Saving for both college and retirement is a daunting task and can involve some hard choices. To get it done, financial advisors recommend these three key steps.
Step 1: Fund your employee retirement account first
Parents would lie down in traffic to protect their children. So the common recommendation — prioritize retirement savings over college funds — feels like throwing your child’s education under the bus in favor of your 401(k), 403(b) or other employer savings plan.
Not so, say financial advisors. “Your kids will have other options to get through school — student loans, scholarships/grants, work-study programs,” says Crystal Wipperfurth, a financial advisor with Bronfman Rothschild in Madison, Wisconsin. “You, on the other hand, once you’re retired, have limited options.”
Try these strategies for balancing retirement and college savings:
- Fund your plan enough to get the full employer match. This is a “must do,” unless you don’t like free money. (Read more on 401(k) contributions.)
- Put leftover cash toward college. A dedicated bank savings account is good; a 529 savings plan is better (more on that below).
- Increase retirement savings with income bumps. As you receive raises, funnel the extra cash toward your employer retirement plan. Experts recommend saving at least 10% to 15% of your income for retirement.
» Retirement savings on track? Check our retirement calculator
Step 2: Open a 529 college savings plan
529 savings plans are investment accounts that provide tax-free growth and withdrawals for qualified education expenses.
Parents should start a 529 fund as soon as a child is born and add monthly deposits to take advantage of years of compound interest, says Matt Ahrens, a financial advisor at Integrity Advisory in Overland Park, Kansas.
Money invested in a 529 plan can grow with the market. Bank savings accounts, on the other hand, often earn less than 1% interest each year. Another potential advantage: Some states give tax breaks for 529 plan contributions.
» Ready to start? Find the best 529 plan for you
To build 529 savings:
- Ask family members and friends to contribute. Suggest that instead of buying your child presents, they give money toward your child’s 529 plan. Or “if your child is getting a lot of gifts from family members, then maybe the parents contribute extra to the 529 instead of more gifts,” Ahrens says.
- Dedicate spare cash to college savings. As your children outgrow clothes or toys, put these items in garage sales or sell them online and add the proceeds to their college funds.
- Earmark half of allowances for college. This is especially helpful as children get older, to create an awareness of their responsibility for their education. (More on that below.)
You can start small. For example, single mom Takiia Anderson started saving for college by putting away $135 in change when her daughter was 3 years old. By the time her daughter was 11, Anderson was saving $12,000 a year.
A good alternative to a 529 plan for some investors may be a Roth IRA, which allows early withdrawal for qualified expenses like tuition, but has an annual contribution limit of $5,500 ($6,500 if you are 50 or older).
» Read more: 529 plan vs. Roth IRA
Step 3: Plan a college-savings strategy with your kids
When your children get closer to high school, include them in discussions about savings and set expectations about how much you can afford to contribute.
“Factors to consider include: How much time is left until the college funds will be needed? Is community college for the first couple of years of college possible? Are in-state public school options available?” says John Madison, certified public accountant and financial coach at 60 Minute Finance in Ashland, Virginia. “By answering these questions, parents can narrow down the expected college costs and thus how much they’ll need to save monthly.”
As you and your children plan to pay for college:
- Apply for financial aid. Prepare the Free Application for Federal Student Aid, or FAFSA. Deadlines to qualify for aid may vary by state or college — so the earlier you apply, the better.
- Fund only a portion of your kid’s education. Plan on paying only 75%, 50% or even 25% of your children’s total tuition cost, depending on your financial situation. “There is nothing wrong with your kids having some skin in the game,” Ahrens says.
- Suggest community college first. Attending community college for a couple of years is a low-cost way to build savings (and grade point average) before your child transfers to a public or private university.
- Put a GPA requirement on your contributions. Agree to a sliding scale of funds based on your kid’s academic performance and your budget.
- Target academic and athletic scholarships. Your child’s college might offer them, as well as local community groups, companies and others.
» Read more: Having ‘the talk’ about college costs with your teen