It can seem unnatural — even unholy — to consider giving your own retirement priority over saving money for your kid’s college. After all, as parents you’re responsible for providing a good education for your children. But most financial advisors recommend giving funding priority to your retirement over college for your kids.
Why you ask? Well, there are at least six reasons why you should do this, even if it doesn’t seem right for purely emotional reasons.
You Can’t Help Your Kids If You’re in Trouble
When airlines are doling out safety instructions prior to a flight, one of the directives they are clear on is that you should always put an oxygen mask on yourself before putting them on others. This is not at all a selfish act — before you can help someone else, you first have to make sure you are in a position to do it.
This is the exact analogy we should apply to retirement savings over college for the kids.
Building a retirement plan is more than just preparing for your retirement — it’s creating long-term financial security. You are building the kind of long-term investment portfolio that will give you just the type of financial strength you will need to help your children with their college education.
You Can Borrow Money For College, But Not to Retire
Though it is obvious that borrowing money for college is an option that we would rather not take, the reality is it’s a choice that always exists. Conversely, there is no way you will be able to borrow money in a way that will help you to provide for your own retirement.
There are various ways you can borrow money to help pay for your children’s college education. You and your spouse could take student loans, your kids can take out student loans, or you can borrow against tangible assets, such as your home or any other types of real estate that you own.
Time Value of Money is Critical
The time value of money is the entire foundation upon which successful retirement savings are based. In nearly any investment scenario you can imagine, you will always be better off if you start investing early in your life.
Various studies have shown that early retirement savings is far more effective than saving larger amounts later in life. This is the basis for compound interest, and the reason for this is simply that the money you do have invested will have more time to grow.
If you prioritize your children’s college education over your retirement savings, you can lose this all-important advantage. To illustrate how important it is to get started retirement investing early, consider if you invest $10,000 in a tax-deferred retirement account at 8% for ten years, the account will grow to $21,589. But if you invest the same amount of money at the same rate of return for 30 years, the portfolio will grow to $100,625.
It is even possible that if you save enough money early in your life, you will no longer need to fund your retirement savings plan. This will leave you more money to fund your children’s college education.
There Are Always Less Expensive College Options
The advantage you have with college for your kids is that there are always less expensive ways to make it happen. Some options include:
- Attend community college for the first two years
- Attend an in-state four year institution
- Commute to school, rather than living on campus
- Have your children contribute some of the costs of their education
- Apply for scholarships and grants
Any one of these options — or a combination of two or more — can cut college costs dramatically.
Leverage Retirement Assets to Pay for College
If your retirement nest egg is large enough, you may be able to use some of the money to pay for your children’s college education. That may be even easier than you think.
For example, you can use a Roth IRA to pay for education expenses, and if you do the 10% early withdrawal penalty will be waived. Also, if you are at least 59 ½ when your kids are in college, you can withdraw the money tax free as well.
Still another example is to take a loan against an employer provided 401(k) plan. Larger retirement asset bases create funding options that you wouldn’t have otherwise.
Avoid Becoming a Burden in Old Age
Though you might feel bad about prioritizing your retirement savings over your kid’s college funding, it can prove to be an advantage of a different sort. By saving for your retirement, you will enable yourself to take care of your own needs in old age without burdening your children with supporting you.
The absence of that burden will also free your kids to pursue their own course in life without having to worry about your well-being.
So if there’s a choice between funding your retirement or funding your kid’s college education, choose your retirement first. This will be even more important if your kids will be attending college at or near the time you’ll be retiring.