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Juggling the Costs of Retirement vs. College

Parents today are faced with the need to save for their children’s higher education in addition to retirement. This double responsibility can be overwhelming and cause uncertainty. 

The costs for in-state public college plus tuition, fees, room & board are around $100,000 per child these days, with costs much higher for private school and set to increase in the future. Add that to your own retirement saving needs, and you could have a real dilemma.

Sorting out these two competing priorities can be a big financial task. But with some smart financial planning, it’s possible to do your duty as a parent and still keep your own long-term security a top priority.

Why you should prioritize retirement first

You should keep focused on your retirement savings, even as college looms, and there are plenty of incentives to do so.

If you can contribute to a retirement account like a 401(k) and receive matching contributions from your employer, that’s “free” money that can supercharge your savings. For example, if you earn $100,000 a year and your company matches 50% on the first 6% you contribute, then if you save that 6%, you’d have an additional $9,000 a year for retirement ($6,000 of your own plus a $3,000 company match).

Receiving an employer’s full 401(k) match is often considered the baseline for smart retirement savings, but you could save even more in tax-advantaged accounts: In 2019, you can contribute up to $19,000 ($25,000 if you’re 50 or older) in a 401(k) plan, not counting your employer’s contributions.

Additionally, investing in a traditional 401(k) (that is, on a pre-tax basis) would reduce your taxable income, regardless of how much you make.

You can also contribute up to $6,000 ($7,000 if you’re 50 or older) in a traditional IRA, or Roth IRA if you meet certain income limits. Both tax-advantaged accounts typically include more investment options than an employer-sponsored plan.

Another plus for these accounts: Qualified retirement accounts, like 401(k)s and IRAs are excluded from financial aid calculations, which can increase the likelihood of receiving need-based aid. 

But what ultimately matters when you’re juggling saving for retirement with other priorities is ensuring that you’ll have as much money as you’ll need in retirement. Use the Schwab retirement calculator to see where you stand and whether any adjustments might be in order. When it comes to financing retirement, there are typically three potential sources of income—Social Security, company pensions and personal savings.  If you haven’t saved enough, options such as working a few more years or moving in with your children or other relatives—may be slim or unrealistic.

How to pay for college

If you don’t have the full amount saved by the time your child starts college, you and your child still have plenty of choices.

  • Student earnings: Kids can pay some college expenses themselves by working during the summers and part-time during school. This not only takes the edge off college costs, it gives kids work experience and potential job references.
  • Loans: Students can take out low-cost government loans, which come with increasingly flexible repayment plans. Indeed,  income-driven repayment plans allows graduates to pay just a portion of their discretionary income. The less they make, the smaller their monthly payment. Any debt that’s left unpaid after 20-25 years of on-time payments could be forgiven by the federal government if the student qualifies. Private loans are also available, but parents and students should pay careful attention to the terms and conditions, as interest rates may be higher and they do not have the protections of federal loans
  • Grants: Financial aid cobbles together federal, state and college-based grants and loans for students with demonstrated economic need. You may not know all the options under that umbrella. For example, many private colleges—including Harvard, Yale, Princeton and Stanford—have programs in place to meet 100% of need for even middle-income families with no loans.
  • Scholarships: Academic and athletic scholarships can also play a role. Thousands of students receive scholarships every year to help cover the costs of college. Scholarships are available that reward everything from good citizenship to a specialized skill. You can search for scholarships online at free web sites or by talking to guidance counselors, financial aid offices or local groups and organizations. Many scholarships go unawarded as they are not well-known or they are for small amounts. Applying for multiple scholarships, even smaller amounts, can add up. But beware of scholarships that require payment, as this could be a scam.
  • Family gifts: You’re generally limited to a $15,000 gift per year to any individual without being subject to gift taxes. However, there’s an exception for paying college tuition bills directly to a school. Anyone who is willing and able to pick up the tab can pay 100% of a child’s college tuition costs to the institution directly, without any reduction in the ability to make additional tax-free bequests later. This gives grandparents, aunts and uncles—or anyone, for that matter—the opportunity to make a difference in their family member’s future. Having family and friends contribute to a 529 plan can be a smart planning tactic.
  • Academic adjustments: To cut costs, students can take AP tests in high school that offer college credit if passed, test out of college courses through CLEP exams, attend an in-state public university; or complete the first two years at a community college before transferring to a four-year university. Finally, students can cut room and board costs by living at home and commuting.

Save early and often

The earlier you start, the better, of course. Ideally, you can set up a college account when your child is still in diapers. That gives your savings a chance to grow and make financing college just a little easier. But on the flip side, it’s never too late to start. Every little bit will help.

When saving for college, time is your ally

The examples below shows the hypothetical results of investing $250 per month in a college savings account over four different time periods. If you start when your child is born, you could have $84,397 by the time he or she goes to college. That’s 409% more than if wait until your child is 13 years of age.

When saving for college, time is your ally

The example above assumes a 5% rate of return. Examples are hypothetical and are not intended to represent a specific investment product. Returns include price, interest and dividend returns. The examples do not reflect the effects of taxes or fees. Past performance is no indication of future performance.

How to save for college

You have several college savings options. One possibility is to set up monthly contributions to a 529 plan, which is a specific type of tax-favored college savings account. Most 529 plans allow regular contributions of as little as $25 to $50 a month. If you have friends and relatives who want to help, they can contribute, too—perhaps in lieu of birthday or holiday gifts.

As with any investment, it’s possible to lose money by investing in a 529 college savings plan. Additionally, by investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state’s plan (be sure to check, as not all states offer tax breaks).

A few more strategies to consider here: It can ease anxiety (and aid your financial planning) if you decide to save a fixed amount, each month or year per child and then gradually increasing the amount, when you can, to reach your goal. This also gives you a framework for setting expectations with your future grad. You might also decide to help with a certain percentage of college debt after graduation, which buys you more time.

As you can see, with so many ways to pay for college, it’s possible to strike a balance in your own life between college and retirement. After all, saving for retirement should never be placed on the back burner.

What you can do next

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.


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