Many parents would do just about anything to give their kids the best opportunities in life. In some cases, they’ll even go so far as working extra hours to make sure their children have access to activities, tutors, etc. that can put them ahead.
Given this, one area that worries many parents is the high (and increasing) cost of college tuition. The price has gotten so high that some parents are tempted to put their kids’ college savings first and cut back on their retirement planning.
The problem with this plan is that it can backfire. Instead, you should seriously consider putting your retirement savings ahead of funding a college savings plan.
Planning for Retirement
While your kids can apply for scholarships to pay their college tuition, you don’t have the same types of resources if you need money during retirement. There is no financial aid for those retiring – Social Security should be treated as a safety net, and not your primary income source in retirement.
If you feel bad because you may not be able to pay for your child(ren)’s college tuition, imagine how bad you’d feel if you had to depend on them to support you in retirement. Believe me… There are many young families dealing with this sort of financial stress right now. I’m sure they’d much prefer for their parents to be financially independent.
Develop your retirement income tripod
If you’re planning for retirement, you should try to have tripod of income streams to support your retirement:
- Employer plan: Depending on where you work, this might be a 401(k), 403(b), 457(b), Thrift Savings Plan, or some combination of the above.
- Personal savings: Whether you have a defined benefit plan at your job or not, you should consider getting a Traditional or Roth IRA, as well.
- Social Security: While the government is trying to solve the long-term finances of Social Security, you might want to consider this to be a backup plan for retirement.
Currently, you can contribute $16, 500 annually to your 401(k) if you’re under 50, and $22, 000 if you’re age 50 and above. The annual elected deferral limit for the Thrift Savings Plan is also currently $16, 500. The same goes for your 403(b) or 457(b) accounts, so you really have no excuses to skimp on saving.
If you haven’t done so already, start contributing a percentage of your paycheck – whatever you can afford. If your employer matches a percentage of your contributions, you can build up your nest egg even faster. The annual contribution limit for IRAs is $5, 000 – $6, 000 if you’re over age 50.
Resources for college students
Have you looked into all of the financial aid available to college students today? If your child has a strong academic and/or athletic record, they may have a number of options – ranging from scholarship foundations to financial aid from their school of choice. You may have to do some digging, but it’s usually worth it.
Consider alternative options for college
What if you and/or your child can’t afford a four year degree at their school of choice? Loans are one option, but there are other good options out there for increasing affordability.
- Attend community college for the first 2 years. Community colleges are usually significantly less expensive than attending a full-fledged university. Just be sure that the credits will transfer to their school of choice. If so, your kids may be able to get their bachelor’s degree for a fraction of the price.
- CLEP some of their coursework. The College-Level Examination Program (CLEP) tests a student’s knowledge in over 33 subjects and courses. Each institution has its own guidelines on how much credit they will give to their students, so your child might want to wait until after they’ve enrolled and take the CLEP exams that the school accepts.
- Get a job. Many students offset at least a portion of their college expenses by working. Depending on the job that they’re able to find, they’ll be able to build up their resume while building their academic record at the same time.
- Apply for scholarships and grants. If you haven’t encouraged your child to do this already, it’s time to start emphasizing the importance of applying for scholarships of any size. Both the FAFSA website and FastWeb can be a tremendous help in your search.
If your child is hard working and creative, there are definitely options out there to make it more affordable.
Your thoughts on saving for college vs. retirement
If you have kids, have you put your retirement savings ahead of their college savings? In other words, do you make sure that you’ve maxed out your various retirement options before plugging money into their 529 account?
What’s up, I read your new stuff on a regular basis. Your humoristic style is awesome, keep doing what you’re doing!
Don’t forget that along with CLEP exams, there are numerous other ways of earning college credit for a fraction of the cost. DSST’s, FEMA courses and Excelsior Exams are often accepted by many colleges.
Even if your college only accepts one or two of these in lieu of classes, it can translate to significant savings.
Do a little research. It will save you money in the end.
-Justin
Steve) Are 529 accounts an ideal vehicle? That’s what we are using. People have to consider the FAFSA — if you earn a “too much”, then the FAFSA is going to reduce the amounts (and types) of subsidized loans that you kids can qualify for. If the extraneous amounts haven’t been saved (or grants or scholarships), then:
1) you kids aren’t going to college, or
2) parents are going to struggle to ‘pay as you go’, or
3) kids (and parents) will have to take on tremendous amount of high interest personal student loans to float the bill, or
4) the kid needs to be ’emancipated’ so the parents income isn’t considered for the FAFSA (kid can’t be claimed as a dependent, etc).
If you want to rely on government aid, the government requires that the parents chip in their share — it’s simple as that. I want my kids to go to college, therefore I’m saving for that expense, years in advance. If you don’t care if/when/how your kid goes to college, by all means don’t save for it.
Chris) so you are picking option #2, as well. :
“do you help pay for your kids college and you work a few years extra before you retire (if ever).”
I know you aren’t saving yet, but you plan on it. If you decided to take the college savings and invest it into your own retirement instead, you could increase your retirement goals (retire earlier, or have more money). This is why I view it as an either or situation.
Either you save, or you don’t — either or.
It’s not as simple as “I want my kids to have the best start” and just “work a few more years before retirement.” Saving for college, or not, is both an input to and an output from an equation. This is a very complex situation in which the variables interact in many ways, obvious and not. As just a few examples: if you feel that you should save for your child’s college, and because of that you save money that you otherwise would have “wasted”, then you have a net benefit. If you save for your child’s education, but in the wrong kind of account (e.g. UGMA – an account in the child’s name), you could do little more than lower your child’s financial aid eligibility; whereas if you had saved in a retirement account, the money wouldn’t be counted at all. We’ve all heard examples of the child who’s parents money enabled them to focus on studying – and the counter example of the student who was able to focus on partying.
Being on the other side of the argument is what makes the world go around. Financial planning is about reaching goals.
I have to say that one of my most gratifying accomplishments was paying my own way through school. It required a stint in the Army along the way and some hard work to gain scholarships but I feel it shaped me in many beneficial ways.
I am on the other side of this argument. I believe it is my duty as a parent to make sure my kids have it better than I did. Seeing them start off in a better situation than I did will be the most gratifying thing I accomplish in my lifetime. I will find a way to take care of myself. I am not saying I won’t save for retirement, but it is not my top priority by any stretch.
It sounds to me like some of the commenters need to do a financial plan. The plan will tell you that you need to save $x/year to meet your goal of retiring at age y. If you can’t save more than $x/year then don’t save for college unless you want your kids taking care of you in retirement.
Like everything else in investing, starting early and using a tax advantaged plan like a 529 plan can take you a long way towards helping with college.
For example in Maryland start with $2500 when the child is born and get a tax break using a 529 plan. If it grows by 8%/year over the next 18 years it will have grown to almost $10.000.
A few parting thoughts. In order to save more on the monthly expenses we skimp a bit on technology. We pay $30 for our TV service which is a cobbled together combo of Sky Angel ($19.99/month), over-the-air (free when you can get it), and Netflix ($10/month). My wife and I each have pay-as-you-go cell phones (Tracfone) that cost us about $30-$35 a month for both of them. Sure, they’re not smart phones, but we don’t really have time for that anyway (I like to refer to my camera-less phone affectionately as my “Zero G dumb phone”). There are alot of other ways to save a few bucks here and there. They’ll help you get to your retirement, debt reduction and college savings goals earlier.
BG,
You asked the question about how much one should save for retirement before you should consider saving for you kids college expenses… This would (of course) depend on your situation–how old you are, how much you currently have saved for retirement, what your debt load is, how you hope to live in retirement (travel the world vs. see the local sites), etc. A financial planner could help you look at your situation and run some figures. I have a pretty good notion of how much I’ll need in retirement based on my lifestyle. Here’s our plan–perhaps it will make sense to some folks out there, but since everyone’s situation is differnt, who knows. My wife and I are in our 40s and we have a decent start on retirement savings. Our only debt is our mortgage currently. We pay nearly $800 a month for our 2 daughters to attend a private school (perhaps that could be considered our educational contribution ???). My short-term goal is to push our savings for retirement to 11% of our gross income. With the match we get from our employers, our total savings for retirement would be 15% of our gross income. That amount I feel will be enough for our retirement. Once we get to this goal (which should be within the next 2 years), we’ll be setting aside more money for purchasing cars, etc. It is our goal to only have my mortgage as my only debt in the future. After we get to that point, it will only be about 3-4 years until my oldest graduates from high school, but I think we’ll FINALLY be in position to start saving for college. Unless gas goes to $8 a gallon, and then that might derail things. 🙂 I guess it’s better to start saving late than never…
@Courtney – I didn’t want this to be an either/or with children taking on student loans for college. I tried to show that they have options that parent don’t have for retirement.
My husband and I did most of the alternative options I listed. He finished with less than $1k in debt. I had more, but I accept responsibility for not being as frugal as I could during my junior and senior year.
My thoughts are parents do more of a service to their kids by preparing for their retirement so they won’t need to be supported by their kids later on. It’s emotionally draining and financially draining.
Every family has to make their own decisions, I wanted to present options.
Chris) If someone were to follow your advice, what is the exact amount/percentage that one needs to save for retirement, before considering to help pay for kids college? If retirement savings is ‘FIRST’, then there must be a line were “first ends” and “second starts”, right?
Courtney) Sorry to hear about your dad. Of course students should tap every form of income/grants/scholarships before leaning on Mom&Dad to kick in.
“I would personally advocate that all students take at least some financial responsibility for their education” <– I agree, which is why I'm chipping in 50% even though we could go higher.
I didn’t really see this article as an either/or kind of thing. It sounds like the point is that you should put retirements FIRST. Once you’ve take care of saving what you need to for retirement, then you can consider helping your kids with college. It also provides some helpful other ways to reduce college expenses. Laura, thanks for the advice!
BG – actually as it turns out my dad passed away at 51, so in a mathematically perfect world they “should” have contributed more because it turned out he didn’t need the retirement money anyways.
My point is that a) they didn’t save anything for my college education and I’m not saddled with debt, and b) even if they had saved the additional $8K for themselves and my student loan payment was twice as much, I’m still not saddled with debt. I’m certainly grateful for what they were able to contribute, but if they hadn’t it wouldn’t have been that big of a deal. My point in listing out my tuition sources was to try to get away from “Spend $100K on your kid’s college tuition OR save $100K for your retirement?” I’m pretty sure it is almost never one or another.
I would personally advocate that all students take at least some financial responsibility for their education, regardless of their parents’ ability to contribute. I know the fact that I had worked over 900 hours in 14 weeks and then paid most of that money towards a semester of tuition was a great motivator.
Courtney) so, it seems like your parents picked option 2 — help pay for kids college. Sure you parents only paid 8% of the total costs, but are you saying that they should have not helped, and instead put the money into their retirement savings?
They could probably retire a year earlier, had they not helped you…
Eric) So, you finance part of your retirement by having you kids take out education loans. I’m not saying whether one way is right or wrong, I’m just pointing out what the decision really is.
BG – it doesn’t have to be either-or. I hate these posts because it always presents it as a binary decision – saddle your kids with debt now, or saddle them with your long-term care later. But I went to a private college and cobbled together my tuition from SIX different sources, only two of which were family-related.
The total cost of my tuition, room and board for four years was $98K. 1) I had a $13K a year scholarship, totaling $52K over four years. 2) I qualified for a state grant (Virginia Tuition Assistance Grant) because I was an in-state student going to a private college. Over four years this was about $12K. 3) I inherited some savings bonds from my great-grandmother, totaling approximately $12K. 4) I worked two jobs one summer and paid $5K myself. 5) I took out approximately $9K in student loans. 6) My parents contributed approximately $1K per semester, partly from lower household expenses and partly from the tax credit they received for doing so.
I worked part-time in various campus jobs for spending money and to buy books. I now have a $52/month student loan payment. Hardly catastrophic, even though my parents only paid 8% of my expenses (and didn’t have any ‘college savings’ in advance of my freshman year).
Simply put: Your kids can work, beg and borrow their way through college if need be. Retirement only accepts cash.
It basically boils down to this:
1) do you make your kids pay for their own college so you can retire earlier (if ever), or
2) do you help pay for your kids college and you work a few years extra before you retire (if ever).
everything else is just beating around the bush. Pick one.
Excellent post. Although I’m not a financial planner I have to wade through the financial planning stuff to get to the investments. Many times I put it like this: as your advisor I’m like a doctor. Doctors have a difficult time thinking about “pulling the plug” because they are committed to preserving life. In the same way, as an advisor my main goal is to get my client to a secure retirement. Postponing saving for retirement to pay for a college education makes that difficult in a lot of cases. The point about being a burden to their children is a wake up call for many.