Saving for the Future: College Tuition vs. Retirement Saving (401K and IRAs)

Despite the skyrocketing costs of a college education, a bachelor’s degree, at the very minimum, is an essential requirement to get ahead in this world. With few, notable exceptions, gone are the days when you could make a healthy, livable income right out of high school. But for parents, the increasingly unaffordable cost of a college education, especially if you have multiple children, means making many personal and financial sacrifices. While sacrifice is certainly a good thing in many situations, too many parents make the mistake of sacrificing their retirement savings in order to fund their children’s college expenses. Here are a few reasons why you may want to consider when making this trade-off:

It will be easier for your children to pay back student loans than for you to delay saving for retirement.

Even though we would hate to think of our children starting their careers saddled with debt; if you and your kids make smart financial decisions, they can complete a college education with a manageable amount of student debt. Considering student loans have typically low interests rates as compared to other forms of debt (thanks to government reforms), and keeping in mind that they have plenty of time before they potentially begin families of their own, a modest amount of student loan debt is not unreasonable. On the other hand, if you wait to save for retirement until your kids are finished with college, you won’t have the leisure of time and compounding, and your nest-egg won’t grow to anything substantial.

When calculating financial aid, retirement accounts are not considered.

Most families qualify for federal or institutional grants from most colleges, which means money that doesn’t need to be paid back. When determining how much aid students qualify for, your family’s eligibility is not affected by any funds saved in a retirement account. As such, you’ll potentially stand to receive more financial aid if you save for retirement.

Neglecting to save for retirement will eventually place a heavy burden on your children.

While you may think that you’ll be doing your children a favor when you front the complete cost of their college education by sacrificing your retirement earnings, you’ll only be passing the burden of support a long for a few decades. When your children begin families of their own and are likewise faced with costs associated with adulthood like mortgage payments, childcare, and retirement savings of their own, adding the additional burden to supplement your retirement will be all but impossible for them. As such, putting your own retirement first before college savings is, in the long term, more considerate of your own AND your children’s futures.

As average lifespan increases, retirement becomes more costly than you would imagine.

As noted in a PBS article published a few years ago, retiring now is radically different than it was for your parents. There are various factors that have affected the astronomically growing cost of retirement, the most fundamental of which is that more and more people are simply living years, even decades, longer than the generation before them. Add to the mix rising costs of long-term health care, Social Security benefits decreasing, as well as the fact that less employers offer retiree health care, and retirement becomes a more ominous question mark than ever before. The article explains:

“According to the 401(k) plan records analyzed by the Employee Benefits Research Institute (EBRI), Americans approaching retirement have, on average, three times their annual salaries in their accounts. Without any other form of savings, these retirees will burn through their 401(k)s in just seven or eight years, leaving them facing 10 or 11 years, based on life expectancy, with nothing but Social Security.”

Of course, no parent wants to leave their children completely in the lurch when it comes to paying for a college education. But if you plan effectively, you can reasonably save for both college and retirement, as long as you don’t place a greater emphasis on one to the detriment of the other.

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3 thoughts on “Saving for the Future: College Tuition vs. Retirement Saving (401K and IRAs)”

  1. Retirement funds shouldn’t be considered for tuition payments. It may seem as though paying for college without taking a loan is the best approach not to incur debt for the student but it actually damages the parents ability to successfully retired. There are a number of alternative ways to pay for school without impacting one’s ability to retire. Student loans can be paid off within 10 years and locked into a low rate through consolidation. However, the years lost from taking retirement funds can never be regained.

  2. I wast talking to a financial advisor as I wanted to know how much would I need to live comfortably by the time I retire at 60. I’m 28 now. He mentioned that I would need around 5 million by the time i’m 60 to live of $100k a year. Now to some this might sound alot. But give the inflation and the overall cost of living, 100k by then would be equivalent to 6k right now. He advised that buying some investment properties and holding on to them would be also a good supplemental income to when I retire. Now I still have about 50k in student loans so hopefully I would be working at home depot when i’m 60. ahah

  3. This is a nice article and I agree, so much so as to suggest not using personal savings or retirement savings to pay for a students tuition. Although loans are expensive and burdensome, many low rates can be locked in through federal loan programs with payments not due until 6-8 months after graduation. Granted the job market is not the best, but students will adjust and need to continue to search. Working at McDonald’s after graduation is demoralizing in the 21st century but there should be no shame it. While working on paying back those bills, the recent grad will continue to search out work and continue to find other creative ways of making money like starting a business, website, or blog. Perhaps they are good at investing.


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