Your Child’s College Fund vs. Your Retirement

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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