Parents everywhere ask this question every day: do I save for my kid’s college first, or do I save for retirement? Parents are parents after all, so frequently our instincts kick in to put our children first, and we make college savings a priority. Is this the right move?
Let’s step back and take a look at the big picture from a financial wellness perspective. There’s a retirement savings crisis in America right now. More than half of us are not even close to being set for retirement. In fact, according to the Board of Governors of the Federal Reserve System, one third of Americans have no retirement savings at all. So there’s plenty of work to do there. Right now, most Americans will not likely to be able to stop working at the classic retirement age of 65 – many already continue on up until they physically no longer have the capacity to work. According to a survey taken by the Associated Press-NORC Center for Public Affairs Research, “Half of Americans ages 50 and older are working in some capacity or looking for work. Even among those 65 or over, 13% are working and not yet retired, 8% are working in retirement, and 3% are looking for work.”
Here’s a critical distinction between college and retirement that every parent must learn. You can borrow for college—very easily in fact, and almost everyone does; but you can’t borrow to finance your retirement.
With most Americans having zero margin for error, not being even close to having enough for retirement, saving for your child’s college education should wait until your retirement savings is secured, or at least well on track.
It’s even more important when the element of time is considered. An important investing rule is that time can do a lot of the “heavy lifting” for you. Through the power of compounding, your money grows faster the longer it’s invested. In retirement accounts, this is amplified by the fact that there are no tax consequences while the money stays in the account. If you choose to forgo continually adding to your retirement savings early on (because you’re putting that money toward college savings), you lose that valuable momentum, and the critical time element when your savings could be compounding most is lost and can never be recaptured.
The same holds true for borrowing from your retirement plans to pay for college. It’s not a good idea, since you’ll lose out on that critical compounding over time.
On the flip side, it’s financially healthy for kids to pay for some or all of their college costs. Most self-made successful people did. There’s something extremely valuable about working your way up and relying on feedback from the real world. Kids who don’t have to pay their own way miss those lessons and the knowledge they build that help the student attain greater success later on. In fact, a 2013 study found that kids who worked part time to help pay for college earned higher GPAs.
It’s better to have financial challenges when you’re young; that’s part of growing up. Most of us probably remember great times doing things that were quite uncomfortable and inexpensive—sleeping on couches, piling into a crowded car with friends for a road trip.
Contrast this with the person who suddenly at an old age starts running out of money due to having put other priorities first. In old age, it’s much less pleasant to “rough it.” Its also a difficult time to be worried about money and where your next rent or mortgage payment is coming from.
Having financial stresses in retirement is just not an acceptable risk for most people. As we age, health issues become a major risk, and we may be unable to continue working. This places a burden on your entire family, including those kids you wanted to protect.
It’s like what the flight attendants tells you on every flight: put your oxygen mask on first. You can’t help someone else until you’ve helped yourself. Per Rick Kahler, research shows that it’s actually cheaper to pay for your own college than to help parents through retirement. With people living longer lives, that difference is likely to increase. So, let’s think twice before diverting retirement savings toward college.
Wavelength Financial Content Inc. provides user-friendly, engaging and affordable financial wellness and education programs. We also provide a white-label financial wellness program for financial advisors and financial institutions who wish to provide this capability to clients and customers.