Oct 8, 2012

Retirement vs. Education Savings

The question of whether to fund my own and my husband's retirement or our children's education is a very significant one for me. We really want the option of sending the boys to private school in a few years, so our current financial priority is saving as much as possible before our oldest heads off to middle school.

We still save for retirement, but not nearly as much as we could be saving because of our other priorities. So I read this Daily Worth article on retirement vs. educations savings with great interest. It didn't say anything new, but it did remind me of the justifications for putting retirement ahead of education:
  • There's no other provision for retirement - You might have a pension or even Social Security, but your retirement planning and saving is all on you. If you don't provide for your future, you might well end up becoming a financial burden on your child in retirement - and that would be worse than not being able pay for all of their educational expenses.

  • There are other means of funding an education - A student can get scholarships, grants, and loans, and maybe even work while in school to help pay for tuition and living expenses. You won't have options like these to fund your retirement.

  • Discussing how to fund college will instill a sense of responsibility in your child - As much as I would love to present my children with fully paid-for college educations, I think a lot of good can come from this. In retrospect, I think my parents spoiled me too much by paying for my college education and not discussing how I could contribute more. Not that I don't appreciate all that they did for me, but I'm sure I would have been more responsible with money if I had been raised a little differently.

  • There are more "upfront" tax breaks for retirement savings - I wish the article went into more detail on this, but I'm thinking that it means you get to deduct most retirement contributions from your taxable income when the contributions are made (as with 401(k)s and traditional IRAs). With college savings plans like 529s and Coverdells, you're putting in taxed income, but the earnings are not taxed upon withdrawal.
Ideally, of course, I would love to be able to fully fund everything - our retirement, the kids' education, and maybe a nicer house and a timeshare in Hawaii. :)

But that's not our reality, which is made more complicated by the fact that alternatives like scholarships, grants and loans aren't really options for middle and high school, which is what my husband and I are saving for. So for us, saving is a difficult balance that's all too common for our generation.

Personally, I think a doable, balanced approach is to figure out a minimum for retirement savings. And then the remainder can go toward education. (This approach assumes that other savings needs, like your emergency fund, are already met.)

For example, if your employer matches 401(k) contributions, the minimum retirement savings could be the maximum that will be matched. Or maybe it's 5% of your gross salary. If you feel you have very little to save, then maybe with each paycheck, half of what can be saved goes toward retirement and the other half goes into a Coverdell or 529 account.

I do think that making the money difficult to touch is important, especially if you would have a tendency to touch it if it were accessible. To that end, retirement accounts like 401(k)s and IRAs, and education accounts like 529s and Coverdells, can be very useful.

How do you balance retirement and education savings? Or do you not even try?


chyk said...

My parents told me young that if i wanted to go to college i would have to pay for it. So i went to the school i could afford to work my way through instead of my first choice. That applies for high school college and grad school. For my own kids i can only afford fifteen dollars a mnth per kid with five of them. They are going to have to pay their own way as well. When it comes to retirement, well i try to max out as much as i can but i put it all in my roth so i won't get slammed later.

Chief Family Officer said...

Well, I definitely have started telling my kids that they have to do well in school if they want to go to a good private high school. But I do feel that through high school, they are very much my responsibility and I want to give them the very best I can afford. For us, it really is figuring out the right balance. I'm with you on the Roth - it's a good place to park your money :)