How to Successfully Save for Both Education and Retirement
It’s logical to ask whether you should be prioritizing saving for your child’s future education over your own retirement, or vice versa. After all, both education and retirement are important.
This is especially relevant given the rising cost of college education over the last forty years.
The short answer, we believe, is that retirement should be the priority. The longer answer is that you can save for both as part of a solid wealth management plan.
To help you plan, we’ve pulled together information on why we believe your retirement fund should take priority and how you can save for both, without having a negative effect on your retirement.
Let’s get started.
Some financial experts may agree with us when we recommend that you prioritize saving for your retirement over saving for education. Let’s get into the reasons why:
Retirement is a lot longer than college and during your retirement, you’ll need funds for everyday items like groceries and gas, right through to bigger ticket items like healthcare.
When planning for retirement, you should take into consideration unforeseen circumstances like health care issues. You also don’t know how long you’re likely to live. All of these means you’ll need to save for much longer than you would for a college fund.
There are a number of different ways to ease the financial burden of college. That is not the case with retirement. For example, a loan is a common way to pay for college. You can also fund college partially with savings and partially with a loan to minimize debt.
College costs can be managed by applying for financial aid in some circumstances. Part-time work can also provide a buffer. Where and which college your child chooses will also determine how much you need to save for tuition and living costs.
If you do not have a financial plan, or sufficient funds, for your retirement this could end up negatively impacting your children. This can happen in unforeseen circumstances like medical emergencies or some kind of event that affects your ability to take care of yourself. If you don’t have enough savings to protect you through these moments, you could end up needing to lean on your children for support.
By placing your money in a retirement fund from a younger age, you reap the benefits of compounding interest that allow your funds to grow over time. Because of the amount of money required for retirement, the funds can benefit from having a longer time to grow this interest. If you’re directing a disproportionate amount of money into a college fund and not your retirement, you may be missing out.
Despite knowing that retirement should come first, there are some valid reasons for wanting to favor education, at least for a period of time. We’ve listed some of these circumstances here:
- If you’re ahead with your retirement contributions. Here it might be ok to switch gears and prioritize saving for education for a time. This decision should be closely monitored against your retirement and financial objectives.
- Your goals and values are important when it comes to saving for either college or retirement. Perhaps your child has ambitions to attend an institution that requires higher tuition. This might mean that you have to make certain sacrifices in order to make that happen with as little financial impact on your child as possible.
- Your education history and experience will also influence how you view this matter. For instance, if you left college with huge loans which impacted the early stages of your career, you might want to avoid seeing your child going through the same.
Whatever your thoughts and experiences are, not saving for your retirement is simply not an option. At Entrust Wealth Partners, we can help guide you through the planning process of saving for both retirement and a college fund. Here are a few tips to get you started.
Your first step should be getting clear on what you need for a comfortable retirement. You then need to plan what you’re going to do to make it happen. From there, you can assess what you want to put towards a college fund.
When making this plan, you’ll need to take into consideration a number of elements including what age you started making retirement contributions, what age you expect to retire, what kind of institution you expect your child to study at, etc. This is where a financial advisor can really help.
It’s crucial that before setting aside significant amounts of money for an education fund, you may consider being up to date with your retirement contributions. If you’re behind, put your focus on catching up.. Once you’ve done that, you can start putting away money for education.
There are many ways you can put aside money for your child’s education. We’ll touch on just three here.
A 529 savings plan lets you deposit funds and see your savings grow tax-deferred. When used for qualified education expenses, withdrawals are not subject to federal taxes. Friends and family members can also contribute to these funds which can help them grow faster. Also, thanks to the Secure 2.0. Act, some of your 529 college funds can now be transferred over to a Roth IRA fund as of 2024.
Roth IRAs are another fund you can use to save for college. While these funds are not specifically designed for that purpose, you can withdraw money from these funds, for education purposes, without facing a penalty, although you will still owe income taxes on any capital gains incurred if under the age of 59.5 and the account has been opened for less than 5 years. Money in Roth IRAs also grows tax-deferred.
Custodial accounts, a type of brokerage fund opened by parents on behalf of the child, can also be a good option, especially in the case your child decides not to pursue further education, as the funds can be used for anything they wish, without facing withdrawal penalties.
It’s natural as a parent to want to prioritize your child and to put their needs and future over that of your own. However, prioritizing your own retirement is crucial. After all, there are many ways to fund college, but there is only one way to fund a financially independent retirement.
As we’ve seen, the good news is that if correctly planned, it’s possible to save for both retirement and college. To make sure you have the support you need to navigate this process, contact your Entrust Wealth Partners advisor or contact our Entrust Wealth Partners office at (860) 838-3730.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
This material was prepared by Courtney Henry Consulting.