Balancing Saving for Retirement and Paying for College

During my career as a financial advisor, I worked with many clients who were trying to manage several financial goals at once. This often included saving up money for a first home or trying to build an emergency fund for the first time. The dual goals of trying to manage saving for retirement and paying for college were easily the most common since most families with kids desperately wanted to succeed at both.

With that in mind, what is the best way for families to save money for college — or fund college tuition in real-time — without sacrificing their retirement goals? That’s a tough one, but I do have some general advice for people who are stuck trying to figure out where to focus their energy and their extra income.

Put Your Retirement Goals First

First, it’s important to note that most families need to focus their energy on saving for retirement before they worry about college planning. The reasoning behind this is simple. It’s possible to qualify for student aid and student loans to pay for school, but individuals who don’t save enough for retirement cannot take out loans to fund their golden years.

Unfortunately, not all parents have found the right way to balance college planning and retirement savings. According to a national College Ave Student Loans survey of parents of college students conducted by Barnes & Noble College Insights, 40 percent of respondents say that paying for college has impacted their ability to save for retirement.

Not only that, but over 20 percent of respondents to the survey are trying to save for their own retirement, cover part or all of college tuition, and take care of their own aging parents at the same time. Further, over 40 percent of respondents said they’ll have to retire later due to college costs.

To avoid having to work longer, most families should be setting aside at least 10% of their income if they hope to reach their retirement goals, but a savings rate of 15% or 25% is even better.

As a stretch goal, it’s smart to try to max out tax-deferred retirement accounts like a 401(k) first, and you should always try to contribute enough to get maximize your employer’s match if you can.

I also suggest people look into other ways to save for retirement, such as opening a Roth IRA or a traditional IRA. Then, max these accounts out to build up even more money for your future retirement goals.

And if you find yourself “behind” in terms of retirement savings, don’t forget to take advantage of “catch up” contributions that can reduce your taxable income and help you save more in one fell swoop.

With an employer-sponsored 401(k), for example, individuals can contribute up to $19,500 per year in 2020. If you’re aged 50 or older, on the other hand, you can contribute an additional $6,500 this year.

Open a 529 College Savings Account

If you still have time to save before your child heads off to college, then you should consider looking into a 529 college savings plan. Depending on the plan you choose, contributions to 529 plans have the potential to grow due to the underlying investments they are placed in. The funds in your 529 plan can then grow on a tax-deferred basis over time, and you won’t have to pay taxes on distributions provided you use the money for qualified higher education expenses.

Not only that, but some states offer tax benefits on contributions. In the state of Indiana, for example, you get a 20% tax credit from the state for the first $5,000 you contribute to a 529 plan each year. This works out to $1,000 back from the state each year for individuals who max out this benefit, and your money still gets to grow on a tax-advantaged basis over time.

Look for Ways to Reduce Spending

If you’re worried about falling short on your retirement savings and reaching your college funding goals, then you have two main strategies to consider — you can try to earn more money to use for your goals, or you can cut your spending so you can save more.

While you may be able to pick up more hours at work or start a lucrative side hustle, reducing your spending is usually easier to accomplish. Fortunately, cutting spending can help you in more than one way. You can reduce your spending and free up cash to save or to pay off high-interest debt, but reducing your spending can also help you reach your retirement goals faster since you’ll be able to retire with a smaller nest egg.

In terms of how to reduce your spending, there are a ton of different ways that can work. For example, you could:

  • Cancel your cable television subscription and switch to a cheaper streaming service
  • Switch to a cheaper cell phone plan
  • Pay off high-interest debt so you can stop wasting money on interest payments
  • Stop dining out quite as often, and set a limit instead (such as dining out once per week instead of 2-3 times per week)
  • Create meal plans so you’re not overspending on food
  • Shop around for car insurance, homeowner’s insurance, and other policies you have to ensure you’re getting the best price

These are just some of the ways you can reduce your spending, but I’m sure you could come up with more. The key is, make sure money you’re not spending goes toward retirement savings or college savings. If you simply spend the money elsewhere in your budget, you’re not really helping yourself.

Use Student Loans to Fill in the Gaps

We already talked about how you can’t take out loans for retirement, but let’s not forget that you can take out loans for college if you need to. This includes federal student loans that come with a competitive fixed interest rate, but private student loans can also be helpful to fill in the gaps when federal student loans aren’t enough. If you have to borrow private student loans, be sure to look for ones that have competitive rates, flexible repayment options, and great customer service.

The Bottom Line

Balancing retirement savings with college funding is possible, but you have to be persistent and intentional if you want to reach both goals. Funding your retirement should come first, but you can also set aside some money for college funding if you’re willing to change your spending habits and find smart ways to make your college savings grow.

No matter what you do, act now so that you can start making some progress on both fronts. College won’t pay for itself, and your retirement account won’t magically grow on its own. Only when you make bold moves to reach your goals will you begin moving toward a financial future you can get excited about.


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