Saving for Retirement and a Child’s Education at the Same Time

Most parents want two things: a comfortable retirement and the ability to help their children pay for college. Achieving both goals can be challenging, but with careful planning and realistic expectations, it’s possible to make meaningful progress toward each.

Start by Understanding Your Financial Needs

Before you begin saving, estimate how much you’ll need for both retirement and college.

Retirement Questions

• How many years remain until retirement?
• Do you participate in a workplace retirement plan or pension? What is your current balance?
• How much Social Security income do you expect to receive? The Social Security Administration provides benefit estimates through its calculators and personal accounts.
• What type of lifestyle do you want in retirement?
• Do you or your spouse plan to work part-time after retiring?

College Questions

• How many years until your child starts college?
• Will your child attend a public or private school?
• Are you saving for more than one child?
• Could scholarships help reduce costs?
• Is financial aid likely?

Online calculators can help estimate both retirement income needs and future college expenses.

Determine What You Can Save

Next, create a detailed family budget that outlines income and expenses. This will help you identify how much you can realistically save each month. Keep in mind that your savings capacity may change as your income, expenses, and family circumstances evolve.

Once you know how much you can save, decide how to allocate those funds between retirement and education goals.

Prioritize Retirement

If money is limited, retirement should generally come first. Unlike previous generations, many workers can no longer rely on generous pension plans, making personal savings essential.

Delaying retirement saving can be costly because you lose years of tax-deferred growth and compounding. While students may be able to use scholarships, work, or loans to help pay for college, there is no equivalent “retirement loan.” Protecting your future financial security should remain a top priority.

Save for Both Goals When Possible

Ideally, you should contribute to both retirement and college savings simultaneously. Even modest contributions to a college fund can grow significantly over time.

For example, saving $100 per month with an 8% annual return would accumulate approximately $18,415 after 10 years. This example is hypothetical and does not guarantee investment results.

If you are unsure how to balance these priorities, consider working with a financial professional. Retirement and college goals often have different timelines and risk considerations, so separate investment strategies may be appropriate.

If You Can’t Fully Fund Both Goals

If your savings projections fall short, consider adjusting expectations or making changes to improve your financial position:

• Delay retirement: Additional working years can increase savings and reduce the number of years retirement assets must support.
• Work during retirement: Part-time income can supplement retirement savings.
• Reduce spending: Cutting expenses now or planning for a more modest retirement lifestyle can free up additional savings.
• Increase income: Pursue career advancement, additional hours, a second job, or a return to work by a previously stay-at-home spouse.
• Consider a more aggressive investment approach: Longer time horizons may allow for higher-growth investments, though they carry greater risk. No investment strategy guarantees success.
• Ask your child to share college costs: Student employment, scholarships, and loans may help bridge funding gaps.
• Choose a lower-cost school: Public universities and less expensive private colleges can provide excellent educations at a lower cost.
• Explore cost-saving alternatives: Living at home, attending community college first, completing an accelerated degree program, participating in cooperative education programs, or delaying enrollment to earn money can significantly reduce expenses.

Using Retirement Accounts to Pay for College

Retirement accounts can be used to help fund college expenses, but doing so should be approached carefully. Most financial professionals discourage using retirement savings for education if it could jeopardize your long-term financial security.

IRAs generally allow penalty-free withdrawals for qualified higher-education expenses before age 59½, although income taxes may still apply. Employer-sponsored plans such as 401(k)s and 403(b)s typically impose a 10% early-withdrawal penalty on distributions taken before age 59½ (with limited exceptions), and taxes may also be due.

Before withdrawing funds from any retirement account, review the rules carefully and consult your plan administrator or financial professional.

Balancing retirement and college savings is never easy, but by prioritizing retirement, starting early, and remaining flexible, you can improve your chances of reaching both goals.

First Bank Wealth Management & Trust does not provide tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.