Balancing Act: Saving for Retirement and Higher Education

Many parents are finding themselves caught in the ultimate balancing act.

They’re squeezed between saving for their child’s college education as well as saving for their own retirement. Although many well-intentioned parents may want to dial back their retirement savings in order to save for college, doing so may be a mistake.

“Although parents want the best for their child, it’s important that they are still adequately preparing themselves for retirement,” said Joe Correnti, senior vice president of brokerage product for Scottrade. “The process of building a comfortable and sustainable nest egg for retirement usually involves decades of prudent planning, so while college is an important expense, you don’t want to neglect your other financial goals.”

If you are trying to balance saving for your child’s education and funding your own retirement, here are some important considerations to keep in mind:

  • Planning is essential:  Are you willing to give up some retirement luxury to send your children to the schools of their dreams? Or do you think a state school with your children handling a larger share of the education cost is the best approach? Whatever you choose, it’s important to map out a plan that you can actually accomplish. “Neither college nor retirement can be planned independently,” Correnti said. “The starting point is setting priorities for both as early as possible.”
  • Start saving for college early:  We have long discussed the benefits of starting your retirement planning early. The same goes for planning for your child’s college education costs – the earlier you begin, the more you can take advantage of compound interest. Let’s say you start with $1,000 and then you deposit $300 a month for 18 years. Assuming an annual growth rate of 6% compounded monthly, you’d have more than $119,000 (excluding fees, taxes and commissions). That’s quite a nest egg for college. Perhaps you didn’t start saving as early as you would like. If this is the case, it’s important to start saving as soon as possible, if you can.  Fortunately, plans are available to make saving for higher education easier. Coverdell ESAs, which are offered at Scottrade, and 529 plans provide tax benefits.
  • Check up on financial aid options:  Even though a school may seem out of reach doesn’t necessarily mean that it is. While high tuition prices can lead to some sticker shock, take comfort that it often isn’t the price that students and their families actually pay. Make sure to fill out the Free Application for Federal Student Aid (FAFSA) to determine whether your child will be eligible for any need-based financial aid. Many schools also provide ample financial aid through grants and loans that can ease the cost burden of college. Parents can also borrow money by taking out federal PLUS loans, as well as other private loans. However, it’s important not to borrow more than you can reasonably take on. Private loans tend to have higher interest rates and less flexible repayment schedules compared to federal loans.
  • Set expectations as early as possible:  If paying the whole way for that pricey private university is going to derail your retirement plans, you may need to keep yours and your child’s expectations in check. “Children have the option of attending a less expensive school, obtaining loans and scholarships and paying at least a slice of their expenses through part-time work,” Correnti said. “Yet retirement is not something that you can borrow your way through.”

It’s important for children and parents to have an open dialogue about the costs of college, saving for college and the expectations for both sides. For example, give them a set amount of money that you’ll be willing to pay and tell them that they’ll be on their own after that.

Next Steps: Check out our Retirement Savings and College Savings calculators.

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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