The decision between saving for retirement or paying for college is one that requires strategic thinking and planning without letting distractions and procrastination affect the final call. But it’s a point of contention because most people believe they need to choose betweenthe two.
At other times, retirement is placed on the back burner and not given a lot of thought because the prospect of not being able to pay for the education of one’s children becomes all too real. Research has shown that 22 percent of Americans have less than $5,000 in retirement savings, with 15 percent having no retirement savings whatsoever.
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Logic and Reasoning
Saving for a college fund and retirement savings can be difficult, especially when both require substantial investment over time. Additionally, both prospects incite emotional reactions considering no parent wants their children to drown in student loan debt or graduate with an overwhelming liability on their shoulders.
There are 45 million U.S. borrowers who collectively owe about $1.56 trillion in student loan debt. However, it’s imperative to put sentiments aside while making this financial decision. Sacrificing retirement savings at the cost of college funds will not help parents or children because once the latter are grown and settled, it may become financially overwhelming to look after their parents.
While a college degree is a strong investment towards children’s future, the cost of college has increased by more than 25 percent in the last ten years, and student loan debt has become a countrywide concern since it makes up the largest share of U.S. non-housing debt. The fact is the price of attending college has been increasing since the 1980s, that too over eight times faster than wages did.
According to Forbes, the average fees for all four-year universities come to $26,160 annually, which translates to the total cost of attendance over four years being a whopping $104,480. Between 1989 and 2016, the cost of a four-year degree has doubled, even after inflation. So, it’s natural to worry about how college fees will be paid.
But while looking at the cost of college, consider what majors the child will take, whether there’s an option of cutting costs by starting in a community college or via a scholarship they’re eligible for. Most of these factors will also depend on the children’s ages, but it’s important to have them understand how retirement planning will help in the long run toward your children’s future as well as your own.
Consider Retirement First
Choosing to give weight to retirement first doesn’t mean investing in college funds is off the table, rather the exact opposite. Investing 15% of your gross income on a monthly basis into a tax-favored retirement account like a 401(k) that’ll lower your tax liability or a Roth IRA that’ll add to your retirement savings is necessary for multiple reasons.
For one thing, you can’t avail a grant program or scholarship to help you get by, and working forever is simply not an option. Research shows that 58% of families in the U.S. used scholarships, while 45% used grants.
Since paying for tuition and college can be aided with loans and fund plans, which is an ongoing exercise, you have room and time to manage expenses for your children’s education. The same can’t be said for retirement plans, which is a need rather than a luxury, and you don’t get a do-over for this prospect.
With a growing income, you’ll have more room to put extra into your children’s college savings, and you can save yourself from drowning in debt. Statistics have shown that parents became financially at risk after bearing their child’s college debt, owing nearly $21,000 on average.
Retirement vs. Mortgage
Being relieved of debt is one of the most liberating experiences as an adult. The average mortgage loan amount was $184,700 in 2019. But a common route that people take is to pay off their mortgage before investing 15% of their monthly income into their retirement savings.
Putting extra money toward paying off the house will eliminate the possibility of a rate of return if you don’t invest in your retirement savings beforehand. You’d be surprised what a combination of time and compound interest can do.
College Savings Accounts
If your residence state allows it, you can even use a 529 plan that helps you save and pay for college and reap U.S. tax benefits, or a Coverdell Education Savings Account (ESA) to pay for education expenses.
Purposeful spending can also maximize your savings since that’ll help you cut out unnecessary expenses like streaming subscriptions or frequent takeaways that can otherwise contribute to your retirement savings or college funds.
You can also automate your transfers to your retirement and 529 accounts as well as small amounts like gifts, your child’s birthday, or holiday money into their college saving accounts in the U.S.
Cash-back Credit Cards
Financial experts recommend responsibly using cash-back credit cards that directly transmit 1%–5% of your purchases into a 529 savings plan.
This will simply ensure you save some money even while shopping and is suitable, especially if you can afford to pay off your credit card debt each month and add to your child’s college savings.
A second job could help you save more for college expenses in the U.S. and transmit more to your child’s 529 account on a monthly basis. But if it’s impossible with a tight schedule, you could even conduct a yard sale annually to contribute to your children’s future.
This way, you can also help those in need with things that are simply taking up space and not posing any value to your home.
Dividing Finances for Every Need
Since you’re responsible for paying off the house, saving for your children’s future, securing your retirement period, among surviving overwhelming costs, it’s natural to feel the need to cover all your bases. Seventy-four percent of parents believed saving for college was far more important for them.
But putting your monthly income towards each of these needs won’t help any of these routes, which you must inevitably accomplish. In fact, this won’t contribute to your children’s 529 account or your 401(k); rather, it will stretch your finances too thin.
It’s natural to feel overwhelmed when you’re deciding which option to put first, but it’s important to consider which option will give you the highest level of return tying together all your family members. With a greater return, you will have more room to invest in all your needs, whether it’s paying for your children’s higher education, your house, or a secure retirement period.
About the Author
The author is a financial specialist on student loans and parent loans at ELFI (Education Loan Finance) — a national private lending company. He has helped countless students and parents navigate effectively between student loans and retirement fundsand secure the future of families struggling to make a unanimous decision.