Should You Save for Retirement or College?

As the summer wanes and children across the country return to school, parents and grandparents encounter the looming costs of education. From kindergarten to college, the expenses associated with a child’s education are substantial.  

In contrast, another critical financial goal – retirement – demands equal attention. Whether you should save for your retirement or a loved one’s college is a complex dilemma many parents and grandparents face. 

Parents and grandparents naturally want the best for their loved ones, often making sacrifices to ensure their future success. Funding a child’s education is seen as a direct investment in their potential, opening doors to opportunities that may not be available without higher education.

The joy of seeing your child or grandchild attend their dream college is a reward many parents and grandparents cherish. However, this emotional connection can cloud the long-term implications of such a decision.  

On the other hand, retirement savings are less tangible in the short term. The benefits of a well-funded retirement account are felt years, if not decades, later. It’s easy to delay retirement contributions, thinking there’s plenty of time to catch up. However, this mindset can be risky. The power of compound interest means the earlier you start saving for retirement, the more your money can grow.

Delaying retirement savings can lead to a shortfall in the future, potentially leaving parents or grandparents dependent on their loved ones or struggling financially during their golden years. 

Financial advisors often recommend prioritizing retirement savings over funding a child’s education. This advice may seem counterintuitive or even selfish, but it’s rooted in the reality of financial independence. The reasoning is straightforward: You can borrow for college, but you can’t borrow for retirement.  

If you exhaust your savings to pay for a child’s education, you may have to work longer, reduce your standard of living in retirement, or rely on your children or grandchildren for financial support later in life. This scenario could place a significant burden on the very child you sought to help.  

By prioritizing retirement savings, you can ensure your future financial security, which can provide peace of mind for your loved ones.  

Conversely, many parents and grandparents view education as the most important gift they can give their children. A well-educated child is more likely to secure a good job, become financially independent, and contribute positively to society. In this light, funding a child’s education appears not just as an expense but as a crucial investment in their future.  

There’s also the argument that the rising cost of education makes it increasingly difficult for young people to graduate without significant debt. Those who can help their loved ones avoid this burden may feel morally obligated to do so. 

After all, starting adulthood with a large student loan can hinder a young person’s ability to save for their future, including retirement.  

However, it’s essential to consider the long-term implications of depleting savings to pay for education. If parents or grandparents sacrifice their retirement savings, they might unintentionally place their loved ones in a position where they feel obligated to provide financial support in the future. This could create a cycle where the children, now adults, cannot save adequately for their own retirement because they are supporting their aging parents or grandparents.  

The debate between prioritizing retirement savings and funding a child’s education doesn’t have to be an either-or decision. With careful planning, it’s possible to balance the two. This balance starts with a realistic assessment of both retirement needs and educational costs.  

1. Begin by estimating how much you will need for retirement and setting a savings goal. An advisor can help determine how much to save each year to reach that goal. Once a retirement plan is in place, you can look at what’s left to allocate to your loved one’s education.  

2. Additionally, there are several strategies to fund a child’s education without sacrificing retirement savings. For example, contributing to a 529 plan allows parents and grandparents to save for education in a tax-advantaged account. Scholarships, grants, and work-study programs can also offset college costs. Encouraging children to attend a less expensive school, at least for the first two years, or to live at home during college can also make education more affordable.  

3. Moreover, involving children in the discussion about financing their education can be a valuable life lesson. Teaching them about student loans, the importance of financial planning, and the long-term impact of debt can empower them to make informed decisions about their education and future. 

An often overlooked aspect of this debate is the role of financial literacy. Educating children about money management from an early age can profoundly impact their future financial decisions. Parents and grandparents who model sound financial habits and involve their children in budgeting and saving discussions provide them with tools to benefit them throughout their lives.  

For instance, understanding the value of compound interest and the importance of saving early can help young adults prioritize their own retirement savings when the time comes. Additionally, a financially literate child is more likely to appreciate the sacrifices their elders make and may be more willing to contribute to their education costs through part-time work or scholarships. 

As parents and grandparents navigate the back-to-school season, the decision to prioritize retirement savings or fund a child’s education becomes even more pressing. While the emotional pull to provide the best education possible is strong, it’s crucial to weigh this against the long-term implications of neglecting retirement savings.  

Ultimately, the best approach is a balanced one – securing your own financial future while providing your child with the resources they need to succeed.

By planning early, making informed decisions, and involving children in financial discussions, you can ensure that both your retirement and your loved one’s education are well funded. This dual approach not only supports a child’s immediate needs but also safeguards the financial stability of both generations for years to come.  

In this way, the decision to fund retirement or education becomes less about choosing one over the other and more about achieving harmony between two of life’s most significant financial goals. 

To learn how you can balance retirement and college savings, reach out to an advisor using the form below.  

Source: “Funding Your Retirement vs. Your Kid’s Education.” FMeX. 2024. 13718.pdf (fmexcontent.s3.amazonaws.com)