College vs. Retirement Funding: Which Comes First?


As a parent, you want to provide for your children. You want to give them access to higher education, so funding a college savings account is important to you. But you also know that you and your spouse have a financial future to consider, as well. You need to save for retirement.

When there’s only so much money to go around, what’s a parent to do? Should you prioritize saving for retirement or for your children’s college expenses?

The Argument for Putting Retirement First

According to a 2014 study by T. Rowe Price on family finances, 52% parents believe that it is more important to save for their kids’ college rather than their own needs. It’s understandable that parents want to provide a solid educational and financial foundation for their children. But the other 48% of respondents have it right: your retirement savings come first if you have to choose.


It’s up to you to provide for your future. Unlike the aging baby boomers, many of today’s young parents can’t rely on company pensions for their retirement. Instead, self-directed savings are an important part of being able to pay your bills in retirement.

You can borrow for college; you can’t borrow for retirement. Very few banks will lend money to aging retirees who aren’t able to pay their bills. But college students have a range of options in paying for college.

Students can receive scholarships, grants, and other financial assistance. They can apply for student loans from the federal government that offer favorable interest rates, flexible payment plans, and even offer loan forgiveness in some situations. And your kids don’t need you to foot 100% of the bill — they can work with you to find affordable college options and they can pick up part-time work.

Let’s say you prioritize college over retirement, but you plan to catch up when the kids are graduated. What happens if things don’t go according to plan? If you suffer a serious illness or extended unemployment, you’ll be severely stretched for saving for retirement.

That might leave you depending on your children just as they are beginning their own financial lives. If you save for retirement and find creative ways to pay for college, you’ll allow your own investments to compound more aggressively for a larger number of years. The whole family will end up with more money to go around.

How to Fund Your Retirement

Now that we’ve established how important saving for retirement is, how do you get started? The first place to contribute is in an tax-advantaged retirement account. The exact type and name of the retirement account will depend on your employment.

For most employees, the best place to start is to begin putting away money in a tax-deferred retirement plan. Many employers will match some amount of your contributions. If they do, that’s free money!

Stay-at-home spouses can set aside money for retirement in spousal IRAs, which are IRAs where the working spouse contributes income for the stay-at-home spouse. And if you’re self-employed, look into a Simplified Employee Pension Plan (SEP IRA) or a Solo 401(k).

Another great option for all workers: a Roth Individual Retirement Account (Roth IRA). When you contribute to this account, you pay taxes on the money you put in. However, when you withdraw the money you pay no additional taxes, even on the new investment gains.

If investing for retirement seems overwhelming, remember that starting is the most important thing. Just open up the account and transfer in an initial amount to get started sooner rather than later.

Making a Plan for College Savings

Paying for college is no easy feat. Even if you aren’t able to pay for the entire cost of college, your child can emerge with a strong financial footing by planning ahead.

Let your children know that the whole family — including them! — will need to work together to make college affordable. Students can apply for grants and scholarships to cover large portions of tuition and living expenses. Also, many students benefit greatly from working part time jobs in high school and college. Some studies even show that part-time work increases student engagement.

Even if you find creative ways to cut down on the cost of college, you’d still like to put money aside when you can towards college expenses. Make the most of those dollars by saving in an educational savings account.

The 529 plan is a popular option and allows you choose mutual funds or other similar investments. Other states offer 529 plans that allow you to prepay the cost of in-state tuition. In some state plans, you can contribute over $300,000 towards a single beneficiary.

Another option is a Coverdell IRA. While the yearly contribution limit of $2,000 is low, the Coverdell IRA legislation does allow for a wider range of investment opportunities.

These educational savings accounts offer federal tax advantages similar to a Roth IRA. You pay federal tax when depositing the money, but you can withdraw all the money, including the investment gains, without any further taxes for qualified education expenses.

Some states also offer tax breaks on state income taxes for money invested in educational savings accounts. The exact specifics of the plan depend on your state and the state that runs the 529 plan, so you’ll want to do your research to find the best option for you and your student.

It’s possible to both create a secure financial future and retirement for yourself and to help your children start their adult lives with a strong financial footing. Save for your retirement first — and then get creative about paying for educational expenses.

Mary Beth Storjohann, CFP® is an author, speaker, and financial coach who takes a fun, no-nonsense approach in working with individuals and couples across the country, helping them make smart choices with their money.

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