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Save for Retirement Before Saving for a Child’s College Education

Saving for Retirement and College

This post is part of the Financial Rules of Thumb series.  Check out the rest here!

(Today’s post comes from Trevor Acy, an Upperline Financial Planning intern)

This rule of thumb can trigger emotional response. It may seem selfish to begin your retirement savings without putting money toward your kid’s college education first. You want to do right by your children, but it is important to right by yourself too.

The Upperline: If you pay for your child’s college but haven’t saved for retirement, you’ll be depending on them or government care in your golden years. Retiring with dignity should take priority over college savings.

This is a rule of thumb that I agree with.  I want you to be able to save for your child’s college, but you should start your retirement savings first.  Both of these are important reasons to save.  College may seem more urgent since your child isn’t getting any younger and it is easy to delay retirement saving “until later”.  A key to retiring with dignity is taking advantage of the power of compound interest.  The best way to do that is to start saving for retirement as soon as possible.

It is ultimately their responsibility for their education. Your responsibility is your retirement.

Having their parents pay for college isn’t their only option.  Scholarships and grants exists for a reason.  They can work to pay their tuition (did you know that college students that work actually make better grades? See this NYTimes article on a study by Laura Hamilton for more on that topic).  They can also start their education at a community college to get credits for core courses at less expensive tuition rates.

We don’t want to encourage students to go into debt for their education. The number one reason people drop out of college is due to debt, not grades (see this great infographic for other reasons).

One note from Jude: Student loans can be a useful tool, but we have seen clients burdened with what amounts to a mortgage payment for their college educations.  Using debt is always about making smart choices, and it’s important to make good choices bout the potential return one can expect on borrowing money for college.

Doing both is great, if you can afford it.

Let me be clear that your goal should be becoming financially capable of saving for retirement and college.  If you are able, these two should be done concurrently. But while you are working toward that goal, your retirement takes priority over college savings.  Don’t forfeit your retirement in order to be a blessing to your child now only to become dependent on them later.  Refer to our post on how much to save for retirement and if there is more discretionary money to spend then you can begin funding an Education Savings Account (ESA) or 529.

We will cover education saving vehicles in an upcoming series, but be wary of using the following for college savings:

  • Insurance
  • Savings bonds
  • Zero-coupon bonds
  • Pre-paying tuition

These do not provide maximum growth or keep up with inflation well enough to be a good savings vessel especially when ESA and 529 plans exist.

What are your questions about saving for college?  Let us know and we may answer them in a future post!

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