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Saving for Both Retirement and a Child's Education

Of course you want to retire comfortably when the time comes. And naturally you also want to help fund your child’s education. How can you manage both goals? Admittedly, saving for both retirement and your child's education can be a challenge. But take heart--you may be able to realize both objectives by making smart choices now.

Know your financial needs

Begin by determining specific financial needs for each savings goal. This first step on your path to success requires honest and thoughtful consideration. Answering the following questions can help to get you started.

Retirement:

• How many years until you retire?
• Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what's your balance? Can you estimate what your balance will be when you retire?
• How much do you expect to receive in Social Security benefits?
• What standard of living do you hope to have in retirement? For example, do you plan to travel extensively, or are you content to stay in one place and live more simply?
• Do you or your spouse expect to work part-time in retirement?

College:

• How many years until your child starts college?
• Will your child attend a public or private college? What's the expected cost?
• Do you have more than one child whom you'll be saving for?
• Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
• Do you expect your child to qualify for financial aid?

In developing answers for the above questions, make use of the many online calculators available that can help you predict both your retirement income and your child's college funding needs.

Future Social Security benefits can also be estimated via benefit calculators available on the Social Security Administration's website, www.ssa.gov. By signing up for an account, you can view your Social Security Statement online, which includes a detailed record of your earnings, as well as estimates of retirement, survivor's, and disability benefits.

Determine what you can afford now

After you’ve calculated your financial needs, you will be in a good place to begin a monthly savings plan. To do so, first prepare a detailed family budget that lists all of your income and expenses. Keep in mind that the amount you can afford may change from time to time with your circumstances. Once you've established a dollar amount, you'll need to decide how to divvy up your funds.

Retirement takes priority

Though funding a college education is certainly a worthy goal, if funds are limited, your focus should likely be on your retirement. With generous corporate pensions mostly a thing of the past, the burden rests primarily on you to fund your future. And if you choose to wait until your child is in college to start saving, you'll miss out on years of tax-deferred growth and compounding of your money. Thankfully, college loans and any number of scholarships make college an attainable dream for your child. Unfortunately, the same doesn’t hold true for your retirement!

Two-pronged approach

Ideally, and if possible, you'll want to try to save for your retirement and your child's education at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child's college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you'd have $18,415 in your child's college fund after 10 years.*

If you're unsure of how to allocate your funds between retirement and college, and how to select the best investments for each goal, a professional financial planner can help. Bear in mind: Concurrent savings plans don’t necessarily justify identical investments. Generally, each goal should be addressed independently.

Help! I can't meet both goals

If the numbers say that you can't afford to educate your child and retire with the lifestyle you expected, you'll have to make some adjustments. Here are a few ideas:

• Defer retirement: The longer you work, the more money you'll earn and the later you'll need to dip into your retirement savings.
• Work part-time during retirement.
• Adjust your standard of living now or in retirement: You may be able to tweak your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
• Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
• Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively. (Keep in mind: Aggressive investments present a greater risk of loss.)
• Expect your child to contribute toward his/her education: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
• Send your child to a more affordable school: If you attended an Ivy League school, you may have dreamed your child would follow in your footsteps. However, unless your child is awarded a hefty scholarship, you may need to adjust your expectations. This is no place for guilt—a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
• Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two in order to work and save.

Robbing Peter, Paying Paul

You may be asking yourself, “Can retirement accounts be used to save for college?” Sure. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child's college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to.

With IRAs, you can withdraw money penalty-free for college expenses, even if you're under age 59½ (though there may be income tax consequences for money withdrawn). On the other hand, with an employer-sponsored retirement plan like a 401(k) or 403(b), you'll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½ (age 55 in some cases), even if the money is used for college expenses. You may also be subject to a six-month suspension and income tax consequences if you make a hardship withdrawal. If you plan to go this route, your best bet is to check with your plan administrator regarding withdrawal options available in your employer-sponsored retirement plan.

A Penny Saved

Trying to save for both your retirement and your child’s education can feel like a never-ending juggling act—you’re worried about losing rhythm, dropping the ball. Determining an amount to save and a plan to save it can be daunting, but there’s really no need to go it alone. In addition to the aforementioned pointers, contact a trusted financial planner who is familiar with your specific circumstances. You’ll likely find that a clear financial path brings a certain sense of stability to your and your family’s future.

• education costs
• financial advisors
• financial planning
• investing
• retirement planning
• tax benefits
• Social Security