Paying for College: Why Parents Should Prioritize Retirement

It’s a common mistake. Parents forgo saving for their retirement in order to put their kids through college. In fact, more than half of them reported that they would rather tap into their own retirement savings in lieu of having their children take out student loans, according to the 2015 T. Rowe Price Group, Inc. (TROW) Family Financial Trade-Offs Survey, which questioned 2,000 parents. Almost half of the survey’s respondents also said they would be willing to work longer and retire later if it meant they could cover their children’s tuition. While such parental generosity should be commended, the truth is that sidetracking retirement savings in such a way will only hurt them in the end. Parents need to secure enough money for their own retirement before or while they save for their children to go to college.

Times Have Changed

Past generations may have thought differently about paying for their children's education. One reason is that college used to be much more affordable. Additionally, in days gone by, many workers received more generous and guaranteed pension benefits via their employer, so saving for retirement was arguably safer and easier. Today, however, most workers rely on savings though their 401(k) plans and may or may not receive matching contributions from their employer. (For more, see: Is Working Longer a Viable Retirement Plan?)

Add to that the fact that people are living longer, which means that retirements can last far longer than they used to and savings assumptions made decades ago may be way off. That’s why it’s crucial for parents to start saving for retirement early and consistently. A retiree today may be looking at 20 or 30 years of living without a paycheck. That’s a lot to plan ahead for, tuition bills or not. (For more, see: How to Balance Retirement Savings with Tuition Costs.)

Don’t Increase Your Debt

According to the T. Rowe Price survey, many parents are willing to work harder and longer and even increase their own debt levels if it means their kids will be able to graduate college debt-free. In fact, some 51% of parents polled said that they would be willing to take on a second job or work an additional part-time job to cover their kids’ college expenses. Of those surveyed, some 52% also said they would be willing to take on $25,000 or more in debt in order to cover their children’s tuition. And 9% of those surveyed said they would be willing to borrow as much as necessary to help their children pay for college.

The not so distant memory of trying to pay off their own college loans has made many parents sympathetic to their children’s plight. In fact, according to the T. Rowe Price survey, 45% of parents who took out student loans to pay for their own college education believe that this burden had an adverse effect on their own ability to start saving for retirement. While that may be the case, many financial advisors are steadfast in advising their clients not to forgo saving for their own retirement or increasing their own debt while putting away money in their kids' college funds. They instead recommend saving for both simultaneously, if possible. They also recommend that people start saving money earlier and in larger amounts, as this can often alleviate the difficulty of having to come up with huge sums of money later. (For more, see: Financial Advisor Client Guide: Saving for College.)

Start a 529 Account

Setting up a 529 plan account is, indeed, a good way to get started saving for your children’s future. Contributions to these accounts often qualify for a state tax deduction, and when the money is withdrawn for the purpose of paying for college tuition, room and board, it is treated as tax-free income. That said, many parents have expressed fear that if they start putting money into a 529 savings account, it could ruin their children’s chances of qualifying for any financial aid packages from the schools of their choice. But this is rarely the case. The savings in a 529 account is, indeed, counted as a family’s assets when universities review an applicant’s financial situation, but it rarely gets factored into the financial aid formula that is calculated to determine who gets how much aid. It’s actually a family’s income that is most used to determine what is included in a financial aid package. (For more, see: Choosing the Right 529 Education Savings Plan.)

Still, parents who are investing part of their salary each month into a 529 accounts should also make sure that they are setting aside money in their own retirement fund. Saving about 15% of one’s gross income in a secure retirement fund each month is ideal, many advisors agree, and this figure includes any company match that may be given. Setting up age-based benchmarks is also advisable. Parents should aspire to having saved two times their annual salary by age 40, six times by age 50, and 10 times by the age of 60. (For more, see: Pay for a College Education with Retirement Funds.)

This is often not the case. One reason is that parents still tend to fall into the trap of saving for their children’s tuition before saving for their own retirement, mainly because college seems more immediate to them than retirement does. But once a person reaches their mid-40s or early 50s, retirement will be much closer at hand. The last thing that any parent wants to do is to be a financial burden on their children once their children become adults. So saving a lot and early for retirement is imperative.

Make Retirement Saving a Priority

The fact is that saving for their retirement should be a priority in everyone’s life — even if that means putting less aside for one’s kids to go to college, or living more frugally during one’s working years. Many financial advisors suggest their clients should attempt to live on 70% to 80% of their salary, while putting the rest into savings. And if at all possible, they should save for both their children’s tuition and their own retirement simultaneously — with saving for retirement as the priority. Maximizing one’s savings earlier during one’s working years is key to maintaining one’s financial security later on. (For more, see: Can Savings From a Roth 401(k) Be Used for College Without Penalty?)

The Bottom Line

Parents should make saving for their own retirement a priority over saving for their children’s college costs. Ideally, both should be done simultaneously. Starting early and saving more is always key. (For more, see: Don't Forget the Kids: Save for Their Education and Retirement.)