Saving for Retirement vs. Saving for Your Children's College Education

Adults with young children often face this savings dilemma: do they save for their retirement, or do they save for their children's future college expenses. We all want the best for our children, including a good education that is vital in today's job market. But we also need to plan for the time when we cannot work and support ourselves from monthly wages.

On the one hand, saving for your children's university expenses means they will have a better chance at a good paying job--which means they can help support you in your old age. On the other hand, saving for your retirement means you won't have to burden your children when they grow up and face their own financial burdens. To help you make the right decision, here are some insights from top financial planners.

Saving Without Labels

According to Kathy Long, an financial adviser with over 15 years of experience, couples should simply save money and not worry about calling it "retirement," "education," "emergency fund," or any other label. If you can't commit to putting money in a 401k plan, IRA, or 529 education savings fund, then deposit money in a traditional savings account with a good interest rate.

Long's advice: when the time comes to send your kids to college, evaluate your savings and current employment situation to see how much you can afford to give your children. Once they become adults, they should be more responsible for their lives, so you needn't feel guilty about keeping part of your savings for retirement. Many students receive scholarships and need-based financial aid, which also helps defray their education costs.

Prioritize Retirement Over Tuition

Bob Jankowicz, another savings and retirement adviser, takes a firmer approach: parents should plan for their retirement first and their children's education second. He offers several reasons for why this is better strategy.
  • Retirement is guaranteed, college is not. There are many situations in which education savings funds are unnecessary or where 529 contributions could go to waste. For instance, if your children are gifted scholars and athletes, they may receive full-ride scholarships. If your children go to school out of state, you may lose state matching funds, or be subject to a tax penalty for withdrawing the funds. In fact, your children may not even attend college at all. Jankowicz reminds investors of tax penalties for withdrawing 529 funds for other purposes, in the event that your children do not use them.
  • Receiving scholarships for good grades and working part-time to earn money for college help build a person's character--including your child's. Jankowicz reminds parents that college dropout rates are higher for students whose parents foot the bill than for students who help put themselves through college. Rather than pay for most of their children's expenses, parents should use a matching funds system, where they match money that their child earns.
  • Simple mathematics: supporting elderly parents poses a greater financial burden than putting oneself through college. Your children will fare well in life even if you don't pay for their higher education. But if you fail to save for your retirement, and your children have to support you, it could cripple them financially. Medical costs for the elderly are a major expense.
All in all, Jankowicz's advises that you not feel guilty about putting your future financial needs ahead of your children's college tuition. He also notes it is a cultural thing in the West. By contrast, in China, parents pay for their children's college and even their first house. But in return, children are expected to fully support their parents when they can no longer work.

Save for Both, Focus on Retirement

Financial consultant TJ Black recommends saving for both retirement and higher education, but focusing more on retirement. For many of his clients, he advises an 80/20 or 75/25 split with 75% to 80% going to an IRA or 401k, and the remainder to an education savings plan. Parents who invest in their children's success invest in their own.

Black explains that when children attend in-state public universities, even $10,000 to $20,000 can go along way toward paying down tuition. And if your children can graduate on time, with no debt, it will give them a big advantage in life. This means that children will be in a better position to assist their parents if and when the time arises. He also explains that if your children can graduate from college with little or no debt, they are less likely to move back home.

© Had2Know 2010