Many parents find it difficult to achieve a balance between saving for retirement and saving for their children’s college education. However, it is often imperative that families save for both at the same time. National studies have shown that one in every five families list saving for college as a top priority.
If you postpone saving for retirement, you will likely miss out on years of tax-deferred growth. You could easily find yourself playing a near-impossible game of catch-up. According to the 2011 Retirement Confidence Survey from Employee Benefit Research Institute, 45% of workers between the ages of 35 and 44 have less than $10,000 in retirement savings. Yet with the ever-increasing cost of college, you would be remiss to not put money aside for these expenses. In 2026, the total cost to attend a four-year public college is estimated at $180,000 in 2011 dollars.
A Sallie Mae survey recently showed 24% of parents, who are saving for their children’s college education, intend to tap into their own retirement accounts to save for college. Depending on the type of account, doing this can trigger dire consequences like taxes and penalties if funds are withdrawn before age 59½, and it can also reduce financial aid eligibility, because funds may be considered income.
To accomplish both goals, you may need to compromise. We feel it is important to point out that you, or your child, can borrow money for college. You cannot borrow money for retirement.
First, we suggest you determine your financial needs for both college and retirement. When calculating your retirement assets, remember to include the estimated value of any employer pension plans, as well as your Social Security benefits and your current savings rate. A financial adviser can help you prioritize your financial goals. For example, you may desire to live at a beach vacation home in retirement, or you may find that it is more important that your child attend a prestigious college.
If you find that you cannot save for both goals adequately, the second step is to consider some compromises:
- Consider working longer, delaying retirement.
- Cut back on current living expense, now and/or in retirement.
- Increase your income with better paying job, or by getting a second job. However, be aware of the potential downside, such as, commuting costs and tax disadvantages on the increased income.
- Seek out more aggressive investments, but beware of the risks.
- Require your children to contribute money to their college savings.
- Explore less expensive colleges. You may find that some less expensive state universities have more to offer in certain programs than their pricey private counterparts. Likewise, you and your child may consider a less expensive community college for the first two years, then transferring to a university.
- Investigate student loans and scholarship programs. Some parents may find it difficult to accept, but the majority of college students finance a portion of their education with student loans.
The third step is to re-evaluate your plan from time to time as your circumstances and wishes change. Remember, the important thing is to earmark a portion of your present income for both goals and do the best you can.
If you want to save for your child’s education, but are having a hard time funding your retirement accounts, we suggest that you use a Roth IRA account for your child’s education account. Roth contributions can be withdrawn from a Roth IRA Account at any time. For example, if you deposit $5,000 in 2011 and 2012 in your Roth account, you can withdraw $10,000 from this account in 2013, without tax or penalty, because this amount ($10,000) is the original contribution. If you are younger than 59½, earnings can be withdrawn from a Roth account after five years without penalty as long as the withdrawal is used for college expenses; however, taxes will be due on the earnings. If earnings are withdrawn before age 59½ and not used for college expenses, there is a 10% early withdrawal penalty in addition to the taxes due on the earnings.
One caveat to saving to a Roth IRA is that any withdrawals you make from your retirement accounts to pay for college are counted as income and reduce your eligibility for aid.
For more information on prioritizing your financial goals and exploring college savings plans, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
