As parents, sooner or later we are faced with the question, “should I be saving for retirement or my children’s college?” This isn’t so bad if we are fortunate to have plenty of money, but what if things are a little tight? What if we have to choose between the two?
According to finaid.org, college tuition is increasing at a rate of about 8% per year and tuition is already incredibly expensive. We want our kids to have all they need to be successful in life which often includes a college degree. College loans, though, are an anchor around so many young people’s lives that we convince ourselves that we must save for our children’s education.
But on the flip side we see items on the news all the time warning that the days of 30 years and a gold watch and a pension are gone. Combine that with dire warnings about the future of Social Security and we are faced with the reality that we may be on our own to prepare and save for our retirement.
So what do we choose? Save for retirement and leave junior to fend for himself? Or save for college figuring we can worry about retirement later?
First things first
Before we even think about retirement or college savings, our first goal should be to get our finances on solid ground.
When you fly, the attendants always instruct you that in the event of an emergency to make sure your own oxygen mask is securely in place before you try to help someone else. In the same way, if we are drowning in debt and consistently spending more than we make, then we need to address those issues before worrying about college and retirement. Get on a budget. Get intense about paying off the debt. Use retirement and college as a motivation to sacrifice and get those debts knocked out as fast as possible. Then make sure you have a good emergency fund of at least 3-6 months of expenses or more.
Once you have that flow of oxygen established in your finances, you are then in a position to be able to think about other priorities.
College or retirement?
While our children’s well-being pulls at our heart-strings and may make us feel guilty if we aren’t saving for college, the answer to this question is almost always, save for retirement first. You need to be saving about 15% of your income for retirement, then once that requirement is met you can save for college with what is left.
The only exception to this would be if you already have a large sum saved for retirement. If you feel you have sufficient retirement savings, then you might back off on the retirement savings some to save for college. If you feel you are in this category, I would highly recommend meeting with a good financial planner who can review your savings and your goals to make sure you are really on track.
What about paying for college?
So if the focus is on saving first for retirement then how will junior pay for college? The most important reason for saving for college only after your retirement is taken care of is that your children have options for paying for their schooling.
- Go to a less expensive community college to get some general requirements out of the way.
- Choose to attend a public in-state school as opposed to a much more expensive private institution.
- Get a job. Some studies have shown that students who work part-time while in school actually get better grades than those who do not.
- Apply for every scholarship you can find
- Many companies pay part or all of the tuition expenses for employees seeking to gain a degree
- Get a loan. I don’t recommend student loans. I think young people should do everything possible to avoid them, but it does remain true that there are loans available for college. You can’t take out a loan to fund your retirement.
Retirement savings must come first
While it is a noble goal to pay some or all of your children’s college expenses, the bottom line is that making sure you are able to support yourself in retirement has to take precedence.
You child has the option to work to pay for their degree. As you near retirement age you might not have that option. Health issues may prevent you from doing what you once did. While age discrimination is illegal, we know that it does still occur, and you may be limited in the jobs you can get when you are 70.
Finally, saving for retirement is so much easier if you get an early start.
Let’s say you start saving when you are 22 and have that first job out of college. Assuming only an 8% rate of return, by saving just $200 a month from age 22 to age 67 you’ll be able to retire with over a million dollars saved!!
Now let’s suppose you also got married at 22 and junior came along shortly thereafter. You want to be able to pay for college so you divert that $200 a month to a college savings program. If you waited until age 40 to start saving that $200 for retirement, you would only have $227,000 at retirement. To have that same million dollar retirement starting at age 40 you’d actually have to save $885 a month. The longer you wait to start the harder it is.
I believe in the value of a college education and I plan to help my son with his educational expenses. However, you must never allow guilt to shame you into prioritizing your child’s education over your long-term retirement savings. If you can do both, congratulations, but if you must choose, always err on the side of your retirement.
There are many options for paying for college. With the uncertain state of pensions and social security, it may be up to you to provide for your retirement years. Make sure you don’t short change yourself.