What is a parent to do: Save for retirement or their children’s college?Submitted by Castlebar Asset Management on June 19th, 2014
Life is a balancing act. Trying to manage your work life balance can be a difficult at the best of times. Many parents also struggle with the decision of what to focus on in their financial lives. Should they invest for retirement or focus on their children’s college?
My recommendation is for parents is to focus on their own retirement. The reasons are simple. Your retirement has to be your top financial priority unless your plan is to have your children support you in retirement. You cannot borrow to fund your retirement but borrowing to pay a portion of college expenses is a reasonable option. Many parents feel like they are neglecting their kids putting their goals before their children’s. Your kids will thank you when you are retired and they are able to focus on their own family’s financial well being.
Prioritizing your retirement does not mean you should ignore saving for college. You should plan at a minimum to contribute to receive the matching contribution at your 401(k) or other work place plan. Your goal should be to max out your 401(k) but you can also contribute to a 529 plan to save for your children’s education. If you are focusing 75% to 80% of your investment budget towards retirement and the balance on college that is a formula for success.
Another strategy is focus heavily on your retirement before your kids reach college. Then you can reduce your retirement contributions to allocate that money to pay for college. When they are out of college, you can focus 100% again on retirement.
It is important to remember your retirement accounts like 401(k)s and IRAs do not impact your financial aid packages. According to Sallie Mae, in the 2012-2013 school year that 27% of college tuition came from parent’s income and savings. The remainder of college was paid from grants and scholarships (30%), student loans (18%), student income and savings (11%), parent borrowing (9%), and relatives and friends (5%).
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Disclaimer: 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 investment(s) may be appropriate for you, consult your financial advisor prior to investing.