Saving for Your Kids vs. Saving for Retirement

Deciding how to allocate money between college funding for your children and your retirement savings can be difficult and emotional. As a young father myself, I have recently gone through this exact dilemma. Parents want what is best for their children, and it can be tempting to sacrifice retirement savings. Yet from a financial planning perspective, it is very important to make sure your financial house is in order before worrying about your children’s college education.

This does not mean that you should just ignore college education expenses. Rather, parents need to make sure their financial situation is in order prior to funding college expenses.

There is a huge advantage to starting to save for retirement at an early age. The compound effect of investment growth can be substantial. Even a modest amount saved over decades can be significant with compounding investment growth. Therefore, the cost of delaying retirement savings can be extremely costly and ultimately very difficult to rebound from.

College savings, however, still matter and shouldn’t be ignored. After getting retirement savings on track, parents should begin to build out a financial plan that includes college savings. 529 plans are the most common tool for college savings. Contributions are not deductible for federal income taxes, but earnings can grow tax-free and withdrawals are tax-free when used for qualified education expenses.

529 plans have also become more flexible. Under current tax laws, 529 funds may be rolled into a Roth IRA for the beneficiary, subject to requirements and limitations including a $35,000 lifetime rollover limit. This flexibility reduces the fears of overfunding 529 plans.

529 plans are only a portion of the education funding equation. Scholarships, financial aid, student employment, and loans can all be part of it as well. Thus, fully covering college expenses with 529 plan funds does not need to necessarily be the end goal.

Parents need to decide what the goal is for college funding given their situation. For some families, the goal is to fully fund four years of college; for others, the goal is to partially cover college costs while making sure the child has some skin in the game regarding funding their college experience. Neither goal is right nor wrong. It just comes down to what you can do financially as well as what your goal really is.

For many households, a good framework looks something like this:

1. Build an emergency fund.
2. Establish a sustainable retirement savings rate based on goals and financial situation.
3. Determine how much additional cash flow is available for education savings.
4. Save funds into a 529 plan.
5. Revisit both retirement and college funding goals on a regular basis.

There is no perfect formula for dividing between these two buckets. Ultimately, it comes down to goals. But as a general financial planning principle, parents should avoid sacrificing their own financial security to fully fund their children’s future.

The best plan often prioritizes both college funding and retirement savings. At Apella, we have these conversations on a regular basis. We have the knowledge, experience, and tools to help you put a plan in place. Please reach out to your Apella advisor with any questions.

Sources:

• Internal Revenue Service, Publication 970, Tax Benefits for Education
• Internal Revenue Service, Topic No. 313, Qualified Tuition Programs (529 Plans)
• Consumer Financial Protection Bureau, Managing Your Money, Part 1
  
  

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