The question I get from a large portion of my clients these days is, “Should I save for my child’s college education or for my retirement?” It can seem like an impossible task to save for both, and with both being incredibly important, it can also seem impossible to choose between the two. Thankfully, you won’t have to make a choice, just implement the following tips, and you will be able to meet your goals for both your retirement and your children’s future college savings.
Prioritize retirement over college savings
While most parents want their children to have the same college experience they had growing up, they also realize the $100-300k price tag required to fund their kid’s education is a lot more expensive than it was for them. So, if a choice has to be made, you should prioritize saving for retirement over saving for your child’s college education. Prioritizing for retirement doesn’t mean you shouldn’t save for your kids’ college, but it does mean that your priority will be ensuring you have the money needed to retire first before all else. Your kids will have other opportunities and options to pay for college through scholarships, grants, and student loans. You, however, only get one shot at saving for your retirement, so it has to be your priority if you ever want to quit working that full-time job someday.
Determine your goals
Before you can determine what you need to save for college and retirement, you have to get clear about your goals for both. According to CNN Money, you will need to replace at least 80 percent of your pre-retirement income to live comfortably in retirement. The numbers may change based on how you plan on living once retired, but the 80 percent figure can act as a starting point when deciding how much you need to start saving now for retirement. It will depend on whether your child is looking at a public in-state university or a private college when it comes to paying for education. Either way, you’re looking at a six-figure price tag per student. One study suggests the cost of tuition could be as high as $205,000 for a four-year degree by 2030. We typically see between $100-300k per student for a 4-year degree. Once you’re clear on the numbers, you can then plan how much you’re going to save to reach your desired financial goals.
Maximize retirement savings
Since you should prioritize retirement savings over saving for college, make sure to maximize all of the available retirement savings opportunities. If your employer offers a 401(k) match, make sure to take full advantage of the plan. If you haven’t already, consider opening a Roth or Traditional IRA as well. A Roth IRA will allow for tax-free withdrawals once you’re ready to retire. In contrast, a traditional IRA will enable you to defer taxes on contributions until you’re ready to withdraw them, lowering your tax bill today. If you make too much money to contribute to a Roth IRA or deduct contributions to a Traditional IRA, take a look and see if your 401(k) offers Roth or post-tax contributions as they do not have those income limitations.
Maximize college savings
Retirement plans aren’t the only ones that allow you to maximize savings opportunities. College plans can also offer fantastic tax benefits making it easier for you to save. Check to see if your state offers a 529 College Savings Plan. 529 College Savings Plan accounts allow for tax-free contributions and withdrawals for qualified education expenses once it’s time for your child to go to college. The new tax law also expanded their use for secondary education expenses. If your state doesn’t offer a 529 plan or does not provide the state tax benefit that many do, try for a Coverdell Education Savings Account or ESA that operates similar to a 529 as it can be used for qualified elementary and secondary school expenses as well.
Find a happy medium
Ultimately, once you’ve set goals and crunched all of the numbers, you may find that you can’t afford to save for retirement and college at the levels you like. Instead of being discouraged by this reality, try to find a happy medium where you can accomplish most of your stated goals. Maybe you decide to retire at 67 instead of 65 to give you more time to save for retirement, or you only fund two-thirds of your child’s education utilizing other methods to finance the final third. Whatever you decide, be sure it’s a decision you’re happy with, and start taking action today, as the future will be here before you know it!
Would you like help to figure out how much you need to save to retire or how to pay for your child’s education down to the penny? Would you like help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!