Saving for Retirement and a Child’s Education at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. But take heart–you may be able to reach both goals if you make some smart choices now.

Know What Your Financial Needs Are
The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started:

For retirement:

• How many years until you retire?
• Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
• How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.)
• What standard of living do you hope to have in retirement? Do you want to travel extensively and live the good life, or will you be happy to stay in one place and live more simply?
• Do you or your spouse expect to work part-time in retirement?

For college:

• How many years until your child starts college?
• Will your child attend a public or private college? What’s the expected cost?
• Do you have more than one child whom you’ll be saving for?
• Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
• Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure Out How Much You Can Afford to Put Aside Each Month
Once you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

If Possible, Save for Your Retirement and Your Child’s College at the Same Time
Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)

If you’re unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

If You Can’t Save for Both, then Your Retirement Takes Priority
As selfish as this may sound…If the numbers say that you can’t afford to educate your child and also retire with the lifestyle you expected, then you should ditch the education planning and focus on your retirement. Wow, that’s harsh, you say. Well…not exactly. And here’s why. The bottom line, is somebody is going to have to make some sacrifices.

Ask yourself this question:

If I do not pay for my child’s education, then how will he/she get the money to pay for tuition, books, room, and board?

The answers, of course, are limitless: loans, grants, scholarships, work study, part-time job, resident’s assistant, etc. There are billions of dollars floating around out there earmarked specifically for our nation’s college-bound youth.

Now, ask yourself another question:

If I do not pay for my own retirement expenses, then how will I get the money to pay for housing, food, health care, leisure activities, travel, etc.?

The answer, of course, is nobody. Sure, you may qualify for a small Social Security payment once a month (and it will be even smaller if you retire before your full benefits age) but even Social Security doesn’t kick in until you’re 62 years old. And you may also think Medicare/Medicaid are on your side for health care expenses. Think again. You can’t tap those resources until you reach full retirement age. (Note: If you were born after 1960, then your retirement age is 67 years old.)

Though college is certainly an important goal, you must focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the retirement burden is now on your back. And if you wait until your child is in college to start saving for a looming retirement, you’ll miss out on years (possibly decades) of tax-deferred growth and compounding of your money. Remember, your child can always attend college by obtaining outside money, but there’s no such thing as a retirement loan!

If you are still not convinced, and utterly unsatisfied with our cold water to the face, then here are some other moves you may want to consider:

• Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
• Work part-time during retirement.
• Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
• Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
• Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss).
• Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
• Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty–a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
• Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for
  four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Using a Retirement Account to Save for a Child’s College Education
Although it may be appropriate in a few select situations, we typically discourage paying for college with funds from a retirement account. We especially discourage it if using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to.

With the IRA, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll pay a 10 percent penalty on any withdrawals made before you reach age 59½, even if the money is used for college expenses. There will be income tax consequences, as well.