Your Child’s College Fund vs. Your Retirement

The Case for Saving for a Child's College Education

One of the most common debates I hear about from people such as myself – twenty- and thirtysomethings with young children at home – is whether it makes more sense to save adequately for retirement or save adequately for their child’s college education. Quite often, young career folks (like myself) don’t have the means to do both, so it becomes a choice. Retirement or college? Today, I’ll look at both sides of this coin that’s central in my own life.

When I envision my life thirty years from now, one key part of that vision is that my children are financially independent and not relying on me for any of their financial needs. I don’t want to be in a situation where they’re still living at home or they’re relying on regular cash infusions from me when they’re thirty.

One major avenue to this level of success is earning a college degree, which can directly lead to a much higher level of earning than life without a degree. I can help pay for this degree, but it may come at the expense of saving adequately for retirement.

What are the advantages of college savings when you’re young?

An adequately funded college savings plan, started when a child is young, can grow into a major resource for paying for significant portions of a child’s college education.

For example, let’s say you start funding a 529 plan with $250 a month when your child is born. The account returns 8% per year. On their eighteenth birthday, you’ll have $116,844 sitting there waiting for their college education. If you don’t worry about it until they’re in junior high, starting at age twelve, they’ll have only $22,888 in savings.

What about your retirement?

Many people who make this choice are also making the choice to work later in their lives than the typical “retirement” age. They have no qualms with starting their retirement savings in earnest after the kids are out of the house (say, age forty five or fifty) and planning on a retirement that starts much later (say, seventy or seventy-five).

For some people – especially people who find a great deal of personal value in their work – this makes a great deal of sense. Take myself, for example – I pretty much never want to be idle until I literally am unable to do anything at all. I’m just not wired that way.

What happens if you change your mind?

If you’re using a 529 savings plan to save for college, you can withdraw the money from the account as you wish. You will have to pay taxes on the gains plus a 10% additional penalty for misusing the account.

However, if you wish to use that money for educational purposes for someone else – say, yourself or a child’s sibling – you can change the beneficiary without a penalty as long as the new beneficiary is a close family member.

Moreover, If you find yourself needing their assistance in your old age, you will have given them a tremendously strong platform from which to help you if they so choose. The financial advantage you gave to them by ensuring that they were not burdened by student loans puts them in a much stronger financial position in adulthood, one in which they can afford to help you if you need it.

What if I reach my retirement age and don’t have adequate savings because of this choice?

You’re finally pushed out the door, but you don’t have enough money to make ends meet. What happens then?

To put it bluntly, you’ll have to find a source of additional income. It’s important to recognize, however, that reaching this point without adequate money isn’t necessarily a disaster. Most people in this situation – having chosen to help their children instead of saving for themselves – do have a myriad of options available to them when they reach old age.

This might come from finding another job. It might come from financial support from your children. It might come from goverment support. It might come from something as simple as being the daycare provider for your grandchildren. If you choose this route, there will be options available to you at this point. It does not have to be devoid of options if you’re willing to step up and take action.

Wait a second! You’re probably wondering what my actual conclusion on this topic is. Is it better for the parents of young children to save for retirement first – or save for education first? As you’ve seen, there is a case to be made for both sides of the coin, but I actually do have an answer… which you’ll read about tomorrow afternoon.

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  1. Mule Skinner says:

    It appears that the previous comments are lost.

  2. Brent says:

    I wish you touched on how a 529 plan counts towards aid. Most students get some form of assistance and they are mostly needs based. Will socking away extra money return you less for your dollar than saving it and paying off their loans after the fact?

  3. jgonzales says:

    Actually, he just posted it twice. I’m pretty sure Trent will come along here soon and remove this one.

  4. Kevin says:

    Mule & jgonzales,

    You’re both wrong. This is a Point – Counterpoint pair of posts.

  5. anna says:

    You can borrow money to pay for college, you can’t get a loan for retirement. If forced to chose between the two, this decision should always be a selfish one.

  6. Josh says:

    I was very confused by the titles too.

  7. Johanna says:

    “You can borrow money to pay for college, you can’t get a loan for retirement.”

    People say that a lot, but is it really true? What about reverse mortgages?

  8. J says:

    “I pretty much never want to be idle until I literally am unable to do anything at all. I’m just not wired that way.”

    Neither was my dad. Then he had heart bypass surgery, and had a stroke as a complication. He is doing OK now, but he retired far earlier than he ever wanted to or intended to. Luckily he was eligible for an early retirement package from his employer that included health care, otherwise quite honestly he would be in a far different place financially.

    I guess the point here is that what you want isn’t what you get out of life sometimes. It can come along and smack you in the face when you least expect it, and if you put off saving up for retirement you can very easily get caught off-guard.

    My dad’s story also illustrates the importance of carrying adequate disability/life insurance. If you are going to put off saving for your own retirement, make darn sure your disability and life insurance cover the eventuality of you not reaching your planned retirement age. Your spouse and children also have a vested interest here, too.

    Also, haven’t you already posted your answer previously?

  9. Given that you’ve covered this topic before and have talked about 529s for your children…not much suspense in waiting for the conclusion. ;)

  10. Angie says:

    The “WAIT A SECOND!” made me giggle. It’s a little hokey. That being said, I don’t see any issue in reframing a topic like this, even if regulars to the blog have seen similar posts before.

  11. Kat says:

    Reverse mortgages are fairly new so who knows whether they will be around forever. They also are only good for people who own a house and planning on not selling it throughout their retirement, since at that time you either have to pay the loan off in full or give the bank your house. You are also limited to the equitity in your home, not to the amount you actually need. I just used the HUD calculator, saying my home was worth $250,000 and I was 65, and it said the loan would be for less than half of that, which isn’t an ideal amount to get me to 90. And would be due all at once if moved, or my heirs would have to pay it back before they could take back the house when I die. As far as loans go, this one seems like a bad idea to use as a retirement plan, more like a last resort. Student loans are much easier to navigate and you don’t need a paid off house to get one.

  12. Johanna says:

    @Kat: I don’t actually disagree with any of that. But the claim people are making is not “There are no loans for retirement that don’t require a paid-off house that you don’t plan on selling, yada yada yada” it’s “There are no loans for retirement.” Which is false.

  13. anna says:

    @Johanna, a reverse mortgage assumes you actually own a house to start with. Student loans are based on the principle that you attend college, there are no loans for retirement based on the principle that you retire.

  14. Josh says:

    A reverse mortgage is not a loan for retirement.

    It is selling an asset to cover retirement

  15. Kat says:

    I agree with Josh, reverse mortgages are closer to selling an asset then to a loan. That’s why it is called a REVERSE mortgage, in a mortgage the bank bought your house and you are paying them back for it, in the reverse mortgage, you are taking the bank’s role, you “sold” them the house and they are paying you monthly for it. In exchange for the seller being allowed to continue living in the home, the buyer/bank gets interest and the ability to take the entire house if your estate can’t pay back the full amount (which if you are doing this, you probably can’t pay it back). It’s dangerous to think of this as a typical loan, like a student loan, and people considering this need to be careful that they really understadn the terms of the reverse mortgage.

  16. If it’s just education, it can be had at the library. If it is the degree, it would only make sense to get one with an adequate internal rate of return. For instance, paying $50000 in tuition for a $30k/year job does not make sense for anyone but the universities. You can make 30k as a roofer or a mechanic or a crane operator and these aren’t pricey in terms of tuition which means a huge headstart in terms of finances both in terms of time and money.

    There has been many studies showing that someone with vocational training that starts working very early will be much further ahead than someone who spends money and time on college and do not turn net positive until they’re close or beyond 30 and do not catch up with the vocations until they’re close to retirement age.

    Despite that, methinks too many are still hung up on the idea that a college degree is the ticket to a nice life. That may have been true twenty years ago, but if we consider the current situation, most of the unemployed seem to be recent college grads. There are simply too many going to college, but unless you’re a smart cookie intellectual education is not the most efficient use of your resources.

  17. Wally says:

    You got me Trent. Will wait for tomorrows exciting conclusion.

  18. Borealis says:

    It is better to invest in your kids when they are young, then invest in yourself as they hit the teens.

    The kids need to struggle on their own. Plus, on a practical level, some kids hit the drugs and will waste whatever they can get. You will do them much more good to let them sort out their own lives before you gift them money they haven’t earned.

  19. lurker carl says:

    The reverse mortgage is another gimmick for banks to profit from uninformed consumers – heavy fees, lowball property values, loaded with ‘outs’ for the bank. The home owner is better off selling the property outright because they can no longer afford to keep it – the house is their final asset with substantial value.

    These “mortgages” would not be so heavily advertised if they favored home owners instead of the lenders.

  20. I agree with #18 almost to the point of saying that if kids can’t get full scholarships, they should not go. Kids mature at different levels. If everybody just goes to college right after HS some may still have the maturity of a 14 year old and waste all the money on partying and drinking. In this case it would make sense to wait several years before trying to actually learn something, that is, get the education.

    In fact one of the smartest strategies I ever heard was the parents insisting on their kids learning a trade BEFORE they went to college. Not only could they then work their way through college; also if the degree failed, they would always have a fall back. In the particular case the person really wanted to go to college, so he learned the shortest trade he could which I believe was hairdresser.

    I think this is a much better approach than going to a top tier college first, getting a degree in movie appreciation and basket weaving and then trying to fight through community college to try to become employable while deferring $30000 in student loans.

  21. I taking the approach of funding my retirement accounts, and trickling $100 into each of my kids 529 plans. I’ve been doing this for 8 years now. My kids are 6 and 9 years old.

    My retirement accounts are on target, and my mortgage was just paid off this month. So now I’m going to double the amount that I put into my kids 529 plans to (at least) $200 per month.

    Later when it’s time for them to go to college, they will still need loans. At that point I’ll help them even more by paying the loans for them! Besides, I’m still rolling the dice that one of my two kids will get a scholarship! ;)

  22. Retirement needs to come first.

    Do you want your kids to have to worry about you and your well-being while they are in college?

    This is a hard concept to grasp, but a no-brainer when you think about it.

    If your finances are in order, you should be able to do both

  23. cynthia says:

    not sure why this is an either or situation. i save for my child’s education because i want her to have opportunities that i did not. I worked and put myself through college and it is not a lot of fun. I hope that she can study abroad and be able to focus fully on her education when she is taking classes. I also fund my retirement because I want to be able to provide for my future. I scrimp in the present, but am glad that I am providing for my own and my child’s future.

  24. Moby Homemaker says:

    I hate to admit this, but I NEVER took my education seriously until I had to flip the bill. I had years and years of great private education–and it came to a head in college. I blew it and wasted thousands of my parents’ hard earned dollars.
    Once I was left to get the loans myself and pay for my classes on my own dime–I magically made the Dean’s List and became extremely interested in graduating!

    My wife and I dfiscuss this often and have agreed that our kids will take an active role in paying for their college pursuits.

  25. Deborah says:

    Fortunately, just before my head exploded at the concept the college for the kids comes before retirement planning, I realized there was a part two.

    This, from your second post, is the core truth “Self-motivated students can always make college work if they choose to do so.” My husband and I are both college graduates, he with a Ph.D. and we received no help from our parents. Our kid got some assistance but knew not to count on it in the planning stages.

  26. Mary says:

    I have always thought it better to fund my and my husband’s retirement before my kids’ college funds. Our son was born when I was 35,my daughter when I was 41 and they won’t be out of the house until we are past 60. So I don’t want them worrying about us when they are college-age. Also, we both paid our way through college,and our kids know they won’t get a free ride either, unless they get academic scholarships.

  27. Virginia says:

    Amen to Early Retirement Extreme in #20 & 16. My family and our ongoing economic crisis is a perfect illustration of the point you make. If my husband had become a mason or carpenter straight out of college, he could retire now. Instead, we will still be paying the debt we incurred for his degrees and educator certifications well into “retirement age”. We are advising our teen daughter that a college degree is not necessarily an asset unless you (1.) know what you intend to do with that degree and are fairy certain you can get a job in that field and (2.) can obtain the degree without significant debt. She also understands that we will not be able to help her with college because we will probably still be repaying our educational debt well into our “retirement age.”

  28. Bill in NC says:

    Schools can go well beyond the FAFSA and count 529 plans, or even home equity when looking at financial aid.

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