Save for Retirement First
Do You Know What’s More Important – To Save for Retirement First or Your Child’s College?
This topic is a hot potato in many respects. Should the parent’s primary responsibility be to save for the child’s education first or to save for retirement? The answers to that question will vary depending upon who responds – the parent or the child.
As parents, we know all too well how high college costs are and the student loan problems that exist today. We all want our children to be successful and have many of the financial advantages that we didn’t have. Student loans now average $35,000 to $37,000 per college graduate, and no parent wants this burden for their child.
However, many financial advisers are of the opinion that a parent can take better care of the child if they take care of themselves first. By this, they mean that the parent should save for retirement first, then college. Following are some of the reasons given for their opinion:
- Who ever heard of loans for retirement – If we all lived in a perfect world, then it wouldn’t be perfect. If the parents are high-income individuals and are able to save enough for retirement and the child’s college education, there would be no problem. This ideal scenario seldom exists and most parents have to set a priority on which goal is first.
For them, all options need to be considered such as the different ways to pay for college. Loans, scholarships, work-study programs, and a part-time job are available. What do you think the chances are for an unemployed 70-year-old parent with limited income, to get a loan for living expenses?
Even though a student loan isn’t a desirable option, it does provide a low-interest way of repaying the debt over a long period of time. Compare that to a retired individual who depletes their savings – usually, the only options are to sell assets and live on social security. Not a pretty picture.
It’s a difficult choice to make between the need to save for retirement and college saving, but parents need to do everything possible to ensure that they have enough saved for retirement. They need to plan and set a dollar amount that will make them independent financially especially when they are too old to get a job, and can’t save anymore.
As soon as that number is established, they will be able to see if monies are available for a College 529 plan, or if the child is already in college, toward tuition.
- The premise of working until age 70 can backfire – Some younger parents are inclined to save for college first since that usually is just a few short years away and retirement seems so far in the future. Plus, they usually make the assumption that their health is good and that their incomes will increase each year.
Young and healthy parents have the illusion that they can work longer if they have to, but all too often, Murphy’s law prevails. They put the college funding first and then when retirement nears, there isn’t enough money saved. Their health fails and working until 70 or later isn’t possible. Save for retirement first!
There are many cases that I’ve read where this presumed option to work later in life did not occur. One lady in particular that stands out was an elderly widow who had pulled money from her retirement account and also from a home equity loan to pay for her son’s college. At age 65, her employer closed the business and she was unable to find another job.
Her minimal savings were all used up and she was forced to sell the home to repay the debt and had only social security to live on. The article didn’t say if the son was around to help her out or not.
- Do you have any idea what it costs to support an elderly parent – Most parents believe that any responsible parent will pay for the child’s college expenses and not have them be in debt. The major problem with that idea is that if the parents didn’t save for retirement and have enough money to live on, the children may need to take care of them.
Compare these two scenarios: A child plans to enroll in an out of state public college. At the present time, the total annual cost is approximately $26,000, so the total cost for four years would be $104,000. This is a lot of money and probably a lot of student loans.
However, when comparing that to providing support for an elderly parent who didn’t save enough, it pales in comparison. Assuming an average lifespan, the total cost of support would be $300,000 to $700,000 if health issues developed.
The amount for the low end of that cost is enormous and no parent should rely on the child’s income as a part of their retirement plan. The fair thing to do is to have the child pay for their college education and the parent to pay for their retirement.
It’s much cheaper to do it that way even though it can be hard to understand initially. To think that a child can earn enough at graduation to support a parent is foolish.
- Consider the flexibility of Roth IRAS – As soon as a baby is born, many parents begin a college 529 plan, and that’s a good idea. Many states allow a partial deduction for the contributions, and the money continues to grow tax-free. Any withdrawals for college tuition or other qualifying expenses are tax-free.
What happens though, if the child doesn’t go to college, or more money than what is needed is left in the account? It can be transferred to another child for college with no tax consequences. If that option isn’t available, the earnings portion being withdrawn is taxable income. Your after-tax contribution would not be.
Many financial advisers often recommend the Roth IRA to pay for college education. Most parents are aware of the Roth IRA benefits for retirement. After age 59 1/2 all money in for 5 years or more can be withdrawn tax-free.
By using Roth IRAS for college and retirement, there are more advantages to consider. The owner can withdraw their original contribution out at any time without penalty, but not the income earned.
This results in flexibility. If you need to help your child pay for college tuition or even a student loan, you can make a withdrawal of your contribution amount, even if the account is under the five-year holding period. If the child has no further need of money (can you believe that?), the account can be used for retirement money.
There are some limitations to the Roth IRA as far as contributions are concerned. Besides the earned income requirement, the normal contribution amount each year is $5,500 for under 50 years of age and $6,500 for 50 and over. However, there are phaseouts based on AGI. In 2018, the phaseout starts at $120,000 for a single person and $189,000 for a married couple filing jointly. This, however, is still a good way to save for retirement.
We would appreciate hearing your opinion on this.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.