Saving for Retirement vs. College: Which Is the Best Choice?

Saving for Retirement vs. College: Which Is the Best Choice?

College costs are rising, and many parents are worried about their children taking on student loan debt. And, many are likely weighing saving for retirement vs. college. 

A 2021 report by Student Loan Hero reports, “Americans owe over $1.71 trillion in student loan debt, spread out among about 44.7 million borrowers.”¹ 

Of 44.7 million borrowers, it’s not surprising that “36% of parents saving for a child’s education still carry some student debt.”² 

Student Loan Hero explains, “Having experienced the challenges of debt payoff firsthand, nearly 4 in 10 parents want their child to avoid taking on student debt at all costs.”³ 

Hence the reason many parents weigh saving for retirement vs. college.

We don’t want our kids to be saddled with student loans, but we also want to live comfortably in our retirement years.

The problem is that one-third of parents believe saving for college is their most important financial task – not retirement.

Studies suggest, “32% of parents said saving for college was their top priority, compared to 25% who selected paying off debt, and 18% who named saving for retirement.”⁴ 

These percentages make it clear that many parents are putting their retirement plans on the back burner and focusing more intently on saving for college.

Plus, studies have found “68% of parents would consider withdrawing from their retirement savings to help pay for their child’s education.”⁵ 

Are these parents making the right choice? 

Probably not.

While these parents have good intentions, they don’t realize that they may be doing more harm than good.

It may sound uncaring to say that parents need to prioritize saving for retirement vs. college, but there are many (many) reasons why it is wiser for parents to focus on saving for retirement.

Save Yourself First

saving for retirement vs. college

As a parent, it’s easy to put your children’s needs above your own.

But this comes at a cost.

Whenever you give and give and give, you wind up depleted.

Have you read the classic children’s book The Giving Tree by Shel Silverstein?

In this book, a child takes from a tree year after year. As the child grows and ages, the tree has less and less to give. 

The child takes apples and sells them to make money for himself, uses the tree’s branches to build himself a house, and eventually chops the tree’s trunk so he can build himself a boat.

By the end of the book, all that is left of the tree is a stump.

“Similarly, if parents aren’t careful, they’ll give until they have nothing left to give.” 

This is especially clear when it comes to saving for retirement vs. college.

If parents prioritize saving for their child’s college over their retirement, they may find themselves without enough to make ends meet during what should be their golden years.

Multiple Ways to Fund College

saving for retirement vs. college

According to Sallie Mae’s How America Pays for College 2021, parents covered 53% of college costs using income or savings, 25% of college costs came from scholarships and grants, 20% was borrowed, and relatives and friends covered 2%.⁶ 

While parents are currently covering about 50% of college costs, these numbers also show other ways kids can pay for college, including scholarships, grants, financial aid, work-study, and part-time jobs.

Moreover, there are savings options for parents that are financially wiser than dipping into retirement savings, such as a 529 plan. 

A 529 plan is a tax-advantaged investment account that is designated for educational purposes. 

But, Student Loan Hero found, “Just under 27% of parents saving for their child’s college education were using a 529 plan. Instead, the vast majority (73%) had turned to regular savings accounts.”⁷

Limited Retirement Options

saving for retirement vs. college

You can’t take a loan out to fund your retirement, and there aren’t any retirement scholarships you can apply for.

Keep this in mind when you are justifying saving for retirement vs. college.

Even if your child does have to take out a student loan, these loans have lower interest rates and a variety of repayment plans.

Retirement May Cost More Than You Think

saving for retirement vs. college

Another reason why you should be saving for retirement vs. college is because retirement costs are on the rise, and it may cost more than you think.

Experts suggest you plan to have 80% of your pre-retirement income to cover the cost of living in retirement. 

Then, you need to factor in that healthcare costs are skyrocketing as much as 88%.⁸ 

Consider the following data.

  • According to HealthView Insights: 2021 Retirement Healthcare Costs Data Report, an average, healthy 65-year-old couple retiring in 2021 will spend $662,156 on their healthcare costs throughout retirement.⁹ 
  • The HealthView Insights 2021 report states, “Retirees in the highest Medicare IRMAA threshold will pay an additional $430 each month for Parts B and D premiums based on their modified adjusted gross income.”¹⁰ 
  • In addition, in the 2020s, “Medicare Part B premiums will inflate by an average of 5.9% per year, Part D by 4.9%, and dental premiums and out-of-pocket spending by 4.5%.”¹¹ 
  • The U.S. Department of Health and Human Services estimates, “Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years.”¹² Unfortunately, long-term care isn’t cheap.

Don’t Place the Burden on Your Kids

saving for retirement vs. college

If you don’t have enough money to cover the cost of living in retirement, who will you turn to for help?

What if you need medical care or long-term care? If you haven’t planned for the possibility that these big-budget items may occur in your golden years, the bill may be passed to your kids.

When you choose to pay for their college today instead of your future, it relieves them of the burden of student loan debt. 

BUT, it also opens up the door to the possibility of burdening your children with your bills tomorrow.

Offer Some Support But Not All

saving for retirement vs. college

Student Loan Hero found, “A majority of parents (65%) aim to have more than $30,000 put away” for college.¹³ 

Here’s the thing – you don’t have to pay for your child’s entire college career.

You can support your child in a way that works best for your financial future. 

For example, you may choose to cover room and board, and ask your child to cover tuition.

Or, you may offer to pay tuition at a less expensive in-state public college over a private college.

You Can Save for Both

saving for retirement vs. college

What if it didn’t have to be saving for retirement VS college? 

Good news! It doesn’t have to be VERSUS. 

You can save for retirement AND college!

The key is to contribute more to your retirement savings than your child’s college fund.

Prioritize your retirement savings, and then contribute to a college savings plan, such as a 529 plan.

Not only will the money in a 529 plan grow tax-free, but it can also be withdrawn tax-free when used for educational purchases.

In addition, family and friends can contribute to the 529 plan.

Release the Guilt

saving for retirement vs. college

We’d be remiss not to mention the guilt parents carry over student debt.

According to Student Loan Hero, “43% [of parents] feel bad that they haven’t been able to save more for their child’s education. Moms are feeling slightly more guilty than dads about their lack of college savings (46% versus 40%).”¹⁴ 

After reading through the various reasons why it is wise to prioritize saving for retirement vs. college, we hope you can release some of the guilt you may be feeling.

Remember, if you don’t take care of yourself, your kids may have to. 

Imagine the guilt you’d feel when your adult children can’t make ends meet, or their quality of life is less than the best because they are forced to take care of you.

There is no shame in prioritizing saving for retirement vs. college. You can’t help your kids if you can’t help yourself.

We regularly post videos with financial information and updates. Check us out on YouTube.

Watch Videos

Sources:

 

  1. https://studentloanhero.com/student-loan-debt-statistics/
  2. https://studentloanhero.com/student-loan-debt-statistics/
  3. https://studentloanhero.com/featured/survey-parents-saving-for-college-harder-than-anticipated/
  4. https://studentloanhero.com/featured/parents-retirement-savings-pay-for-college/
  5. https://studentloanhero.com/featured/parents-retirement-savings-pay-for-college/
  6. https://www.salliemae.com/about/leading-research/how-america-pays-for-college/
  7. https://studentloanhero.com/featured/parents-retirement-savings-pay-for-college/
  8. https://www.businesswire.com/news/home/20210507005403/en/Fidelity%E2%80%99s-20th-Annual-Retiree-Health-Care-Cost-Estimate-Hits-New-High-A-Couple-Retiring-Today-Will-Need-300000-to-Cover-Medical-Expenses-an-88-Increase-Since-2002
  9. https://hvsfinancial.com/wp-content/uploads/2020/12/2021-Retirement-HC-Costs-Report-op-final.pdf
  10. https://hvsfinancial.com/wp-content/uploads/2020/12/2021-Retirement-HC-Costs-Report-op-final.pdf
  11. https://hvsfinancial.com/wp-content/uploads/2020/12/2021-Retirement-HC-Costs-Report-op-final.pdf
  12. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
  13. https://studentloanhero.com/featured/parents-retirement-savings-pay-for-college/
  14. https://studentloanhero.com/featured/parents-retirement-savings-pay-for-college/

 

0 0 votes
Article Rating

401(k) Maneuver™ is offered by Royal Fund Management, LLC, which is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Royal Fund Management, LLC, is not affiliated with or endorsed by NASDAQ.

All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio. There are no assurances that a client’s portfolio will match or outperform any particular benchmark. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. Projections are based on assumptions that may not come to pass.

Images and photographs are included for the sole purpose of visually enhancing the website. None of them are photographs of current or former clients. They should not be construed as an endorsement or testimonial from any of the persons in the photograph.

All third-party trademarks, including logos and icons, referenced in this website and our content, are the property of their respective owners. Unless otherwise indicated, the use of third-party trademarks herein does not imply or indicate any relationship, sponsorship, or endorsement between 401(k) Maneuver and the owners of those trademarks. Any reference inside this website or content to third-party trademarks is to identify the corresponding third-party goods and/or services.

0
Would love your thoughts, please comment.x
()
x

Select a Date from the Calendar below

UPDATE YOUR 401(k) ACCOUNT

Select a Date from the Calendar below

UPDATE YOUR 401(k) ACCOUNT

Have questions? Need help?

Book Your Complimentary

15-Minute 401(k) Strategy Session


logo

Looking for tips that might maximize your retirement
savings and help you be a better steward of your money?

Subscribe to our 401(k) Blog

The go-to-source for your retirement investing and saving tips

5 401(k) Accounts Mistakes that May Negatively Affect Retirement Income

Download Your Copy Today

*Your privacy is important to us. We do not rent, sell or share your information.


Why Account Balancing & Allocation May Affect 401(k) Performance

Download Your Copy Today


*Your privacy is important to us. We do not rent, sell or share your information.


The 5 Top Costly 401(k) Rollover Pitfalls

Download Your Copy Today

*Your privacy is important to us. We do not rent, sell or share your information.

Make the Best Decision for Retirement:
Understanding the Different Types of
Financial Advisor Licenses

Download Your Copy Today

*Your privacy is important to us. We do not rent, sell or share your information.


How Popular Advice On Target Date Funds May Be
Working To Undermine Your 401(k) Retirement Savings

Download Your Copy Today

*Your privacy is important to us. We do not rent, sell or share your information.


3 Things That May Supercharge Your Future
401K Performance...Even In a Down Economy

Download Your Copy Today

*Your privacy is important to us. We do not rent, sell or share your information.