As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education. If you are facing that dilemma, here are some thoughts:
Prioritize retirement over education
In most cases it is more important for parents to put the financial needs of their retirement ahead of their children's college education. Here's why:
- Retirement funds will be used to cover your basic needs for daily life for as much as 20, 30 or even 40 years. While education for your children is important, it is secondary to your long-term well-being.
- Financial aid and numerous other programs are available for your child to take advantage of to help them afford college.
- If necessary, your child can take out student loans. While it may take years for them to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.
Ways to plan for both
There is plenty of opportunity to fund both retirement and college education in a tax-advantaged way. Consider funding basic retirement needs first, then look at educational savings accounts and related programs. Here are some suggestions:
- Start saving early. Use time to help grow the value in your retirement and education savings accounts. Take advantage of employer-provided 401(k) or similar retirement programs, especially if there is an employer match. After that, look into a Coverdell Education Savings Account and a Section 529 savings account to maximize your education savings potential.
- Research and apply for grants and scholarships. Start researching early, as there are college scholarships available for children as young as 5 years old!
- Consider in-state public colleges. They are generally less expensive than private or out-of-state colleges. If an out-of-state college is preferred, check to see if they have reciprocity agreements with your home state.
- Look into work-study programs. Many schools provide part-time jobs for students to help them pay for school while keeping up with their studies. These programs vary based on a student's financial needs.
Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found. Call if you want to discuss your specific situation.
As always, feel free to pass this Tip along to friends, and reach out if you need help with your personal tax and finance situation.