, you may have to choose a less expensive school or be comfortable with some student loans. If you prioritize college, you may have to delay retirement and work longer.
• Your current retirement savings: Assessing where you are with your retirement savings is critical. If you are behind, retirement should be the priority. If you find yourself on track or ahead, you have greater flexibility to save for college.

While most parents will sacrifice their retirement savings for their children’s education, there are some very real financial implications that need to be considered.

Why retirement savings should come first

When the air pressure drops in the cabin of an airplane, the advice is to put your own mask on first and then to help the other passengers. When it comes to your money, the same advice typically applies: plan for your financial security and independence first and then help others around you. But does this apply to the retirement versus college debate?

Here’s what the math says. First, the cost of healthcare alone in retirement for a married couple can reach $300,000 (and this doesn’t include unexpected costs like long-term care). That’s more than double the cost of an average four-year college education that clocks in at just around $140,000. 

Second, the rule of thumb for retirement savings is that you will need to replace somewhere between 70% to 90% of your pre-retirement income. So if you make $100,000 per year, you will need to generate $70,000 to $90,000 of income per year for 20 to 30 years or more.

Money isn’t the only thing that should drive the decision, but you should be aware of the trade-offs you will need to plan for. If you decide to make college savings the priority, here’s what that may mean for you:

• Delayed retirement (working longer): You may have to delay your retirement and work longer to give yourself more time to save and to reduce the number of years you actually spend in retirement.
• Significant lifestyle changes: You may need to make larger lifestyle changes than you had originally planned like selling your home and downsizing, moving to a retirement friendly state, or even reassessing your travel plans.
• Potentially putting your family at risk: You may put your family in a situation where they need to provide for your care later in life if you haven’t saved or planned properly for healthcare and long-term care related expenses.
• Missing out on critical returns: You may miss out on one of the most essential elements of retirement savings success: time. Delaying your retirement savings means you’ll miss out on the power of compounding returns:

For example:

Let’s say the goal is to save $1,000,000 by the age of 65. Assume all investments achieve a 7% hypothetical return (no guarantees of course).

If you start saving when you’re 40, you’ll need to save about $15,000 each year from the age 40 to 65.

Wait until 50 and you’ll have to save more than twice as much: almost $37,500 per year.

^{*Fees and taxes not included in this calculation}

If you choose to make retirement your priority, you will find that there are many options to make college affordable and to ensure your child gets a good education and a great college experience.

• Financial aid packages: The sticker price for most colleges isn’t the price that most students pay. There are scholarships and grants that may be available to your child and both are considered “gift aid” meaning they don’t have to be paid back.
• Part-time work: Whether it’s a federal work-study program or a part-time job, there are several benefits including the work experience and the added income to help pay for college related costs.
• In-state versus out of state college costs: The average in-state tuition is a little over $9,000 per year; out-of-state tuition averages just over $27,000 per year.* That equates to a savings of $72,000 over four years.
• Public versus private college costs: Private school tuition alone can cost north of $35,000 per year (compared to $9,000 for public) and this doesn’t include room and board and other ancillary costs.* A public school education could save you north of $100,000 over a four year period.
• Student loans: You and/or your child can consider loans to help offset the total cost of a college education. If used wisely and planned for properly, college loans can be a great tool to help pay for a great education.

^{* Source: https://educationdata.org/average-cost-of-college} 

The bottom line is that there are many options for making college affordable, but you only get one retirement. You can choose a less expensive college but choosing a less expensive retirement lifestyle requires some significant changes.

Focusing on your financial health may be the most selfless thing you can do to protect your retirement security and your family’s well-being for years to come.

How to save for both retirement and college

The decision doesn’t have to be retirement or college. The good news is that the decision can be about retirement and college, but there are a few steps that are important  to take to determine the approach that is right for you.

Step 1: Get clarity around what you need for retirement AND college

Creating a successful saving and investing strategy for any goal starts with getting clarity around how much you need to save.

For retirement, determine how much you need to save to provide the income to maintain your desired lifestyle. This includes factoring in retirement income sources like Social Security and pensions, retirement healthcare costs, and how much income you can generate from your investments.

For college, it’s a conversation about what type of college (public versus private), where the college will be located (in-state or out of state), and how much you want to cover. College costs can range from a few thousand dollars per year to north of $50,000, so it’s critical to get clarity around what you are looking to achieve.

Step 2: Determine if you are on track for retirement

Before making the decision as to how much you can afford to save for college, it’s important to assess where you stand with your retirement savings today. If you are behind on your savings, making retirement the priority becomes that much more important. If you find yourself on track or ahead of schedule, it could make sense to put more of your savings towards college (but, again, this is a personal decision).

Step 3: Get serious about an education

With a better understanding of where you stand with retirement, you can get started developing your college savings strategy. Like all other savings plans, the earlier you start the better.

Example:

If you save just $250 per month starting when your child is born, you could save almost $84,600 by the time they head off to college (assuming a 6% rate of return and 17 years of investment growth).

If you wait until your child is ten years old to start saving $250 per month, you would only have around $25,000 saved (assuming a similar 6% rate of return and only 7 years of investment growth).

Even if you can’t start with $250 per month, you can always start with a smaller amount and increase it every six to twelve months. Most education savings plans let you start with as little as $25 per month. 

The key to a successful college savings strategy is to get started, increase your savings over time, use tax-advantaged accounts like an education savings account (529 plan), and to evolve the strategy over time as life – personally, professionally, and financially – changes.

What options do you have to save for a college education?

When it comes to saving for an education, there are several savings and investment accounts you should to be aware of. Here is what you need to know and how to choose the right account(s):

Education savings account: You may also hear this called a 529 plan. It’s an account designed specifically for saving for an education. All earnings and growth in the account are tax free and withdrawals may be tax free as well if they are used for qualified education expenses. Depending on where you live, some of your contributions may qualify for a state income tax deduction.

Custodial account: A custodial account is a savings and investment account for your children. Any money placed in the accounts is technically their property, but you get to control the account until they reach a certain age (18 in most states). Custodial accounts can adversely affect eligibility for financial aid so you need to factor this in when planning for college costs.

I Bonds: With inflation at a 40-year high, risk free I bonds offer a great way to generate interest. There are limits on how much you can purchase, and you cannot sell them until you have held them for at least 12 months so you need to plan accordingly. Keep in mind how you own I bonds (e.g. in your name or your child’s name) can impact financial aid.

Taxable investment account: This is not a college specific investment account, but it is an investment account you can use to save for retirement while maintaining the flexibility to use it for college. You’ll have to account for capital gains taxes if you sell your investments for a gain.

Roth IRA: A Roth IRA is not an account that is typically used for education savings. However, it can be a great account that you can use to supplement your retirement savings and give you the flexibility to withdraw your contributions tax and penalty free in the future should you need or want to. And if you don’t need the money, you can keep it in the account and use it in retirement.

The right approach is often best achieved with a mix of the above accounts. The right mix for you will depend on your retirement and college savings goals and the strategy that will help you achieve them.

Final word

The decision to make retirement or college your savings priority is a personal choice. Success in this situation should be defined by you and your family. Making your financial health, security, and independence a priority is always a good call, but your children, and the life you want for them, need to be part of the plan too.

No matter which decision you make, it’s important to clearly define what is most important to your family, understand the necessary trade-offs, and to create a savings and investment strategy that gives you the flexibility to adjust your plan as life – personally, professionally, and financially – changes.