|Saving for Retirement and a Child's Education at the Same
You want to retire comfortably when the time comes. You also
want to help your child go to college. So how do you juggle the two? The truth
is, saving for your retirement and your child's education at the same time can
be a challenge. But take heart
may be able to reach both goals if you make some smart choices now.
Know what your financial needs are
The first step is to determine your
financial needs for
each goal. Answering the following questions can help you get started:
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? (One way to get an estimate of your future Social Security benefits
is to use the benefit calculators available on the Social Security
Administration's website, www.ssa.gov. You can also sign up for a my
Social Security account so that you can view your online Social Security
Statement. Your statement contains a detailed record of your earnings, as well
as estimates of retirement, survivor's, and disability benefits.)
What standard of living do you hope to have in
retirement? For example, do you want to travel extensively, or will you be
happy to stay in one place and live more simply?
Do you or your spouse expect to work part-time in
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
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?
Many on-line calculators are available to help you predict
your retirement income needs and your child's college funding needs.
Figure out what you can afford to put aside each month
After you know what your financial needs are, the next step
is to determine what you can afford to put aside each month. To do so, you'll
need to prepare a detailed family budget that lists all of your income and
expenses. Keep in mind, though, that the amount you can afford may change from
time to time as your circumstances change. Once you've come up with a dollar
amount, you'll need to decide how to divvy up your funds.
Retirement takes priority
Though college is certainly an important goal, you should
probably focus on your retirement if you have limited funds. With generous
corporate pensions mostly a thing of the past, the burden is primarily on you
to fund your retirement. But if you wait until your child is in college to
start saving, you'll miss out on years of
potential tax-deferred growth and compounding of your
money. Remember, your child can always attend college by taking out loans (or
maybe even with scholarships), but there's no such thing as a retirement loan!
If possible, save for your retirement and your child's
college at the same time
Ideally, you'll want to try to pursue both goals 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%
annually, you'd have $18,415 in your child's college
fund after 10 years. (This example is for illustrative purposes only and does
not represent a specific investment.
Investment returns will fluctuate and cannot be guaranteed.)
If you're unsure about
how to allocate your funds between retirement and
college, a professional financial planner may be able to help.
This person can also help you select appropriate
investments for each goal. Remember, just because you're pursuing both goals at
the same time doesn't necessarily mean that the same investments will be suitable.
may be appropriate to treat
Help! I can't meet both goals
If the numbers say that you can't afford to educate your
child or retire with the lifestyle you expected, you'll probably
have to make some sacrifices. Here are some suggestions:
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.
Reduce your standard of living now or in retirement: You
might be able to adjust 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 (but remember that aggressive investments mean a greater risk of
Note that no investment strategy can guarantee success.
Expect your child to contribute more money to college:
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 less expensive school: You may have
dreamed your child would follow in your footsteps and attend an Ivy League
school. However, unless your child is awarded a scholarship, you may need to
lower your expectations. Don't feel guilty
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 and work to earn
money for college.
Can retirement accounts be used to save for college?
Yes. Should they be? That
depends on your family's circumstances. 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
the money you withdraw). But with an employer-sponsored retirement plan like a
401(k) or 403(b), you'll generally pay a 10%
penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some
cases), even if the money is used for college expenses. You may also be subject
to a six-month
from plan participation if you make a hardship
There may be income tax consequences, as well. (Check with your plan
administrator to see what withdrawal options are available to you in your
employer-sponsored retirement plan.)