Saving for long-term goals is an important component of financial fitness. How can Americans balance their retirement needs with the college costs of their children?
Most investors know that saving is an important component of financial fitness, but they struggle to save for their own retirement while also contributing to their children’s college funds.
Fifty-six percent of investors in their 40s are contributing to the education of a child, and the same is true for more than 40 percent of investors in their 50s, according to a Millionaire Corner survey conducted in April. These households typically pay 70 percent of college expenses. (Our research also finds that a significant share of grandparents are helping with college costs.)
The costs appear to be a strain. One-third of investors in their 40s, and more than 40 percent of investors in their 50s say they’ve had to cut back on other areas of their budget to pay the educational expenses of a child. More than one-third (38 percent) of investors in their 40s and 29 percent of investors in their 50s say they have “major financial concerns” about these college costs. (Families express ranging values about who should pay for college costs, according to our research.)
Top among these concerns is retirement security. Investors rank running out of money in retirement as their biggest financial fear, according to a Millionaire Corner survey conducted in May, which shows that the concern increases with age. (Forty percent of investors in their 40s; 44 percent of investors in their 50s; and 46 percent of investors in their 60s identify insufficient retirement savings as their biggest financial worry.)
How can investors address the competing interests of college and retirement? Financial fitness experts say it can be done, but it won’t necessarily be easy.
“Ideally, college and retirement should be part of the same financial plan, but you should still expect some trade-offs as you try to balance these goals,” states the website Saving for College. “You may have to work longer than you would like or your children may have to borrow more money than they would like. The important thing is that it is possible to meet these two major financial responsibilities.”
Financial planning experts urge investors to begin saving for retirement with their first paycheck, and for college with the birth of a child. Even small monthly contributions can add up to significant savings over time. Saving for College recommends taking full advantage of tax-advantaged retirement accounts such as an IRA or 401(k) before funding college savings accounts.
“Paying for college is not your only financial concern,” says Saving for College. “Providing for your own retirement can be even more important since no one offers grants, scholarships, or federally guaranteed loans to support you when you leave the workforce.”
Assets held in these retirement accounts will not be counted in a child’s federal financial aid application, according to Saving for College, nor will life insurance or annuities. In addition, federal tax law allows investors to tap an IRA for qualified costs without incurring the 10 percent penalty imposed on early withdrawals, though the withdrawals may be subject to income tax. Investors may also be able to borrow against their 401(k).
“Just remember that using any of your retirement money to pay for education costs means it won’t be there for your own retirement expenses,” warns Saving for College. “You probably don’t want to support your children through college only to risk becoming a burden to them in your later years.”