Saving for retirement or your children’s college tuition, which is more important? When looked at from a financial standpoint the answer is clear – retirement comes first. But that’s not the way life works. Our emotions play an important factor in financial decisions, especially when it comes to our children. You need to resist the urge to save for the kids education instead of your retirement.
Don’t feel guilty
Somewhere along the way parents started believing they need to provide everything for their children. Everyone gets a trophy, every child plays on a travel sport team, every minute of the day needs to be planned and accounted for with activities, and we need to financially support our children for years.
“Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.” – Dale Carnegie
How are they going to learn to become self-supporting adults? Life isn’t always easy. I’m rambling a bit, but the point I want to make is that you cannot sacrifice your retirement for your children’s education. Unfortunately, that is what’s happening. According to the Government Accountability Office (GAO),
“The percentage of households headed by those aged 65 to 74 having student debt grew from about 1 percent in 2004 to about 4 percent in 2010. While those 65 and older account for a small fraction of the total amount of outstanding federal student debt, the outstanding federal student debt for this age group grew from about $2.8 billion in 2005 to about $18.2 billion in 2013.”
Sure, going from 1% to 4% isn’t all that much, but that’s not the whole picture. It’s not just about carrying student loan debt into retirement. I’m concerned with those people in their 30s, 40s, and 50s who are redirecting their retirement savings to their children’s college tuition – parents who must then delay retirement, or face the prospect of retirement with little or no savings.
You can’t get a loan for retirement
I think every financial advisor uses that line. It’s the truth. You must fully fund your own retirement. No one is going to help you. Stopping your retirement plan contributions, or worse yet, taking early distributions does more harm than you realize. Actually, you will realize it when you want to retire.
Taking early distributions from your IRA or 401(k) is treated differently when used to pay for tuition. Both are treated as taxable income (which could affect financial aid the following year), but the IRA and Roth IRA are exempt from the 10% penalty. The 401(k) is not exempt from the 10% penalty. You may be able to take a loan out from your 401(k), but you’d be better off taking a student loan and letting your 401(k) grow.
Distributions from a Roth IRA are a possibility. There’s no penalty for removing your contributions only, but due to the annual contribution limits of $6,000/$7,000 (age 50+), the balances usually aren’t enough to cover the entire amount of tuition. In specific instances using a Roth may have some merit.
I want to make one thing clear, excluding the Roth on occasion, all of the other options are not recommended. You will not be able to make up for the lost growth potential.
There are also risks involved that may leave you with some hefty bills and nothing to show for it.
- What happens if you run out of money in retirement? Do you want your children to have to take care of you? That would defeat the purpose of helping them.
- What if one of your children doesn’t graduate college or becomes a professional student who repeatedly changes majors? Are you going to keep on accumulating the debt?
Have your cake and eat it too
This obviously isn’t an all-or-nothing proposition. You need to make your children partners in this venture. Tell them how much you’re covering and how much they’ll be responsible for. Design a college savings plan that works alongside your retirement savings plan.
Putting your retirement first doesn’t mean that you can’t help your children. If you are able to build a nice-sized nest egg, you may be able to help with student loans. Not only does it not sabotage your retirement, but I think your children are more grateful. They’ve become responsible adults (you hope), and understand what it’s like to have to pay bills.
Some parents want to help even to the detriment of their own finances. If you’ve weighed the options and decide it’s the right thing to do, then that’s what you’ll do. In the end, it will come down to your emotions. Think very carefully about the long-term consequences and possible outcomes. You don’t want to regret that decision in the future.