Planning and saving for retirement and your children’s education are common financial goals.
They are also two of the biggest challenges for families today. How do you plan for an unknown future that requires so much upfront planning? And how do you balance wanting to save for your child’s future with saving for your own? Here is some guidance in thinking about these two in tandem.
Saving for your children’s education is obviously important. But, even if you’re confident your child will attend college, max out any retirement savings account options – such as a 401k (especially if your company matches) or IRA – before you fund a 529 college savings plan or any other education-specific account. The tax deduction and long deferred growth of retirement accounts tends to outweigh the tax-deferred growth in your 529 for a shorter period of time. If you’re eligible for a Roth IRA, you should also contribute to that account before a 529. The principal can be pulled anytime, including for education expenses.
You should not sacrifice your retirement for your children’s education. You can always borrow or apply for financial aid for college costs; you can’t borrow for your retirement. When it comes to college planning, the interest rates for federal student loans – the types of loans your children might take out if they need to – are usually less than what you can make by putting your money in retirement investments.
Career Projections and When to Save
Income varies over a career, and there are different strategies and optimal times to save for retirement vs. education. Understanding your projected career and salary trajectory helps in knowing when and how to save. After all, the salary you earned at 24 is likely not the same two decades later.
When looking at different ways to pay for your child’s education, keep in mind that you will most likely earn more later in life. So as your child grows, so will your salary, which can be important when thinking about planning for the entire family. When you are making the most money, this may be the optimal time to think about saving for both your child’s education as well as your retirement.
Determining Your Retirement Goals
Much of all of this is predicated on how you envision your retirement lifestyle. After all, how do you know how much you can put toward your child’s future if you don’t know how much you need for your own? It’s important to understand what kind of retirement you want. Pick a date, track your budget, know your cash flow, and remember to always look at your finances in a “big picture” way.
There is a huge amount of information on education, college, finance, and retirement out there. Avail yourself of what interests you, but don’t let it overwhelm you to the point that you act rashly… or don’t act at all.
An unbiased financial advisor who is a fiduciary for your money can help you strategize around how best to reach your long-term financial goals and ensure that you are able to achieve the retirement you desire.
To learn more about saving for future education expenses without sacrificing your other financial goals, read our free “Guide to Saving for A Child’s Education”.