Saving for College and Retirement

You need to fund your kids’ college tuition and your own retirement at the same time. This article shows you what should come first (and why), smart ways to set aside money for college, and how to tell your kids if they’ll be footing their own tuition bills.

By Kate Ashford

Marcia Delgadillo, 47, is worried about college. She has a daughter and son, 11 and 14, and right now she’s not putting anything away for their future schooling. She’s too busy paying their current tuition — to private schools. “We feel like we have no choice, because the public schools where we live aren’t great,” says Delgadillo, who works as a marketing specialist and lives in California.

Her husband, Holvis, recently went back to school to earn his masters degree in public health. He graduated in May and should earn a good salary once he finds a job.*
You’re not doing your kids any favors by sacrificing your 401(k) — they may have to support you down the road if you run out of cash.
But while he was studying, it was hard for the couple to set aside anything for retirement, much less the thousands of dollars the kids will likely need to attend four-year colleges. “We still don’t have a game plan,” Delgadillo admits. “We’re going day by day.”
College vs. retirement tug of war
It’s hard enough to afford parenthood — food, clothes, entertainment, even private school — without having to worry about saving for the future. Eventually, though, you do have to confront the looming costs of college and retirement. And that can lead to a quandary: Which do you fund first?

Most experts believe you should make saving for retirement the priority. You can borrow money for your children’s education but not for retirement.

For college, “there are grants, there are loans, there are scholarships,” says Greg Denton, Life Event Services manager for Wells Fargo Advisors in St. Louis. “It’s easier to pare down education expenses than to leverage your retirement.” Plus, you’re not doing your kids any favors by sacrificing your 401(k) money — they may have to support you down the road if you run out of cash.
Funding a 401(k)
If you’ve got access to an employer-provided savings plan, such as a 401(k), think about putting money there first, especially if your company has a match. Ideally, experts want you to save at least 15% of your income or the maximum 401(k) contribution, whichever comes first. (In 2015, the maximum you can put aside, tax-deferred, is $18,000, or $24,000 if you’re 50 or older.)

If that’s too much, at least consider contributing enough to get your employer match; after that, do what you can. If you plan to save 15% of your income, up to the maximum 401(k) limit, you might allocate 12% of that amount toward retirement and 3% toward your children’s education.

Now that you have your priorities straight, here’s what you need to know about saving for college:
The sooner the better
The sooner you start saving for college, the more money you should have when the time comes. If you begin when your child is born and put $100 a month into an investment earning 5% annually, you could have about $38,000 in 18 years. Start when your child is 10 and you’ll have not quite $14,000.

The 529 plan is still a popular vehicle for college savings — that’s a tax-advantaged savings vehicle that allows families to save for future college costs. Once you open a 529, you might want to automate your contributions, so that a specific amount of money will be transferred each month from your bank account to the 529 plan. That way, you won’t have to think about it.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Keep your kids in the loop
If you’re not planning to cover 100% of your son or daughter’s college costs — or you’re not able to — talk to your child. Once it’s all out in the open, you may want to have a family discussion about less expensive colleges, student loans, and your child working part-time to help with expenses.

“Have children set aside a small portion of their allowance that’s dedicated to college,” says Clarissa Hobson, a retirement planning expert in Colorado Springs, Colorado. “They can do that from a very young age.” For Delgadillo, setting expectations means letting her kids know they’re probably going to be footing their college bills themselves. “I’ve been encouraging them to get good grades, because they’re going to have to get scholarships,” she says.
The borrowing trap
Some people plan to take a loan from their 401(k) to pay for college. Not a good idea. If you lose your job, you owe that money back in full within 30 to 60 days to avoid paying taxes and penalties on it. And in the meantime, you may lose out on potential earnings.

What about a home equity line of credit? Experts say they are more difficult to qualify for now. But if you can qualify, a home equity line of credit is a source of ready cash for tuition. Just realize that you’re putting your home on the line for your child’s education.
Go ask Grandma
You’re not the only one who wants to see your child get a good college education. Maybe your parents would be willing to contribute something to a college fund (and cut back a little on gifts for your child’s birthday).

The rules on 529 beneficiaries allow pretty much any family member to designate another family member to receive 529 funds.

Bonus: With someone else socking money away for college tuition, you may be able to max out that 401(k) after all.

Key Points:

  • Give priority to funding your retirement over saving for your kids’ college tuition.
  • Consider setting aside money in a tax-advantaged 529 college savings plan.
  • Try not to borrow from your 401(k) to pay for college.
  • Consider asking your parents to help cover tuition costs.
Kate Ashford writes about personal finance and health. Her work has appeared in Money, More, and Good Housekeeping, among other publications.

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