College or Retirement: Is there a Choice?

Imagine you’re at the hospital and your wife has just given birth to your first child – a girl. Friends and family are coming to visit. They all want to hold your baby, shower her with gifts, and perhaps some of your more practical family members give you money to set up her college fund.

With the small college fund now set up, the difficult questions follow. How will we continue to fund for college? What about retirement? What’s the next step? What’s the priority?

It’s easy to get lost while searching for the answers to these. Money is tight. There’s the house note to pay. Expenses have gone up with the new family member. There are added insurance costs. An emergency fund needed for unexpected expenses. It all adds up and there isn’t room in the budget for everything.  Saving for college and saving for retirement tend to be afterthoughts.

Many experts will argue they shouldn’t be thought of that way. Unfortunately, Americans aren’t doing well at saving for either. In 2015, 48% of parents saved for college versus 51% in 2014. Retirement savings didn’t fare much better. One 2013 survey reported the median working-age couple had only saved $5,000.00. These statistics might suggest that Americans don’t even have a choice between their children’s education and their own retirement.  Possibly there simply might not enough money for either.

Many parents might be tempted to follow advice promoting saving for college over retirement. While it might be tempting for young parents to think they should save for college first, because there will always be time to save for retirement later. Fortunately, most financial experts will generally recommend saving for retirement first and saving for college expenses should come second.

A few thoughts sometimes get lost in these types of conversations. You can always borrow for college but you can’t borrow for retirement.  Unforeseen events, like a forced early retirement, may leave parents wholly dependent on Social Security or the largesse of their children if they follow the college first approach and save for retirement last.

While it might seem noble to want to help your children achieve a college education under the guise it will lead them to a better and more fulfilling life, neglecting your own financial well being at the expense of your children achieving that goal could be harmful for both. With your own retirement future secure, you are then in a better position to help the kids as they transition into adulthood.

Colleges offer a myriad of ways to pay for tuition. There are grants, scholarships, work study opportunities, in addition to student loans. All of these allow students ways to help fund their education in addition to help from parents.

The biggest factor influencing the size of retirement savings is time. Time is your friend in allowing your retirement savings to grow. The more time you give them, the more time the power of compounding has to work its magic.

To illustrate this magic let’s look at two sets of parents. One makes retirement a priority and the other makes college the priority before saving for retirement. The first couple (Couple 1) invests $5,000 per year for 10 years from ages 25 to 35. The second couple (Couple 2) invests $5,000 per year for 30 years from ages 35 to 65.

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Our first couple only put away $50,000 for retirement while the second couple saved $150,000 and still came up short in comparison. This is a perfect illustration of why saving for retirement should come first and saving for college should become a second priority.

The power of compounding allows your earning to grow ever faster much as a snowball grows as it rolls further and further downhill. As you can see in our illustration, our second couple cannot catch up with the first couple even though they saved an extra $100,000 and saved for an additional 20 years.

Saving for the kid’s college may be a noble endeavor and something every parent may aspire to do. But, as our example shows taking care of retirement first will pay dividends for years and years to come.  

Contact us today to learn how CoPilot can help you strike the right balance.

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Nicholas Crary, Financial Services Representative - nccrary@pai.com - 800-236-7400 X3381

Nick is a subject matter expert on 401k, retirement savings, participant advice, small business 401k, investments, education on options