Balancing College Savings and Retirement Funds
If you had your kids at a pretty young age, then by the time you reach your 50s, they may be graduating college with a diploma in hand. But for folks who had kids in their 30s – and a lot of us are in that boat – your 50s are when you’ll be faced with a common dilemma. Do you boost your kids’ college fund in the hopes of sparing them the horror of student loans? Or do you start making the 401(k) catch-ups you promised you would make once you were old enough?
It’s a hard decision. It’s easier to borrow money for college in a relatively affordable manner than to borrow money to pay your living costs as a retiree. But when you’re a couple of years away from college and have multiple kids to send, the pressure can mount. You may be inclined to put college savings first by virtue of it being the more imminent milestone. If your oldest is a junior in high school and their younger sibling is only a couple of years behind, you have a handful of years to come up with extra tuition money ahead of college. Retirement, on the other hand, might still be a decade or more away. But while it’s easy to make the case for prioritizing college savings, doing so is a move you might sorely regret.
Parents are putting their kids first
A 2024 Fidelity survey found that parents are putting college savings ahead of their retirement savings. This tracks with a 2023 Thrivent survey, which, too, saw parents saving to send their kids to college over their own retirement. On the one hand, this data speaks to the overwhelming generosity of parents. On the other hand, it highlights a major crisis in the making.
Many older Americans today sorely lack retirement savings. AARP finds that 20% of people 50 and over have no money set aside for their senior years. And Vanguard’s most recent review of its 401(k) plan data found the average balance among Americans ages 55 to 64 to be only $244,750.This isn’t to say that every parent is prioritizing college savings over their nest egg. But many are. And you need to be careful not to be one of them.
How to make the right call
In an ideal world, you’d simultaneously be funding 529 plans for your kids and your own retirement savings without missing a beat. In reality, there may be periods when you have to choose. This is one situation where it’s not only okay, but vital, to choose yourself.
Your children can take steps to lower their college costs if your savings fall short and they don’t want to be saddled with loans. They can spend a year or two at community college to tackle requirements before moving on to a more expensive university. They can commute instead of living in a dorm. And they can pursue opportunities like work-study arrangements, merit-based scholarships, and more. In retirement, your options for lowering your expenses may be limited.
You might need to stay in a higher cost area to have access to family and other resources. You might have to spend a certain amount of money on healthcare because, well, that’s what it takes to address your medical needs. And while it may be possible to save money on housing by downsizing, even an inexpensive home is going to require maintenance and repairs, not to mention come with a property tax and insurance bill. So if you’re not sure whether to prioritize college savings over your retirement nest egg, assess your long-term savings and see where you’re at. If you’re happy with the number or ahead of the game in the context of building your nest egg, then by all means, focus on funding those 529 plans (or wherever you’re saving for college) while you still have the chance.
But if you’re worried about where you are in your retirement savings journey, it may be wise to put your IRA or 401(k) first. Even if your children end up with some loans, they’ll have the rest of their lives to pay them off. And if you end up with extra money heading into retirement, you can help them whittle down their balances. But this is one situation where your personal savings may need to get funded first. And, as always, consulting with a financial planning specialist with your own situation is key.
