Skip to main content

Saving for retirement vs saving for college

You’re saving for retirement, but you also want to start saving for college for your child’s future tuition. For many families, this is a huge dilemma. Saving for retirement isn’t easy, but higher education often comes with a hefty price tag.

It’s tough enough to try to save a large enough nest egg for retirement without having to worry about paying for an education as well. Scholarships and financial aid can do a lot to help pay for school. But, often these are not enough to fund an entire college education. If you’ve had to deal with student loans you may not want to same financial burden for your children. In fact, according to a survey conducted by LIMRA Secure Retirement Institute, one third of individuals polled stated that they would reduce their retirement savings to save for their loved one’s education.

So, how do you choose between saving for retirement and saving for college

The good news is that you may not have to choose. You may be able to save for your future and your child’s education. The key is having a smart savings strategy.

There are a few steps you can take that can allow you to adequately save for your retirement. This can help your child pay his or her way through school. The tips listed in this article – like all financial tips – are not for everyone. You should always speak to a financial adviser and consider your unique financial situation before you start saving.

Consider saving for college? Look at a 529 Plan

A 529 plan is designed specifically for college savings, so it only makes sense to incorporate this savings plan into your educational savings. These plans are state-sponsored and will allow you to contribute tax-free funds to pay for your children’s education.

As long as the proceeds in the account are used for educational-related expenses you will no receive taxes on any money you withdraw. Additionally, some states may even give you incentives to contribute to these accounts. You can find out more information here.

Want to start saving for retirement? Utilize A Roth IRA Plan

Ah, the Roth account. If it seems like a magical retirement fix-all, it isn’t. It is; however, a crucial component to a smart financial plan – even if you already are saving for retirement through another pension plan.

In terms of college savings, a Roth account is great because it taxes you on what you contribute rather than what you take out this means that you can withdraw money for college without paying an early-withdrawal penalty.

Additionally, if your Roth earnings are not needs for educational expenses, you always have an extra boost of savings to help supplement your retirement income. As we’ve also previously mentioned, the investment features of Roth IRA or a Roth 401(k) are more diverse than other types of retirement savings, which means you can easily find options through which to grow your portfolio.

Don’t Save Alone

This is, perhaps, the most overlooked part of saving for your child’s college: knowing that your whole family can contribute to your college savings.

For example, consider asking for contributions to 529 plans during birthdays and holidays. This way, you can boost your college savings – and everyone is pitching in.

After-school and part-time jobs are great ways to get your children to help save for their college as well. Asking your children to get an after-school job is not only a great way to save for their college tuition, but can help teach them smart ways to manage their income. The earlier smart financial decisions are induce to children, the better!

The One “Savings” Plan You Should Avoid

There are two things you absolutely should NOT do when saving for college. Don’t tap into your retirement funds or your home equity. A 401(k) loan comes with many hidden fees and can end up depleting your retirement resources, and defeating the purpose of saving for retirement and educational costs. Additionally, you do not want to use your home as any sort of collateral for your debts.

The multi-faceted approach to retirement and college savings allows you to diversify your assets and to accumulate as much savings as you can through several different vehicles. This way, you now that your retirement fund is covered and that your children’s future are covered as well.