Save for Retirement First

Do You Know What’s More Important – To Save for Retirement First or Your Child’s College?

Save for retirement first is importantThis 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.

    [bctt tweet=”It’s a difficult choice to make between the need to save for retirement and college saving” username=”HBSTaxTips”], 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.

    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.

    [bctt tweet=”Many financial advisers often recommend the Roth IRA to pay for college education” username=”HBSTaxTips”]. 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.

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Rebecca M.
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Rebecca M.

Speaking as a college student, I knew early on that my parents couldn’t possibly afford to pay for my college education. They put as much as they could in 529 Plans, and when I started college, I had grants and scholarships, but was still short. I was able to get part time jobs and didn’t have to borrow much. I also enrolled in a Community college for my first two years, and that helped a lot.I graduate in 2019 and won’t be in debt very much and feel really good about that..

Nick M.
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Nick M.

My parents told me if I wanted to go to college, I would have to pay part of it myself. After reading all about those people that had huge amounts of student loans, I made up my mind that wouldn’t happen to me. I live near a state college and live at home, so I am saving a lot of money.

Barbara W.
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Barbara W.

I didn’t realize that option mentioned in your article was so important. I just assumed that money would be there to pay for my college. You’re absolutely right, parents must save for retirement first otherwise their kids would have to help support them. I have quite a bit in student loans, but I was able to land a good job and am doubling up on my payments and plan to have them all paid in a few years.

Chris W.
Guest
Chris W.

An interesting article and a difficult choice to make for a parent. I have two young sons and I want them to get a good education. I have to agree with your advice, in that I must provide for my retirement first. If this means that my sons will have student loans, then I hope to help them repay them as soon as we can.

Gracie D.
Guest
Gracie D.

You present a dilemma, or so it would appear. Before reading your article, I would have disagreed with you 100%, because I thought that a parent should take care of their kids first. If you look at the numbers, the opposite is true. Thanks for opening my eyes.

Derek S.
Guest
Derek S.

I guess this is almost like a catch 22 situation. For the average parent, who is by no means wealthy, it’s better to get their retirement squared away first. If borrowing has to be done, it’s better for a young person, even though it could take 20 years to pay it back.

Annie B.
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Annie B.

Every time I come to your site, I learn something new. The way you list these facts, it’s definately better for the parents to do their retirement first. I sure would hate to have to pay for their medical expenses and other bills, plus support my family.

Rebekah E.
Guest
Rebekah E.

Wow, I didn’t realize how important saving for retirement is, and the possible ramifications of not doing it. Great article. Thanks.

Bill T.
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Bill T.

When I read what it could cost to support parents, I am hoping they are taking care of themselves first. I’ll worry about my student loans when the time comes.

Peter A.
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Peter A.

I have a hard time understanding why anyone would think that a parent should save for their kids college before they save for their retirement. To me, it’s a no-brainer.

Randy N.
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Randy N.

This is my first time visiting your site and I must say, I like what I see. I glanced down at your various articles/posts, and they are very relevant to what we are presented with each day. Good job.

Frederic T.
Guest
Frederic T.

I have to disagree to some extent. Today, there aren’t many viable options for investing, and saving money in this environment is a form of punishment. Interest rates are below 1% and to me it makes more sense to pay for my kids college now which will lower their amount of student loans. This will save them the 7% in interest they would have to pay. We do have social security(if it remains solvent) and a fully funded 401(k). Any more that is needed, we’ll deal with it later. We just can’t see putting our kids into huge debt, and… Read more »

Scott P.
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Scott P.

This is good advice. My wife and I currently contribute to our 401(k) accounts to the maximum allowed which should provide enough retirement funds evev if social security goes belly up. The same year that our son enters college, we will have our mortgage paid off. He has been told that he will be in our local community college for his first two years, and a state college for the final two, so that cost won’t be too much. What we had been paying on our mortgage will then be paying for his college. To accomplish that plan, we live… Read more »

Beth T.
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Beth T.

You’re kind of preaching to the choir here because we have absolutely no money saved for college for our three kids. We do, however, have a substantial sum in our 401(k) accounts. My husband and I never got any help from our parents for college and we both graduated without any debt. Between scholarships, tuition reimbursement programs, and part time jobs, and hard work, we did just fine. We both went to community colleges for two years and then transferred to state colleges that saved quite a bit of money. We also feel that our kids are more than capable… Read more »

Cynthia K.
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Cynthia K.

I read your article and have mixed emotions. I agree with you mostly, but as a single parent, I have a very hard time in putting my daughter last. If I didn’t have a child, maybe I would agree 100%, but for me, she has to come first.

Carl N.
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Carl N.

Someone has to be the doomsayer, so I guess it will be me. Because of the lack of sufficient retirement funding, retirement in itself, will not be sustainable. Many, many, individuals will be forced to work up to the day they die.

A big problem will be the health crisis due to the high rate of diabetes, obesity, and general health problems. Those will be unable to work because of their medical issues, and we’ll see widespread poverty among the elderly.

Brett W.
Guest
Brett W.

Another reason to invest heavily in your retirement instead of your child’s college fund is that financial aid is based in part on a FAFSA score. Retirement money is not counted as an asset when determining this score, so one actually benefits twice by increasing the retirement funds. One by the yield on the retirement account and the second by lower out of pocket money for the cost of the college because of higher financial aid. However, we need to realize that there is no one size fits all approach because we each have our own particular financial situation. But… Read more »

David V.
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David V.

I know some parents that aren’t able to save for retirement or for college, and they and their children are going to have some serious problems down the road. Since our two kids were born, we’ve been putting money into college accounts every month. Also, the grandparents are contributing to both accounts.

Our two 401(k) accounts are maxed out so we should have sufficient retirement money when we finally retire.

What concerns me though is that the college accounts may end up with large balances and may affect their eligibility for scholarships or other financial aid.

Robert W.
Guest
Robert W.

We have two young children and have been investing 3,000 in a 529 plan per year for each of them. In addition to that, my 401(k) is at the max with an employer match and my wife is a school teacher with a pretty good pension. So there shouldn’t be a problem with retirement. Our goal is for both kids to attend a local community college for two years and the final two years at a local state college commuting from home. If any of them get the idea of some Ivy League school, they’re on their own. I agree… Read more »

Hannah P.
Guest
Hannah P.

Paying yourself first is sage advice, but emotion does enter into it. A parent’s love for their child is difficult to understand for some, but a parent has an inate desire to see him/her succeed. That being said, if one starts a 529 plan at the child’s birth, investing about 286.00 per month until the child reaches age 18, will result in about 100,000.00 account balance. Plus, maxing out a 401(k) plan as a young adult would solve the retirement dilemma. The challenge that I see today, is that Generation X and the Millennials are choking on credit card and… Read more »

Nancy N.
Guest
Nancy N.

I think saving for retirement must be first and then saving a part of the child’s college cost. The reason to not save as much for it is to make your children pay for a part of the cost. They need to understand the true meaning of the value of money and that good things in life require hard work. My parents did that for me and I worked part time to keep my student loans lower.

Tony S.
Guest
Tony S.

This is all solid advice. Parents must plan for their own financial future before planning for college for their children. I think it is beneficial to have your children expect to pay for at least a portion of their college expenses. It makes them appreciate the experience more and gives them self-respect as they build for their own future. The last thing a parent wants is to eventually become a financial burden on their own children. The way to avoid this is to ensure the parents have sufficient funds for their own retirement. This is best for all concerned.

Liam V
Guest
Liam V

I live in the Netherlands, which is generally a country considered to have good social security. However, my neighbors did not save up a penny for retirement and they now suffer because of it. Their house (attached to ours, unfortunately) is slowly caving in, and we have paid for two repairs of their roof so that it wouldn’t leak into our house. They are 83 and 85 and every few months new debt collectors ring their bell (and we get to witness that). They get social security which keeps them alive, but their life does not look like it’s any… Read more »

Anna m.
Guest
Anna m.

If I had to make a choice between the two options, I would choose to fund retirement first. I just finished college and it was mostly paid by scholarships and my part time jobs. I’ve moved to France and my future children will have French citizenship. What that means is that they can go to college for just under 2,000.00 per year for each of them. But if for some reason it were expensive, I would require them to work part time and apply for every scholarship under the sun. I would be willing to co-sign student loans as well,… Read more »

Julie Y.
Guest
Julie Y.

My view is that there’s nothing wrong with wanting your child to pay for a portion of his/her education; however, one should be mindful of the impact of having to repay substantial student loans early in one’s adult life. I plan on funding the majority of my child’s education; however, I also see the wisdom in wanting him/her to have some “skin in the game”. My parents funded my entire college and graduation school education (mind you, neither was over the top in terms of costs, and they had the money to do so without sacrificing their own retirement), and,… Read more »

Alexis B.
Guest
Alexis B.

Great site, just came across it a few days ago. My husband and I have a young son that we hope will be able to go to college, but right now, we are focusing on building our retirement. We had some medical issues when he was born and it wiped out all savings. Right now, I am not able to go back to work, but hope that I can by the time our son is off to college. We plan to use my salary to pay for his college and feel guilty that we aren’t able to save more for… Read more »

Charles B.
Guest
Charles B.

In my opinion, there’s nothing wrong or improper in having your child pay for a portion of his/her college education. As a parent though, we need to consider the consequences of having them saddled with substantial student loan debt. Repaying student loans for 20 years or more is ridiculous and unfair. I plan on paying for most of my child’s education, but I do want him/her to work for a part of the cost just so they know what its all about. In addition, a community college for 2 years, and then a state college would be in order depending… Read more »

Emily L.
Guest
Emily L.

Many parents spend sleepless nights worrying about these two issues. You want your child to get the best education that you can afford so they can be successful in life, but on the other hand, retirement for yourself and your spouse is very important. Both are very important, but which one should take precedence? Doing the numbers as you did shows me that you can’t borrow for retirement, and students have more options. This is a very tough question. And dare I raise this question? Does every child have to get a college education just because all of his peers… Read more »

Ellie P.
Guest
Ellie P.

Too many parents want to give their children TOO MUCH, make them earn it. The best thing my parents taught me VERY EARLY in life, that there’s NO FREE LUNCH, you have to go WORK & SAVE for it. You can not finance your retirement.

Kellie O.
Guest
Kellie O.

I have an idea how to do both if you’re a high income earner by using the cycles of the stock market, and investing in individual stocks. Over a period of 18 years, a high income individual should be able to amass a multi-million dollar portfolio. When it’s time for the child to enter college, sell some of the stocks, and pay lower capital gains, to fund the child’s education.

Another plus is that through dividend reinvestment, the portfolio grows even more. Now, if I had the high income, I could practice what I preach.