The Case for Saving for Retirement Over Saving for a Child’s College Education

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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 I’m not financially dependent on my children. I’m able to live the life I want to lead without them worrying about me (at least financially) in the least, particularly in my final years.

The best way to ensure that kind of a future is to focus primarily on shoring up retirement savings, even if it comes at the expense of saving adequately for the college experience of one’s children.

What are the advantages of retirement savings when you’re young? The big advantage of retirement savings when you’re young is that it has a huge number of years to grow and grow and grow. The power of compound interest has plenty of time to work in your favor.

The real numbers tell the story better than anything else. If you invest $10,000 when you’re 45 at an 8% rate of return, you’ll have $46,609 when you’re 65. Invest $10,000 when you’re 35 and you’ll have $100,626 when you’re 65. Invest $10,000 when you’re 25 and you’ll have $217,245 when you’re 65. The earlier you sock away money for retirement, the better the deal is.

What about their education? Self-motivated students can always make college work if they choose to do so. There is a myriad of financial aid options available, plus most schools also accept transfer credits from very low-cost institutions, enabling students to fulfill many of their general education requirements at a very low cost from community colleges.

Beyond that, having a student take a large deal of responsiblity for their education forces them to learn some personal responsibility that they might not otherwise learn. It can also show them, first hand, the cost of their education – and the value of it. Those are lessons that aren’t taught by simply writing a check for them.

What if I change my mind? If you start saving for retirement, then change your mind about your choice, you’re not completely without options. Most common retirement savings plans allow you to use some – if not all – of your retirement savings to help with college education.

Most 401(k) plans allow you to borrow against them to pay for educational expenses. However, if you do this, you lose out on the returns during the years that you’ve got the money out on loan. If you’ve used a Roth IRA, you can withdraw the amount you’ve contributed at any time without penalty, but you can’t put that money back.

I’ll feel guilty about saddling my children with lots of student loans. There’s no reason you can’t help them pay off those loans when you’re very secure in retirement. At Christmas, write a check to their student loan holder, knocking off a chunk of their loans for them. This way, you’ll be making the payments from a position of total security rather than from a position where the future is uncertain.

What if this makes my children fail to get an education? From my perspective, that’s more of a commentary on the initiative of your children than anything else. If this roadblock somehow “prevents” them from going to college, they’re showing a lack of self-motivation that will hinder them in more ways than just not getting a degree. Without that kind of drive, they’ll be hard-pressed to succeed in any high-pressure field.

They might also simply not be interested in what college has to provide for them and are intelligent enough to make that decision on their own. In that situation, a trade school or something similar might actually be the best situation for their temperment, for one example. Students who attend trade schools can often earn a very good salary doing a wide variety of skilled labor.

This makes a strong case for saving for retirement instead of saving for your kid’s education. But what about the flip side of the coin? Tune in later today to see that discussion.

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38 thoughts on “The Case for Saving for Retirement Over Saving for a Child’s College Education

  1. There are many things children can and should do for themselves to prepare for college, if college is actually the route they need to take for their careers. If they can not accel in acedemic or sport endevors to be awarded scholarships, then another solution is working jobs related to their major and paying their tuition is an excellent option.

    The total college burden should not be on the parents. Nor should the parents become a financial burden on the children because of their education expenses.

  2. It seems odd to me that you’re simultaneously assuming the best and the worst of your children. First, they’re self motivated and can “make college work” without any help from you, but in the very next paragraph, they’re lazy bums who can’t possibly acquire any personal responsibility or understand the value of their education unless they’re paying the whole multi-myriad-dollar bill themselves.

    Also, everything else you’ve written about saving for retirement and what you envision for your life thirty years from now (i.e., you just *know* you’re the type of person who would be pleased as punch to carry on working forever, and your retirement savings are for launching your “second life” that you plan to spend volunteering and writing fiction) makes the “I just want to make sure I’m not a burden on my children” argument seem a little disingenuous.

  3. There is going to have to be some sort of solution to the sky rocketing costs of college in the future regardless of whether we save for our kids or not. Especially when an undergraduate degree is slowly being more and more devalued in the workforce, since so many people have them.

    It’s funny how all that was pounded into my head when I was in high school was that “you have to go to college.” I’m glad that I did, but I have plenty of friends that do quite well in trades that didn’t require any of that. Not everyone wants to run the company, some of them just want to be the plumbers, electricians, etc that do their jobs well and go home each day.

  4. One reasons college costs are so high, sorry for being off topic here, is that there is so much free and cheap money available – or there has been in the past. This has allowed colleges to increase their tuition costs without too much of an argument. But it’s likely those days may be changing. Due to the recession people are flocking back to school – community colleges are packed to the gills and affordable state and regional schools are doing well, too. Not sure where the future lies here, but others have raised some good points about the sky high cost of a bachelor’s degree that seems to be a dime a dozen anyway.

  5. If you start a skilled trade during or right out of high school, you can easily be retired and financially independent by 30. If you go to college, especially an over-priced private university, you will lucky to even payoff your student loans by 30.

    I went to a cheap state school and have no regrets, however the older I get the more I realize how all schooling in this country just seems designed to transform people into wage slaves for the rest of their life.

  6. Another thing: When making the “they can just go to trade school” argument, keep in mind that most of the highly paid blue-collar trades (like plumbing, carpentry, and electrical work) are heavily male-dominated and can be unwelcoming of women. So a career in skilled labor is likely to be a lot less appealing for your daughter than for your son.

  7. Trent: I usually agree with most of what you write on this website, but disagree with you on parts of this issue. I think that if you are saving “adequately,” then you can certainly start to put money into a 529 plan for your children. My wife and I feel comfortable with amount that we are saving for our retirement and have begun to put a small amount of money into a 529 plan for our children (we put about 1/3 of the amount that we save for retirement away for our children). We think that this will be helpful for us down the line, not to mention for them. We are planning on helping our children through college (as our parents helped us), but we plan on saving that money up front. For both my wife and I, our parents took on second, sometimes third jobs to help us with college. We certainly saw the value of college (my wife has her masters degree and I have my doctorate), we both worked during college to help ourselves, we both lived at home and commuted to local universities to save money. Our plan is not to pay for college outright (I agree with your thoughts about that), but to help them. This will be our money and our contribution and they will need to pay for a portion on their own, whether it is through loans, working, grants, or elsewhere. I don’t think this will make us a burden on our children, but instead will teach them the value of saving a little bit of money and using compounding interest. We do not plan on sharing with them the amount that we have saved, but will tell them upfront how much we plan to contribute. We think that this will put them in a greater position financially when they graduate and they will not be totally saddled with student loan, but will instead know the value of saving and instead put some money into their retirement accounts when they begin working (as we have done).

  8. Johanna, that’s not necessarily true. There are plenty of trade schools that are female-dominated as well. Cosmetology school, for one. Stylists can do very well financially, often making 6 figures, and there are many avenues open to them.

    I have to say that I 100% agree with Trent on this one. My siblings and I all paid for our own educational costs, and we all have different temperaments, but it worked out really well for us. I was the super-motivated student who got scholarships (I worked 10x as hard to ensure that I got those scholarships because I knew I couldn’t afford the schools that I wanted to go to on my own) and went to a private East Coast school. My brother saved money by working for a year before college and then attending a public state institution. A few years later, he went on to get a graduate degree out of state, which was funded by research grants. My sister went to a state school in another state that had a tuition exchange program with our state, where she only had to pay like 1.5x in-state tuition. She had to take out some loans, but not too many, because she also worked in the summers and during the school year. She has commented numerous times that she valued and took her education more seriously because she was paying for it- she made sure to attend every class, read every word in her textbooks, etc. She also managed to pay off her loans quickly by getting a good-paying job overseas for a year and half, and living frugally.

    I think we are all examples of why it is a good idea to at least think about making your children contribute (if not shoulder the entire burden) of their education. I don’t resent my parents’ decision at all- sure I did, when I was in high school – but now, as an adult, I think they were very wise. I am extremely independent and responsible about my money and I know I can do anything if I set a goal and work toward it. I thank my parents for NOT paying for my college!

  9. Why not do both?

    If you’re well off, your child will get less financial aid. If you’re not helping out, that makes it more difficult. If you’re less well off, your child will get more financial aid and you have to contribute/save less. You also need to save less in absolute terms to replace your current income in the future.

    Small case studies have been done showing that low income children that are promised that they can go to college paid for are much more likely to go to college than those who think they have to pay for it themselves. Nudging does change things for children on the margin.

  10. @Cara: According to the website of Chicago Women in Trades, the average pay for hairdressers and cosmetologists (90.8% of whom are women) is $10.17 an hour. The well-paid “stylists to the stars” and such are the exception, it seems, not the rule.

  11. “When I envision my life thirty years from now, one key part of that vision is that I’m not financially dependent on my children.”

    Or for that matter have them dependent on you. Raise them to be adults.

  12. You don’t have to be a stylist to the stars to do well as a stylist- you just have to be motivated enough to build a strong client base and work at a decent salon. All stylists are basically in business for themselves, making a commission. There are a lot of workers in American only makeing minimum wage- or maybe $10/hr like what you quoted above. I’d say stylists can do quite well (I have a close family member in the industry and base my knowledge on what she has told me) – just as well as any other job really. It all depends on what you put into it.

  13. I’m writing on behalf of the college student. Mine, and my husbands parents are not able to help any of us (we both have a couple siblings) at all with school, and we are doing just fine. It’s a bit of a stretch, but my husband and I (BTW people get married young in the midwest) pay our tuition monthly (thus far all the sibs are still in highschool). I’m nearly finished with my first 2 years of school, which I have attended at the local community college (inexpensive and everything transferes to state universities). What I have observed is that students that are paying their own way are generally more committed to getting good grades, behaving in a manor that is a appropriate (ex. NOT using cell phones in class) while students that are being sent by their parents don’t seem to be as diligent, or well behaved. They seem to think the world will be given to them on a silver platter. SO… in my opinion I think its better for these young adults to support themselves to at least some extent when it comes to college, as I think they appreciate it more and understand the value of it a little better.

  14. Misty– My DH finds at his state school that the students paying their own way fall alseep in class if they attend at all (they also seem to expect special treatment for working f/t and going to school f/t). Many of them fail so many classes that they take 6-7 years to graduate if they graduate at all. Community college may be compatible with working long hours, but many university majors are not.

    A friend of mine at another state school in a different state has research showing that students paying their own ways are much more stressed out (sometimes to abnormal scales) than students getting some help from their parents, even when other traumatic family experiences are controlled for.

    There’s a difference between paying some of your college (and doing work study for ~10 hours per week, having reasonable loans when you graduate) and having to shoulder the entire burden, especially if your parents make too much for financial aid.

  15. When my son was nearing college I told him to get into the best college he could, and then we would figure out how to pay for it. I think college is challenging — especially if you go into engineering at MIT like he did — and the kid is faced with a new lifestyle on campus, and likely a new community where he knows nobody. And then you say that he should *work* as well?

    I brought the kid into the world, where college is necessary, but where the costs are spiraling ever upward. I owe him whatever help I can give him to get through it.

    In this specific case he was a national merit scholar and got a scholarship that covered 1/3 of the cost; and we got a *parent* loan to cover another third, and then I began paying out-of-pocket. He was able to work summers to cover some of his expenses.

  16. Also keep in mind timing and opportunities to bring in more income that will open themselves up as the kids grow up and mature. As the kids hit the end of middle school and start high school, it’s highly possible that a stay at home parent can start to work outside the home in a part-time or full time capacity. Since, by definition, the family has been getting by on one income until this point, this second income can be diverted to college savings for the children. This does require discipline to do, in order to not end up inflating the lifestyle of the family.

    I can anticipate that someone will cry out “but that’s when trouble starts at home” and will say that this will vary by family, specifically on the personality and maturity of each child. If you can’t trust your kid alone, this is likely not an idea that’s going to work for you, but for many families it is something that can be explored since there are many ways in which it can be made to work.

  17. I paid for my own education. My parents have a healthy retirement plan they have worked hard for. I don’t believe in a free ride and I am unsure how a FREE education is part of our society. Everyone can have their own opinion but me having to pay my own way built character and taught me life lessons.

    I am of the opinion that you should save for retirement and let the kids pay their own way.

  18. I went to college, and yes I got loans and a lot of financial aid, but I lived off of ~$12k-$14k a year, including rent, tuition and books.

    I had friends who spent that much on food/alcohol alone. They were always saying how “lucky” I was to get so much financial aid and that I’m rolling in money. So “lucky” when my budget for necessities was less than their spending money/allowance.

  19. This is a tough one and it kind of depends on your kid(s) and how they develop academically and personally. Most scholarship winners are great students who put in the effort to work harder than anyone else and some are aided by private tutoring (which costs money). Now, one good strategy could be to use tutoring and any extra resources to ensure your child has a greater chance of getting the scholarships instead of trying to pile on money for their tuition. This won’t always work, and it really depends on the child’s ability to not only learn and study, but score high on exams.

    Then there are trade programs for those not inclined to ever study literature or higher level math. Some people do become important civil service members like firefighters, police, or military persons, which may not require formal education, just a ton of training.

    I think something more reasonable would be to save a small amount for each child’s transport costs, whether or not they decide to drive/bus/train to their destination for trade or univ.

  20. My parents were always in credit card debt. I observed this and knew it was to be avoided. I was a pretty good student, and often voiced my desire to attend a 4-year college. However, there was zero set aside for that. After seeing my parents struggle with debt, I was relucaant to take on student loans. I promised myself my own kids would not be denied going to a ‘real’ college.

    I attended Junior College, paid for by some small scholarships and my summer job money. I graduated from LPN/LVN school with a certificate, moved out of the house two months after turning 21 and getting my first job, and have never looked back. I even reminded my father to take me off of the family’s car insurance policy. It made me proud to support myself.

    My dh and his sister were given the opportunity to attend a large state college, complete with a condo purchased for him to live in. (with a room mate). Both of them partied and flunked out.

    I am having some difficulty saving college money, as I have been a SAHM for 9+ years. I plan to return to work as mentioned by poster #18, when my kids do not need a sitter. I am not that worried about my current lack of college savings. From what I have seen from dh and his sister, on through some of my friends’ kids, is that 18-year-olds are often not mature enough to actually do the work at college.

    I have no problem staring my kids out at community college. I am currently taking classes there to facilitate a career change when I do return to work. I hope to show my kids that attending college, even if it is just community college, is an investment in a productive career.

  21. Hmm, as usual some contentiousness here. Everybody’s experience is different, so everybody’s got a different opinion. Opinions are based on personal experiences more than on a deep knowledge of all the factors involved, particularly given the complex economics of higher education.

    My personal experience is, I earned a full academic scholarship to the hometown school, lived at home the first three years, lived off campus my senior year only because my parents offered to pay rent on a studio apartment. Paid my own way through graduate school (with no loans) after moving to the big city. Have since self-funded two professional certifications in fields completely unrelated to my collegiate studies.

    I agree with both Misty and with Nicole’s DH: paying your own way can make you value your education more, but it can also make it damned hard to get through a semester.

    I think it’s completely appropriate for parents to *expect* kids to pay their own way (via work, grants, or scholarships) for the first two years of community college or the local in-state school. After that experience, those kids are going to have a much better idea what they actually want to do in life. And the parents are going to have a much better idea how much help their kid might need to get launched.

    The kid may choose to stop with the associate’s degree and learn a trade; go on to the state school; or move away in order to get a completely different experience. Based on their performance the first two years, everyone involved will know better what the student is capable of and where their heart is leading them.

    The parent’s duty is to be open to honest conversation with their children about work, life, education, finance, and everything else. It isn’t to be an ATM for frat rats.

  22. Once again it’s not necessarily an all or nothing situation. Start early with a little ($20) and add a little every raise or COL increase ($5-10) and be consistent in saving it and you’ll have enough to help.

    Just like retirement, you may not get everything you want, but if you save nothing, you really limit your options. Even if you saved just $50 a month for 18 years it would amount to $11K or so of help. That’s two years at a lot of community colleges and better than nothing.

    Certainly focus on your retirement, but the flip side of not wanting to be a burden on the kids is not wanting to burdened with them, and *their* kids, when you’re getting up there. Some type of training beyond high school can help decrease the chances of that occuring and providing at least some opportunity for them is a reasonable goal in my opinion.

  23. I have to share our experience- we had jobs with a retirement pension that continues until death. If my husband dies first, I continue to receive 60% of his pension plus my pension (we won’t get social security- didn’t pay into it) and if I die first, he gets 60% of my pension plus his full pension. We were also eligible to collect our pension and retire after 20 years of service (at a smaller amount, obviously-we retired after 27 years) So, we knew this when we chose our careers and decided to save for our sons college expenses.
    Our oldest son went into the military and is currently attending school part time, at your expense (thanks!) due to his service, and working full time at a GREAT job. So, no college costs there. Our youngest son will graduate in May. We have covered a portion of his expenses (housing, food, transportation and medical insurance) for 5 years at approximately $1000 a month. He takes care of everything else on his part time job. Yes, he has some student loans, but he also went to a state university that is renowned for his field (Graphic Design).
    When he graduates and gets a job, we will continue to send him $1000 a month for two years- enough to pay off all the student loans. We are able to do this because we took jobs in the public sector that didn’t pay great money, but had great benefits.
    Do we struggle now? Yes. Do we wish we had done things differently? Well, yes and no. I wish we had saved more towards college but I don’t regret our decision to retire early from law enforcement or to help our son with his education.

  24. I am also a student that has paid my way through college. My mom raised me and my two siblings alone and on a very low salary-she saved for neither college nor retirement. I started at community college (tuition=$500/semester), then a state school (tuition=$3000/semester) and am now in my first year of vet school (tuition=$8000/semester). I worked my butt off at a full time job (+/- a part time job) until I started vet school. Now I work 12 hours a week during the semester and full time during breaks. Not only do I greatly appreciate where I am and how I got here (financial aid paid for it all during community college-now its me and loans!), but I see every day the kids whose parents pay for it all and how little they appreciate it. Not just tuition, but cars/insurance/housing and spending money. There is a good mix of those like me and those getting a free ride in vet school, and boy can I tell the difference. Everyone works about equally hard at their studies, but those of us paying our way party less, practice more frugality (old edition textbooks, older cars, cheaper housing, etc) and generally seem more grateful for what we have (both education wise and other). I also think that those that have never held down a real job are going to be at a great disadvantage when graduation comes, given their attitudes now.

  25. If you can only do one (retirement or college savings) you should first max out your Roth IRA every year. Why?

    You can always, for any reason withdraw your contributions without taxes or penalties. (If you withdraw the earnings early you will pay penalties ) The reverse isn’t true with a 529.

    Under current regs your retirement savings isn’t counted as an asset when determining financial aid. OTOH 529s and the like will reduce the amount of aid you can get.

  26. Johanna,

    There may not be a lot of women on construction jobs but that doesn’t really mean women are unwelcome. My wife worked in construction not long ago and I asked her about this and she said she didn’t feel ‘unwelcome’. I worked a construction job about 20 years ago and women there were treated like anyone else at the time. It does vary from trade to trade though and some are more chauvinistic than others.

    Arguing that women shouldn’t seek blue collar jobs because there aren’t many women doing those jobs just perpetuates the problem you claim exists.

    I don’t see more women working in engineering than construction, would you argue women shouldn’t become engineers due to too many men? What about CEO jobs or positions in the US Senate?

  27. Since both posts are now up, I will throw my “vote” into the Retirement Before College Savings pile. The fact of the matter is that there is no such thing as (subsidised) loans, financial aid, scholarships, or work study for retirement. And it’s patently ridiculous – wishful thinking – to assume you will be in good health, willing and able to work into your seventies and beyond.

    Yes, college is ridiculously expensive – but that’s in part because people are willing to put their financial lives at risk to pay for it. Yes, your child will need both encouragement and financial support to go to college – but that doesn’t have to be a full ride.

    There are a few of your arguments that seem neither pro-nor-con. E.g. the numbers of how much you could save at X% rate of return – since the rate is the same the word “retirement” and “college” could be interchanged – it’s a wash. Obviously the sooner you can start saving for any goal, the better.

    There is one situation in which I would put college above savings, and that’s if I lived in some hypothetical situation where the only way to get a good income for my children would be to pay for college with my own savings. In that case the total income of the family would be increased by putting the money towards college. However, that is just a hypothetical situation and certainly not what exists in the United States today.

  28. jim,

    First of all, of course I’m not saying that women should not work in male-dominated fields, and I don’t know why you think I am. (I work in a male-dominated field myself, but not a blue-collar one.) I’m saying that not every woman would want to, and that’s okay.

    Second, if you don’t believe a problem exists, ask Lilly Ledbetter.

  29. I have to say that I am generally in the “retirement before college” camp. I will do better for my child if I save for my old age, than if I save for her college to the exclusion of my retirement. There are more ways for her to get creative in funding her education–notice I didn’t say college she will be able to go to college, go to a trade school, or even join the military–than there are ways for me to get creative to fund my old age.

  30. If you have cared enough to listen to the safety announcement in airlines, there is a line which goes something like this – “Should the cabin experience sudden pressure loss, stay calm and listen for instructions from the cabin crew. Oxygen masks will drop down from above your seat. Make sure that your own mask is on first before attending to your children”. I beleive the same holds true for retirement savings and college funding as well – take care of yourself (retirement savings) first and then attend to your children (college funds) !!

  31. I funded 5 pre-paid college funds for 5 grandchildren now ages 18-22. One is a freshman incollege, one a senior who has used up all the pre-paid benefits and still needs to go another year(she kept playing around changing her major frequently), one went one year and decided he did not like college (even tho his grades were good) and is currently enrolled in a trade school not using the pre-paid program, and the final one has decided he wants to go into the military. I have not decided yet about helping the senior so she will not have any student loans when she finishes or let her either work or take out student loans to finance the last year. I am retired and comfortable in my retirement but certainly not rich.

  32. Fund your retirement first. I see plenty of retirees who are not only struggling to make their own ends meet but those of their parents who are outliving their retirement funds by many years. I have not noticed any discussion of people like me who went straight from the sending kids to college years to caring for elderly parents years. I figure there is 5 to 10 years left of the latter situation. I will be 65 to 70 years old and still taking care of my parents. Think about it.

  33. I started saving for my son’s education by signing up for Upromise and involved my family in helping contribute by grocery purchases and online shopping. I also asked at birthday to give a donation in lieu of a gift to his education fund. When he turned 16 he started working afterschool and put some of what he earned toward the fund too. he went to a local community college and is debt free from college loans. We are now helping out other family members and my potential grand children.

  34. Looking forward to the last tuition payment next month as we are a pay as you go family. I vote for the save for retirement before college savings. One should look at costs prior to even having children and even talking over the goals with potential spouse before marriage. It all boils down to how many children you have and what your income is to provide for them. IMHO, in the USA the irresponsible have more children than they can afford to raise properly and end up getting a free ride on the FAFSA calculation while the people that only have the amount of children that they can afford to raise properly end up getting the shaft when it comes to tuition aid.

  35. Currently we’re not saving for either, but as of our last discussion on the subject, my husband and I are of the ‘retirement before college’ mindset.

    Each of us falls into a category – his parents paid for college, and he appreciated and uses his degree, but because of not being involved in family financial matters, made early mistakes. He (we) were warned, but it’s one thing to spout doom-and-gloom and quite another to constructively teach!

    I paid my own way with loans, because my mother was not a saver for many years and had her own issues, financially and emotionally. I didn’t graduate because I decided college was not for me at the time. We struggle because we are self-employed, but not un-happy with our decision. I echoed the financial problems early-on because even though I knew we weren’t well-off and my mom made negative decisions, I had no idea how those decisions were arrived-upon; only what the outcome was.

    So, I guess the moral of my story is whether you decide to fund for retirement above education, education above retirement, or a mix of both – remember that without knowing the process behind any financial decision, children (and even adults) will have no appreciation of how that decision was made or what it means.

  36. @almost there
    If you do the proper calculations and only have as many children as you can afford, why would you need financial aid?

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