Saving for Retirement: What If You Want to Pay for College Too?
Parents Face Competing Savings Priorities
Your child is headed to college in the not-too-distant future, just as you’re starting to plan your post-career life. With limited funds for savings available, which do you prioritize: college or retirement?
It’s no wonder so many families are overwhelmed by this question. The price tags attached to both retirement and higher education are steep. The average American will need upwards of $1 million to retire, depending on whom you ask and the desired retirement lifestyle, yet only 60 percent will be able to afford it, according to a 2014 survey by the Employee Benefit Retirement Institute (EBRI). After all, 36 percent of U.S. workers have less than $1,000 saved and 60 percent have less than $25,000.
Preparing for college isn’t much easier for most working families. A Sallie Mae survey found that half of all households with children under age 18 did not save for college in 2013, despite the fact that the average annual college bill today is $44,750 for private college, $22,826 for in-state public schools, and as much as $60,000 for each year at elite private institutions. It’s no surprise the average graduate of the class of 2014 left school with $33,000 in student loan debt.
Faced with these competing financial pressures, many parents feel stuck. How can they possibly save enough?
Put retirement first
The answer to this quandary? Prioritize retirement. After all, you can borrow for a college education, but there are no federally subsidized loans for retirement. And by socking away extra funds in a retirement account now, you stand to benefit from the extra time to grow these assets in the long term.
Another reason: tax breaks for retirement accounts are far more generous than those for college savings. For 2014, most workers can shelter up to $17,500 in a tax-deductible 401(k) or similar plan, plus many enjoy an employer match. Meanwhile, there is no federal tax deduction for 529 plans, the most common type of college-savings vehicle, though some states do offer a limited state income tax deduction for 529 contributions.
One of the most powerful arguments for contributing to retirement accounts is that doing so boosts your chances for need-based college aid: When determining what assets the family can contribute to a child’s education costs, many schools do not count the parents’ retirement savings.
But perhaps the most significant — and also overlooked — reason for prioritizing saving for retirement over college is that in doing so, you reduce the odds you will burden your children later. Already 21 percent of middle-aged adults provide financial support to a parent age 65 or more, according to a 2013 study by Pew Research Center.
Tips for financing a quality college education
Of course, prioritizing retirement savings doesn’t mean you can stop planning for those college bills. To afford a college degree, educate yourself on the financial aid process, explore affordable colleges, and research outside scholarships and grants. Make a plan, involve your student and get everyone working toward the same financial and educational goals.
The good news is that the majority of families qualify for need-based aid. In 2011-2012, 85% of first-time, fulltime students at four-year schools received some form of financial aid, according to the National Center for Education Statistics.
Also consider less expensive options. In-state tuition at a public school can cost less than half of that at a private college. Community colleges offer a lower-cost way to start earning college credits, which can often be transferred after a year or two to a four-year program. And technical or vocational programs provide trade skills for a modest price.
While loans can be a great way to finance a degree, be wary of taking every line of credit offered. Sit down with your student and do the math: Considering his or her professional aspirations, what is a reasonable monthly student loan payment? What is the real value of a degree from a name-brand institution? Brainstorm about how your student can meet his or her educational goals in a way that makes financial sense.
Research any community scholarships or merit aid that might be available for your child, too. Some aid is targeted to lower-income families, while other programs offer support to middle- and upper-middle-class families, especially those with multiple children enrolled in college at the same time. Finally, call the schools that your child is most interested in to plead your case — private colleges may have the flexibility to increase aid packages for students who make a strong case about their need and commitment to the institution.
The bottom line on the retirement-or-college conundrum: Funneling available income now into retirement accounts increases your chances for a healthy financial future for yourself, while reducing the likelihood your children will have to support you later.
Photo: © GettyImages/PhotoAlto | Marcia Layton Turner is a bestselling business writer, ghostwriter, and author. She has authored, co-authored, or ghosted more than 30 books on business or entrepreneurship.