I have had several clients and friends ask the question, “What should we save for first: our children’s college education or our retirement?”
My quick response is undoubtedly retirement. I was told very early on in my investment training that you can borrow for college, but you cannot borrow for retirement. Of course, that was before a reverse mortgage was considered a viable option. But, for me, even with that added tool, I still feel strongly about saving for retirement being the higher priority. Here’s why.
Many of you, including one of my dearest and closest friends, have been faced with having to financially support aging parents who didn’t save enough for retirement or made poor investment and retirement planning decisions. I know one couple who will soon be paying for college for their children while simultaneously supporting an aging mother who no longer has financial resources above Social Security. These burdens have not only put tremendous stress on their personal finances, but also on their marriage, their ability to have the lifestyle they want, and on their relationships with both their parent and children as all have to sacrifice in this situation.
Is this the gift you want to give your children? Do you one day want to be knocking on their door to take care of you in old age because you spent your retirement on their education? If the answer is yes, by all means, save for their college first!
Keep in mind there are many ways to get help with college funding, including merit-based or athletic scholarships, grants, loans, military benefits, work programs, pre-paid college tuition programs, and even home equity loans. I also promote the idea of considering a less-expensive junior college if you have a child who may waffle in his or her commitment to being a university student. This allows for them to earn their way to a more expensive education by proving they are taking their education seriously. As with anything in life, you value what you earned through hard work far more than things that were just handed to you.
So what should you do?
Based on the popular rule of “pay yourself first,” here is a simple guide forallocating your savings:
1. Invest in your company’s 401(k) program if they match. Invest up to the amount that qualifies for a match.
2. Pay off any high-interest debt. This includes credit card debt, personal debt, and student and auto loans.
3. Make sure you have a 6-month reserve of emergency savings. Total all of your must-pay expenses for a month and multiply by 6. That’s your mark for emergency savings.
4. Invest up to the maximum in your Roth IRA (if you qualify) or traditional IRA. Right now, that’s $5,500 per year if you’re under 50. You can also contribute the same amount to a non-working spouse’s IRA. Remember, Roth IRAs have education spending benefits built-in also.
5. Work with a fee-only financial planner to determine the dollar amount you should be setting aside for your ideal retirement. Everyone’s number is different, but I generally use 10% of pre-tax income as a guide. Your number could be lower or higher than that amount.
6. Then fund a 529 plan for your children’s education. If you live in a state that offers tax benefits for these accounts, you are essentially throwing money away by not opening a 529 plan to fund college expenses.
But in the end, save for retirement first!