If you’re like most families and have limited financial resources, should you put your money toward your child’s college education or your retirement savings?
Although it can be nerve-racking to make that choice, while you can borrow money for college, you’re on your own when it comes to retirement. Here are a few reasons why parents should consider saving for retirement before saving for their children’s college costs:
- Parents have to think of college and retirement as two competing needs for their money. You can’t think about one without the other.
- Saving for college is optional, but saving for retirement is not. There is no such thing as a college loan for retirement. You can borrow for college—your kid can borrow for college—and they have a whole life to pay it off.
- Talk to your kids early on so they know what their responsibilities are. No one likes surprises.
- If you’ve already promised your child a college education, revisit the conversation. Explain the things they can do to help out, including earning scholarship-worthy grades or going to a state school instead of a private one. Also, young adults would probably prefer to finance their college education themselves rather than having to support you during your retirement.
- People value things more when they pay for them — so you’re doing your children a favor by giving them the responsibility of paying for college. You are teaching them responsibility and the value of that education and a dollar.
- If you still can’t wrap your mind around it or feel too guilty not paying for college, save for retirement while your children are young. Then, when they reach college age, put the brakes on for a bit and start giving them some money.
Now, we are not saying that you should not give your kids any money. Grades are important, and you want them to worry more about reaching for a high GPA then making minimum wage at Burger Barn. If you have a good retirement savings plan, then you can probably help them out during college years without sacrificing your golden years. Just use some common sense.
Retirement Savings Planning
Most people look forward to retirement. After years of hard work, you’ll finally have time to take that cruise or those golf lessons. You can travel across the country or volunteer for a cause that interests you. Of course, these things cost money.
Here are some vital steps you need to take to secure your financial future:
- Invest in tax-deferred vehicles, like a Roth IRA, traditional IRA, or 401k. Keep in mind that this is just an account—you then have to take that money and invest it in the market.
- We recommend something we call the 15 percent solution. You ought to be saving at least 15 percent of your salary every year. Don’t let that scare you, though, as the 15 percent includes employer matches. Depending on how much your employer contributes to your 401k, you could be pulling as little as 7 percent out of your pocket.
- Take into consideration when you started saving. If you start saving when you’re ten years away from retirement and can put in more than 15 percent of your salary, do so to play catch-up.
- Look into life-cycle funds, which will take your money and make investments based on how much time you have left before retirement. The closer you get to that date, the less risky your investments will be.
- Look at online calculators to help you come up with your magic numbers.
- The key to making your money last is the amount you withdraw the first year. Set yourself up so that in the year you start withdrawing, you take out 4 percent. Then, every year after, multiply the previous year’s withdrawal by 1.03 to keep up with inflation.