Every day you get closer and closer to the reality facing every family: someday your baby will go to college and a little further down the road, you’ll want to retire.
While you’re thinking about college and retirement savings, your monthly expenses are vying for attention, and an unexpected need is waiting just around the corner.
How do you know where to focus your efforts?
Save for college first? Or save for retirement?
Ideally, the answer is yes. Save for college and save for retirement.
You already know that saving early means more growth, more tax benefits and more matching funds. The sooner you start saving for both college and retirement, the better it is. Some states allow you to open a 529 educational savings account with as little as $25.
If you can manage to allocate money to both accounts, then please do.
Be Intentional About Your Savings Plan
When it’s time to decide how much money to save and where it should go, most financial planners want you to start with a number. I want you to start with a goal.
What does “going to college” look like for your child?
What does “retirement” look like for you and your family?
Your vision for the future will be as individual as you are. Tailoring your savings plan to your goals means the steps you take will be uniquely yours.
If college looks like a liberal arts school in Vermont, you’ll need to aggressively save toward tuition. If college is a state school, or community college for 2 years first, you’ll have more flexibility to pile money into your retirement accounts.
Deciding how to balance retirement and college savings boils down to identifying your priorities.
Numbers are important too
Once you’ve identified your priorities, then we can move into talking about specific numbers and projecting if your current rate of savings will help you reach your goals.
You don’t want to get to your child’s 18th birthday, only to realize the college savings won’t be fully funded for another 10 years.
My favorite financial planning tool, Right Capital, can help you find the specifics. Answering a few short questions will help determine if your current savings allocations will keep you on track to reaching your goal.
Open Up to Alternative Solutions
Unforeseen challenges are bound to impact your savings plan at some point down the road. Job loss, health concerns, unexpected expenses -- we all take a turn with these experiences.
If you have to cut back for the short or long term on saving, reduce your education contributions before your retirement.
There are many more options for paying for college than 529 savings accounts. Scholarships or student loans pave the way for many students. If you need them to bridge the gap - programs for your child are out there.
But there’s no retirement scholarship. Bridging the gap when you fall short in your retirement goal is much harder and the likelihood that your ability to earn will be affected by declining health increases with every passing year. If you wait to save for retirement until after your child has gone to college, you’ll lose out on years of matching funds and potential market growth.
This mindful approach acknowledges that many of the possibilities we face are completely out of our control. Putting retirement savings before college savings can give you greater flexibility to maneuver in areas you can change.
College, after all, is a beautiful gift you can give your child. Retirement is coming, whether you like it or not.