Many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education.
With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do?
Retirement prior to education
In most cases it is more important for parents to put their financial needs ahead of their children. Why?
- One of the best ways you can help your child in the long-term is to ensure you won’t be a financial burden on them in the future.
- Your children can take out education loans, while lending options during retirement years are limited.
- There are numerous programs available to your child to help them afford college.
- While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.
Some tips to consider
There is plenty of opportunity to fund both retirement and college education in a tax advantaged way. You might wish to consider funding basic retirement needs first, then look at tax advantaged educational savings programs.
Retirement: First fund employer provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children.
Child’s education: Look into Coverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings.
Consider other ways to generate college funds. Here are some ideas;
- Start saving for both retirement and college early. Use time to help grow the value in your accounts.
- Attend a public versus a private college
- Look into work-study alternatives
- Review and apply for grants and scholarships
- If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school.
Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found.