As a parent, saving for retirement and your children’s education at the same time can be overwhelming. Figuring out what to prioritize is a juggling act. Of course, you want to retire comfortably, but parents often put their children’s well-being before their own. They want to see them go off to college and prosper without all the stress that debt can bring. Having a financial plan will help parents strike the right balance between these two goals. A financial planner can help assess your financial needs, look at the tools available, and set realistic savings goals moving forward.
First step: Know what your financial needs are.
- Time Horizon – How many years until you retire? How many years until your child starts college?
- Resources – Are you contributing to a retirement account? Does your company offer an employer-sponsored retirement plan or pension plan that you are/could start participating in?
- How much do you expect to receive in Social Security benefits? (You can get an estimate of these benefits on ssa.gov).
- Do you or your spouse plan to work part-time in retirement?
- Cost –What is the expected cost of their education? What amount of that cost do you want to pay? Do you expect your child to qualify for financial aid or is there any possibility of a scholarship?
Devise a savings plan that prioritizes retirement.
After assessing your resources, you may discover that you only have the funds to focus on one of these goals. If this is the case, focusing on retirement savings is really the only choice. There is no plan B in this scenario. You bear the sole responsibility of funding expected living expenses during retirement. With college, there are options: loans, financial aid and scholarships, work study programs, and others.
Hopefully, if you plan ahead and start making smart choices early, both goals can be met. When devising a plan, determine how your money can be used in the most efficient way. This includes capturing as much “free money” and tax deductions as possible. For example, one of the best resources you can take advantage of are matching dollars you receive from an employer in a 401(k) plan or similar retirement account. In addition to this benefit, “traditional” salary deferrals to a 401(k) plan reduces your taxable income. (Employer plans can also allow for Roth-type salary deferrals, and that may make sense for some folks, especially those currently in a lower tax bracket.) You can also contribute to a Traditional IRA or Roth IRA to fund your retirement. Constructing a plan with a Financial Planner will give you helpful information as to how to tailor your accounts to meet your specific needs. For example, did you know that your balance in a qualified retirement account is excluded on the federal government’s financial aid application, the FAFSA, and will not jeopardize your child’s chances of receiving financial aid?
Next focus: Education
Once your retirement accounts are set up and you have a cushion you are comfortable with, you’re ready to construct a plan for your child’s education. There are several options here, but the hope is you will be able to allocate your funds in a way that contributes to your retirement and education at the same time.
One option is a 529 account. Contributions to a 529 plan grow tax deferred. Money you withdraw is tax-free at the federal level (and generally at the state level, too) when used to pay for qualified higher education expenses. Individuals can contribute up to $15,000 per beneficiary without incurring gift taxes, and you can pre-fund several years in advance.** Many plans also allow regular contributions of as little as $25 a month. This account is useful to have if other family members are wanting to contribute towards the child’s education
Another tax-advantaged option to put money aside for your child’s education in a Roth IRA. However, there is a contribution limit: $6,000 per year (or $7,000 if you’re age 50 or older). And you must meet income limits in order to contribute. Once you reach age 59½, however, the money can generally be withdrawn tax and penalty-free. A benefit to this account is that the money can be used to fund education expenses or your retirement needs. Some find it best to fund both types of accounts, using the 529 first and then tapping into the Roth IRA for any additional expenses. There are additional issues to consider if you are thinking about using a Roth IRA to fund higher education; talk this through with an experienced financial planner before committing to this path.
Additional tips for meeting both goals
Even with a plan in place, there may be shortfalls. Here are some additional tips to consider when juggling these two goals:
- Student earnings: Encouraging your child to fund part of their education can have several benefits. They will start gaining experience in the workforce, building up their resume, and gaining potential job references. They will learn about budgeting and saving along the way. And they may even take their education more seriously since they are spending their own hard-earned money! Start this conversation with your child early on.
- Student loans, grants or scholarships.
- Choose a school that lines up with your budget. . . and that may not be your top choice. Experts suggest that the total debt a student takes on should be no more than the average starting salary in their field of study. Or, the total amount parents borrow for all of their children combined should be no more than they can afford to repay in ten years.
- Defer retirement so you can continue earning, while allowing your retirement accounts to continue growing.
- Find part-time work during retirement. This may allow you to find a new hobby or explore a field you are interested in without the pressures of earning a high salary.
- Adjust your budget and standard of living now or in retirement. Consider downsizing when your children go to college.
- Invest more aggressively if your time horizon is long.
As you can see, there are lots of options in meeting these two goals. Putting a plan into place can help you strike the right balance. With the cost of a college education continuing to rise, it is important to be proactive and flexible with your plan.
~ Madison Moore
Broadridge Investor Communication Solutions, “Saving for Retirement and Child’s Education at the Same Time”, 2021.
Broadridge Investor Communication Solutions, “How Grandparents Can Help Grandchildren with College Costs”, 2021.
Any opinions are those of Madison Moore and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
**Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the
contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters.