Finding a Balance
How to Save for Retirement and Send the Kids to College
As a parent, you may have lofty goals to save early and often for your child’s college education while also saving for your retirement. But as life unfolds your plans may take a detour, especially in the aftermath of stock market volatility and a tough economy. Perhaps your retirement accounts have taken a hit and you’re looking for ways to build them up. At the same time, kids may need help paying for rising college costs.
Many parents wonder:
- Should I focus on saving for retirement or college?
- Should I save for both goals equally?
- Should I save more for the goal that comes first chronologically?
The answers depend on your unique situation, but in general, it makes sense to put your retirement savings first. Students have numerous opportunities to manage college costs, from taking out low-interest student loans to choosing a less-expensive school or working through college. They have decades to pay off the debt, whereas your retirement horizon may be approaching quickly.
Before the College Years
Maximize retirement savings first. If your employer matches your contributions up to a certain amount, make sure to contribute enough to receive this benefit. Try to increase your contributions each year, or whenever you get a raise. Keep in mind that retirement assets are sheltered from the aid formulas used to calculate student aid, so it can be beneficial to build up funds in your retirement accounts vs. other taxable accounts.
Save for college next. Consider directing additional savings to a 529 college savings plan. Contributions compound on a tax-deferred basis and are tax-exempt when the money is used for qualified higher education expenses. Family members can contribute as well, so you may encourage grandparents and other relatives to contribute to your child’s 529 plan instead of giving cash gifts.
While the Kids Are in College
Leave retirement assets alone. You may decide to reduce retirement contributions in order to help with tuition payments. However, you should avoid withdrawing money from retirement accounts to pay for college. Doing so may shortchange your retirement future and reduce next year’s financial aid eligibility, since retirement distributions are considered taxable income.
Consider other sources of funding. Financial aid, student loans, scholarships and grants may help fund higher education if your child qualifies.
Refocus on retirement savings. With college bills out of the way, make it your mission to ramp up contributions to your retirement plan. If your finances are in great shape, you may have the flexibility to help your child pay off student loan debt in the future, should you choose to be so generous!
Ask a financial advisor for help setting your savings strategies for retirement and college education. Contact Jeffrey Hamm at Navigator Financial Planning Services at 228-474-3427 to review your options.
- Representative is not a tax advisor or legal expert. For information regarding specific tax situations, please contact a tax professional. For legal advice, consult an attorney.
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