You are undoubtedly familiar with the airplane flight attendant’s warning about putting on your own oxygen mask in the event of a sudden drop in cabin pressure before helping others. That’s because you need to be breathing and conscious to assist others in an emergency; essentially, “take care of yourself first.”
One key component of your financial plan is similar, even though the reasons are very different.
When facing the competing challenges of saving for your retirement versus saving for the kids’ college education, experts say you should prioritize your needs.
I Don’t Want to be Selfish
It’s not a matter of being selfish. It’s financially sound advice in most cases. That’s because there are several reasonable options to pay for their education. However, the options to build your retirement nest-egg are very limited, especially as you get closer to the retirement goal line.
It may seem logical to save for college expenses before prioritizing retirement, because college usually comes 10-to-20 years before retirement does. Then, the thinking goes, you can turn your attention to yourself. But it doesn’t work that way.
Basically, the kids (or grandkids) have decades in front of them to work and pay off the cost of an education, and you can help when the time comes, if you are positioned to do so. There’s no denying that college can be extremely costly, but your window to pay for your golden years is starting to shut.
Options for Funding College Expenses
None of us want to burden our kids with piles of debt, but college loan programs, scholarships, grants, debt relief and forgiveness programs can be structured in a manageable way. However, if you spend money on their education, you may face a cash-crunch later on. According to AARP, you could end up funding your retirement with high-interest rate credit card or other costly debt, without the income, options, or time to dig your way out.
The most recent Federal Reserve Survey of Consumer Finances, from 2022, shows that seniors aged 55-to-74 have the highest average credit card balances, more than $7,500.
Instead of helping the kids, you could end up being a financial burden to them. You don’t want your grown kids living in your basement now, and you don’t want to end up living in their spare bedroom years from now.
Do Both, If You Can
It’s not always an all-or-nothing choice. Setting aside money in an education fund is a great idea if you are on track to meet your retirement goals. A WalletHub survey from 2023 found that nearly three out of four say their kid’s education is worth going into debt for. That’s a great goal, but the financial consequences can be long-lasting and far-reaching.
As one analyst put it, don’t commit “financial suicide.” As we’ve noted before, many retirement models say you need to save six to 10 times your peak salary by the time you retire.
529 Plans and Other Options
It’s a tough balancing act, but once you feel that your retirement plan is on track you can begin to put money into the college fund. A good option for most people is to open a 529 college savings plan. You may get a tax break on your state taxes when you deposit money (but not federal); the funds grow tax-free; and there’s no penalty to withdraw the money if it’s used for qualified higher education purposes, which includes everything from tuition and room-and-board to books and computers.
There are state-by-state contribution limits on 529 plans. In New Jersey, the limit is $305,000 per beneficiary. (You can participate in any state plan; you don’t have to live in that state.)
Of course, you can also use a taxable brokerage account. You don’t get the tax-free growth, but you have more flexibility about how and when you use the money.
One other benefit of the 529 plan is that the money does not count as income on financial aid applications, while funds from a brokerage account or a Roth IRA do.
The bottom line is that it’s great if you can pay for college, but only if you can do so without going into debt. Carrying that debt into retirement can lead to financial hardship for the rest of your life. Remember, you can’t borrow to fund your retirement.
