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Should I Save for Retirement or College?

May 9, 2014
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By Peter Ashby

Learn more about Peter on NerdWallet’s Ask an Advisor

Being a parent has been one of the most rewarding experiences of my life. It has brought me so much joy to watch my baby grow up. As with many of you, I’m now faced with the reality of saving for my retirement at the same time I’m saving for my child’s college education. But every time I see how much college will cost, I feel a tinge of nausea as I wonder how it can cost as much as a house in 16 years. As a Certified Financial Planner, I’ve seen what works and here are five tips to help you succeed.

Put yourself first. This is the one time you are allowed to think this way. The reason is simple: Saving money is the primary, and sometimes only, way you can fund your retirement. With fewer of us receiving pensions and with Social Security’s future in doubt, this may end up being our only significant source of income in retirement. There are grants, loans, scholarships and other ways of funding college, but there are no retirement loans. Your child will also have their entire working career to pay off any debt they accumulate in college
Start early. The earlier you start saving for college, the smaller the drain will be on your budget, and this leaves more money for your retirement savings. For example, assuming a 7% return, if you start saving $250 a month when your child is born, you can expect to have about $107,680 by the time your child is 18. If you wait until your child is 5 years old to start saving, you can expect to have about $63,332. Not only do you have $15,000 less because of delayed savings, but you also have missed out on nearly $20,000 because of compound interest and returns.

Set realistic goals. Even though we would like to pay for all of our child’s education, it is important to be realistic about your finances. If you set a goal to pay for 25-50% of your child’s education, you are less likely to become discouraged and stop saving altogether.
Start small. I advise clients who have limited resources to set a goal to cover tuition, books and fees. This total tends to be smaller and more manageable than the numbers for fully funded college plans. If your situation changes, you can always increase the amount you are saving.

Minimize taxes. Many states offer tax deductions to residents who open a 529 Plan to save college. Go to your state’s 529 Plan website for more information.

Good luck!