I’m a very linear person. I default to moving in a chronological order, doing things step by step according to a predetermined plan. So it’s confusing when trying to decide whether to save for retirement first or our kid’s college.
On the one hand, it’s been drilled into me that saving for retirement is important. However, I know the costs of college tuition are increasing every year with no end in sight. I’d love for my kids to graduate from college debt free and feel an obligation as a parent to help with some of my own money to make that happen.
The thinking goes that college is a nearer-term goal than retirement. That fits with a linear life narrative. Prepare for the financial situations that are coming sooner and push off financial decisions that can be made later. For most people, college costs will come before retirement costs so shouldn’t we be focusing on that first?
It seems logical to prepare for college first but I’m going to suggest today that we should do the illogical. The exact opposite should happen. Save for retirement first and college second.
Why to Save for Retirement First
There are four major reasons why we should save for retirement before college:
1. The Time Length and Cost of Each Season
The seasons of college and retirement are vastly different. By seasons I mean length of time. College lasts four years, maybe five if your child changes majors their junior year and graduation gets stretched out. Even if you have four children like we do, the cumulative length of their college experiences would be 16 years.
Retirement will last much longer than that (God willing). Given the advances in medicine that are increasing life expectancy, one could reasonably expect to live into their 80s. My grandfather recently hit 100.
Because the season of retirement is longer the cost for that season will be greater. In our family, we could potentially shell out $480,000 for 16 years of college at 30k per year. For retirement however, I’ll need $800,000 for 20 years of living at 40k of expenditures per year. Those numbers can obviously be adjusted based on individual choices and circumstances but I think they reflect a reasonable scenario.
2. Growth on Investments
This may be the biggest argument to save for retirement earlier rather than later. The growth that occurs on investments will be greater the longer the investment is active. Like any investment we don’t have a guarantee of that but the basic principal remains true. Quality investments grow in value over time.
So if I start saving for college using investments in the stock market at age 25 when my first child comes into the world, I’ll have 18 years for that to grow before I tap into it. If I begin to save for retirement at age 25 I won’t need to touch that money for at least 40 years. The extra 22 years that money is invested will significantly impact how much money that turns out to be.
3. Fewer Funding Options
How will you fund your retirement? I’m not counting on the government to help in that regard. Unless they get their act together there is little doubt Social Security will be there for me with much substance in 25 years. So that leaves it up to me as the sole source for funding retirement.
College is a different story entirely. There are many ways to fund college expenses, the three principal ones being through loans, grants and scholarships. The multiple avenues to pay for college should reduce the pressure parents feel to fund college entirely with their own money – a point that I will drive home with my next point.
4. No Given Joint Effort
The responsibility of paying for college can – and in my opinion should – be shared with the child who is attending college. They can work hard in high school to attain scholarships. They can pursue on campus work/study programs. They could get a full or part-time job to help with expenses. The burden doesn’t have to rest on parents alone.
In retirement it can’t be assumed that our children will be available to or capable of helping us financially. We’d like to think they would help financially but that’s not a given I’m willing to make. Nor would it be something I would impose on them or pressure them to do. It’s too difficult to project 40 years down the road and know what my needs will be let alone if my children will be able to help me should the need arise.
You Can Contribute to Both
In full disclosure, I am presently choosing to save retirement and college at the same time. If you plan on doing so here are some suggestions:
- Project how much you might need for college and then divide your allocation based on that predetermined plan. Even if it will be a lot of money for college, I’d still put more of a percentage toward retirement for the reasons mentioned above.
- Make sure the college savings are going into the proper investments that will give the best returns. Most likely you will want to look at some form of Educational Savings Account (ESA) for those funds.
- Find a cheaper college alternative in regards to tuition and learn other ways to reduce the cost of college. College can easily be done for less than 30K a year.
When working through this issue of whether to fund college or save for retirement first, it’s important to keep your long-range vision in tact. College seems like a very pressing and immediate need that we MUST take care of.
It’s really not. If we get it funded, great. If not, the kids still have options. The consequences of an inadequately built college fund will be much less than an inadequately built retirement fund.
Questions: Which are you more worried about funding – college or retirement? Do you feel pressure to save for retirement? Do you feel pressure to fund college? Will your kids be paying some of their college expenses?
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