In the battle of savings goals, no faceoff is more fraught with emotion for parents than the one between retirement and college.
Prioritizing retirement can feel like sacrificing your child’s future, especially when you feel certain — as many of us do — that he or she is bound for the Ivy League.
But any financial advisor will tell you that, emotions aside, the financially prudent decision is to put yourself first. That’s a directive that a parent may feel distinctly uncomfortable following, but on paper, it’s the obvious choice: There is financial aid for college. Some of it, such as grants and scholarships, doesn’t even need to be repaid.
But no one is going to offer to help finance your retirement. Putting college savings first could mean living a retirement of canned food and part-time employment.
“Much of it comes down to how much of the burden you shoulder,” says Richard Russo, a financial advisor with Clarity Financial in Houston. “You shoulder 100% of the burden for retirement; you don’t have to shoulder 100% of the burden for college.”
You don’t have to, but many parents still want to, and to that end, there are ways to split the difference and leave yourself room to maneuver.
Grab 401(k) matching dollars
An employer match is not something you should ever walk away from, and that means contributing at least enough to your 401(k) to capture those dollars. The most common 401(k) match these days is dollar for dollar up to the first 6% contributed, which is a significant amount of money.
You shouldn’t even consider other goals until you’ve hit that match for the year.
This is your safety net for retirement; you can’t use it to finance your child’s education unless you are prepared to pay income taxes on what you withdraw plus a 10% penalty.
Start saving as early as you can
The best way to save for any goal is to put money away early and often. The younger your child is when you begin to save, the less you have to save overall and the more you can put toward retirement.
Thank compound interest for that: If your overall goal is pulling together $100,000 in a college fund, starting to save with 18 years to spare means investment earnings will make up nearly half of that final amount, and you’ll need to save less than $250 a month. If you have a total of $1,000 that you can afford to put away each month, you can put just a quarter of it toward college and still be on a good path. (For the record, if you consistently put the other $750 in a retirement account each month, you’d have $1.3 million after 35 years, which is no small pot.)
If you only begin saving as your child approaches junior high, on the other hand, hitting that $100,000 goal will require the whole $1,000 a month, because you’ll have much less time for it to earn interest and grow.
Consider a Roth IRA for flexibility
A 529 plan is generally considered the best college savings vehicle. It is tax-advantaged — both federally and in some states — and has high contribution limits. But it’s also fairly inflexible in that the money must be used for qualified education expenses. If your child decides not to attend college, you can change the beneficiary; if that’s not an option and you need to instead withdraw the money, you’ll pay a 10% penalty and income taxes.
That’s why the idea of using a Roth IRA holds water, particularly when your children are young and you may be just launching your career or stretching a single income. The Roth allows distributions of contributions at any time, with no taxes or penalty.
“I tell parents, you don’t have to put everything in a 529 right now. Start with a Roth and that gives you time to assess your financial situation and the potential of your career,” Russo says.
As your children grow, you may adjust your expectations and decide a couple years of community college to start is a good way to keep costs under control. Or your income may increase substantially over time, loosening the tension between these two savings goals. Or you may decide that you’re positioned well for retirement and want to ramp up college savings efforts by opening that 529.
“A Roth IRA is a way to balance. You really do want a Roth IRA to be for retirement, but psychologically, you know that if you need to tap it for education, you can,” Russo says.
The bottom line
One thing many parents fail to realize in the moment is that saving for college to the detriment of your own retirement can easily backfire: If you can’t save enough money to support yourself, you may end up relying on your child during retirement. That’s a stretch for even an Ivy-League salary, and it’s not a burden you want your child to bear.
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