Should You Prioritize Retirement Savings Over College Savings?
As a young parent looking to the future, you may be faced with a daunting choice: do you save earnestly to secure your retirement, or save to fund your children’s education?
It’s possible to do both, but with the cost of college education and retirement rising faster than the rate of inflation, targeting just one of those goals can be a challenge. It’s estimated that 36% of people feel that they’re falling behind on their retirement savings goals*, and if you feel similarly, you may need to assess your current goals and priorities. Here are some things to consider if you’re choosing between saving for retirement or college:
- Unless you have a guaranteed pension and work benefits, you’re responsible for saving for your own retirement. In contrast, students have access to scholarships and financial aid to help them pursue higher education.
- Some qualified retirement accounts, like your 401(k) and Roth IRA, are not counted as an asset when determining your child’s eligibility for financial aid, and neither is money held in cash-value life insurance. Understanding the Free Application for Federal Student Aid (FAFSA®) form is complicated and beyond the scope of this article, but generally, assets accumulated in your child’s name can count against their eligibility for aid.
- Speaking of qualified retirement accounts, some accounts, like a Roth IRA, can be used as a source of college funding. Keep in mind that while you can withdraw from your Roth without a penalty, the amount you withdraw is counted as untaxed income on the FAFSA®. Funds may also be borrowed or withdrawn from a cash value life insurance policy to pay for college, without penalty or tax consequences (as long as the policy is properly structured for this purpose).
- Many students aren’t able to make it through college on financial aid alone and may need to have access to additional savings for college. One option is a 529 College Savings Plan, which offers tax-free withdrawals for college expenses. Consider speaking to a financial professional or college planning professional to learn more and see if this could be part of your college saving strategy.
You Need a Strategy
College is expensive, but saving for it shouldn’t come at the cost of your other financial goals. When planning for higher education, consider how it fits into your full financial strategy, and look into the funding options available for college (i.e. aid, grants, and scholarships).
You should also make sure that you fully understand the college investment you are getting ready to make, and a qualified college funding professional can help with this.
Regardless of your strategy, planning and saving early can help you prepare for college costs when your child is ready to attend.
Want help with planning for college and retirement costs? Contact our office for a free initial strategy session with a Certified College Financial Consultant!
*Source: Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2020 - May 2021, https://www.federalreserve.gov/publications/2021-economic-well-being-of-us-households-in-2020-retirement.htm
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