The Great Debate: Saving for Retirement vs. Saving for College

Financial well-being September 15, 2023 By First United Bank

What should you prioritize – saving for retirement or your child's education?

If you have children, deciding whether to save for retirement or college can be complicated. How can you make the best decision for yourself and your family? This article will help you consider the pros and cons of each as you plan your financial future.

A Changing Landscape

While incomes have grown in recent years, so has college tuition – and at a staggering rate, significantly outstripping average salary and income increases.

But that’s not the only change. The retirement landscape is also quite different. While 401(k)s have primarily replaced pensions, only about half of employers offer them, and only half of those offer matching funds.

The takeaway from all this is that you’re essentially on your own when it comes to managing your long-term financial well-being, and maintaining financial security is becoming much harder. That’s why it’s crucial that you set appropriate savings goals for your retirement during your working years – and stick to them.

How to Decide

As a parent, you want to help your children succeed, which usually means helping them through college. But should you ignore your own financial security in the process?

You’ll want to address your retirement first. Make sure that you’re on track and contributing enough to your retirement plan, such as a 401(k) through your employer. Take advantage of any employer matching options to help grow your savings. If you don’t have a retirement plan through your company, think about traditional and Roth IRAs. It’s wise to consult a financial planner who can help you explore your retirement account options and advise you about saving for your future.

Next, look at your college savings goals. Are you determined to pay for full tuition? Or will your son or daughter handle some of the costs? You can help pay for college without shelling out for the whole thing.

Here’s where the planning comes in. Once you adequately fund your retirement program, you can contribute to a 529 education savings plan as you go. Consider setting aside a portion of future bonuses or raises to put into the account or ask family members and friends to contribute to the fund instead of gifts for your prospective college student.

Be Sure to Pay Yourself First

While it’s natural to want to help your children as much as possible, keep this in mind: if you run out of money during retirement, you may need to move in with your grown kids or ask them for long-term financial help. That’s much worse than having them fend for themselves to pay for college.

You can still support your college student even if you don’t cover tuition costs. Help with researching grants and scholarships or picking the school to attend. While not strictly financial, this assistance could help them save money in the long run.

If you meet your retirement funding goals and have extra cash after you retire, you can use it to help your kids later in life by giving them money for a down payment for a first house or paying off student loans.

Avoid Using Retirement Savings for College

It may be tempting to use retirement money to help pay for education costs but think long and hard about it. The money you use for your kids’ college won’t be available to fund your retirement.

If you decide to tap your retirement accounts, here are some things to consider. You can withdraw funds from a traditional or Roth IRA for qualified college costs before age 59 ½ without getting hit with the 10% penalty. However, you may have to pay taxes on the money.

Accessing your 401(k) to pay for college is more challenging. In certain circumstances, you may be able to borrow from your retirement account, but you may incur a penalty, and you will need to pay back the money quickly.

Experts recommend proceeding carefully. You want to ensure your retirement savings are sufficient and avoid relying on your children for financial support in your later years.

A Balanced Approach

It’s not necessary to sacrifice your long-term financial well-being to help your children. Funding your retirement should always be your top priority, but you can build a healthy nest egg and still put money away for college. To help you choose the best way to reach your retirement goals and create a plan based on your family’s situation, reach out to your First United Bank relationship banker.

By First United Bank