Financial Intel Monthly

Saving for Retirement and a Child's Education at the Same Time

May 17, 2019 1:05:02 PM / by The Retirement Group (800) 900-5867


You want to retire
comfortably when the time comes. You also want to help your child go to
college. So how do you juggle the two? The truth is, saving for your retirement
and your child's education at the same time can be a challenge. But take heart
— you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are

The first step is to determine your
financial needs for each goal. Answering the following questions can help you
get started:

For retirement:

How many years until you retire?

Does your company offer an employer-sponsored retirement plan or a
pension plan? Do you participate? If so, what's your balance? Can you estimate
what your balance will be when you retire?

How much do you expect to receive in Social Security benefits?
(One way to get an estimate of your future Social Security benefits is to use
the benefit calculators available on the Social Security Administration's
website, You can also sign up for a my Social
Security account so that you can view your online Social Security Statement.
Your statement contains a detailed record of your earnings, as well as
estimates of retirement, survivor's, and disability benefits.)

What standard of living do you hope to have in retirement? For
example, do you want to travel extensively, or will you be happy to stay in one
place and live more simply?

Do you or your spouse expect to work part-time in retirement?

For college:

How many years until your child starts college?

Will your child attend a public or private college? What's the
expected cost?

Do you have more than one child whom you'll be saving for?

Does your child have any special academic, athletic, or artistic
skills that could lead to a scholarship?

Do you expect your child to qualify for financial aid?

Many on-line calculators are available
to help you predict your retirement income needs and your child's college
funding needs.


Figure out what you can afford to put aside each month

After you know what your financial
needs are, the next step is to determine what you can afford to put aside each
month. To do so, you'll need to prepare a detailed family budget that lists all
of your income and expenses. Keep in mind, though, that the amount you can
afford may change from time to time as your circumstances change. Once you've
come up with a dollar amount, you'll need to decide how to divvy up your funds.


Retirement takes priority

Though college is certainly an
important goal, you should probably focus on your retirement if you have
limited funds. With generous corporate pensions mostly a thing of the past, the
burden is primarily on you to fund your retirement. But if you wait until your
child is in college to start saving, you'll miss out on years of potential
tax-deferred growth and compounding of your money. Remember, your child can
always attend college by taking out loans (or maybe even with scholarships),
but there's no such thing as a retirement loan!


If possible, save for your retirement and your child's college at
the same time

Ideally, you'll want to try to pursue
both goals at the same time. The more money you can squirrel away for college
bills now, the less money you or your child will need to borrow later. Even if
you can allocate only a small amount to your child's college fund, say $50 or
$100 a month, you might be surprised at how much you can accumulate over many
years. For example, if you saved $100 every month and earned 8% annually, you'd
have $18,415 in your child's college fund after 10 years. (This example is for
illustrative purposes only and does not represent a specific investment.
Investment returns will fluctuate and cannot be guaranteed.)

If you're unsure about how to allocate
your funds between retirement and college, a professional financial planner may
be able to help. This person can also help you select appropriate investments
for each goal. Remember, just because you're pursuing both goals at the same
time doesn't necessarily mean that the same investments will be suitable. It
may be appropriate to treat each goal independently.


Help! I can't meet both goals

If the numbers say that you can't
afford to educate your child or retire with the lifestyle you expected, you'll
probably have to make some sacrifices. Here are some suggestions:

Defer retirement: The longer you work, the more money you'll earn
and the later you'll need to dip into your retirement savings.

Work part-time during retirement.

Reduce your standard of living now or in retirement: You might be
able to adjust your spending habits now in order to have money later. Or, you
may want to consider cutting back in retirement.

Increase your earnings now: You might consider increasing your hours
at your current job, finding another job with better pay, taking a second job,
or having a previously stay-at-home spouse return to the workforce.

Invest more aggressively: If you have several years until
retirement or college, you might be able to earn more money by investing more
aggressively (but remember that aggressive investments mean a greater risk of
loss). Note that no investment strategy can guarantee success.

Expect your child to contribute more money to college: Despite
your best efforts, your child may need to take out student loans or work
part-time to earn money for college.

Send your child to a less expensive school: You may have dreamed
your child would follow in your footsteps and attend an Ivy League school.
However, unless your child is awarded a scholarship, you may need to lower your
expectations. Don't feel guilty — a lesser-known liberal arts college or a
state university may provide your child with a similar quality education at a
far lower cost.

Think of other creative ways to reduce education costs: Your child
could attend a local college and live at home to save on room and board, enroll
in an accelerated program to graduate in three years instead for four, take
advantage of a cooperative education where paid internships alternate with
course work, or defer college for a year or two and work to earn money for

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on
your family's circumstances. Most financial planners discourage paying for
college with funds from a retirement account; they also discourage using
retirement funds for a child's college education if doing so will leave you
with no funds in your retirement years. However, you can certainly tap your
retirement accounts to help pay the college bills if you need to. With IRAs,
you can withdraw money penalty free for college expenses, even if you're under
age 59½ (though there may be income tax consequences for the money you
withdraw). But with an employer-sponsored retirement plan like a 401(k) or
403(b), you'll generally pay a 10% penalty on any withdrawals made before you
reach age 59½ (age 55 or 50 in some cases), even if the money is used for
college expenses. You may also be subject to a six-month suspension from plan
participation if you make a hardship withdrawal in 2019. There may be income
tax consequences, as well. (Check with your plan administrator to see what withdrawal
options are available to you in your employer-sponsored retirement plan.)


Tags: The Retirement Group

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