Should You Create a College Fund or Focus on Your Own Retirement?

Save for retirement or pay for kids college

There are more than 44 million people holding on to some piece of the $1.5 student loan debt pie. Future parents and new parents are understandably concerned about their children’s future ability to pay for college tuition, textbooks, room/board and all the other jaw-dropping expenses required to obtain a college degree nowadays.

However, a new financial concern is looming on the horizon, and that’s approaching retirement age with no savings. By the time you retire, perhaps your mortgage will finally be paid off and you won’t have any kid-related expenses to pay for, but you might be surprised by how comparable your retirement budget would be to your current budget.

After all, you may start dining out more often, traveling farther and longer, and take up new hobbies to stay active during retirement. But, people mistakenly assume their expenses during retirement will be significantly lower than they are currently.

So if you’re presently confronted with the decision to regularly put money into your children’s college savings account or max out your retirement savings accounts, which one should you prioritize?

Here are some considerations you should make before finalizing your pathway forward.

Save for Retirement or Pay for Kids College

Beginning vs. End of Career

When your kids are college-aged, you’ll likely be within 10 or so years of retirement. While your kids will be starting their careers and earning salaries on their own, you’ll have comparatively little time to continue saving for your own retirement.

One of the biggest mistakes people make when planning out their retirement savings strategy is making the assumption that there’s always “more time” to start saving or save more later. However, there are enormous financial benefits of saving for retirement earlier.

If you started saving for retirement at age 20, then you would need to save less than $3,600 per year to become a millionaire by age 65, assuming 7% returns on investment over the course of your career.

If you try to save for retirement and a college savings fund for your kids at the same time, then you could be missing out on valuable opportunities to exponentially grow your nest egg.

Do NOT Withdraw From Your IRA or 401K

People with retirement savings accounts have the option to withdraw funds early – and without penalty – if you put the money towards qualified higher education expenses. However, this could seriously put a dent in your retirement saving progress. Plus, you likely won’t be able to recoup the money in full before you finally retire.

To avoid the possibility of running out of money during retirement, you’ll want to leave your IRA and/or 401K accounts alone at all costs.

Future of Higher Education is Unclear

Another reason why you shouldn’t prioritize a college savings plan is that we simply have no idea what higher education will look like in 10-20 years.

Some states, such as California and New York, already offer free college tuition programs. In CA, community college tuition is covered by the state. In NY, the Excelsior Scholarship covers tuition for undergraduates who come from families making less than $100,000 annually and attend public state universities.

Some politicians have been advocating for tuition-free college nationwide, while others are calling for increased access to loan forgiveness programs, greater public awareness of the benefits of trade and technical schools, and even a complete wipeout of many/all student loan debts.

While some of these options are extremely unlikely to happen, they nevertheless demonstrate how paying for college could radically change over the course of your kid’s journey from childhood to adulthood. Of course, there’s also the possibility that college will only get more unaffordable, but is it worth sacrificing a chunk of your retirement savings for?

Asking for Help withbCollege Plans

If you’re financially stable and want to help your kids pay for college when they get older, then you have additional options that won’t force you to choose between your retirement nest egg and your kids’ future college degrees.

A popular trend for new parents is asking family members for contributions to their child’s college savings fund in lieu of gifts. And, grandparents are increasingly leaving money in their wills specifically for their grandkids’ college tuition.

When your kids get older, you should encourage them to begin applying for scholarships in high school, as well as participating in extracurricular activities or sports, which could help them get at least part of their education paid for.

What Savings Should You Prioritize?

Clearly, saving for retirement should be number one at all times. Even if you’re not a parent yet but you planned on starting a college savings account for each kid once you’re ready to start a family, your retirement savings should still be prioritized over saving for college.

Your kids will have 40+ years in the workforce after college, but you will only have 10-15 years left, giving you substantially less time to catch up and save enough money to remain comfortable throughout your golden years.

It’s not selfish to prioritize your own well-being in retirement, especially considering the astronomical costs of senior healthcare nowadays. If anything, dedicate 10-20% of your monthly savings to a college fund and 80-90% to your retirement accounts to protect your long-term financial health without leaving your kids entirely on the hook for paying for college when they get older.  

Save for retirement or pay for kids college

3 thoughts on “Should You Create a College Fund or Focus on Your Own Retirement?”

  1. I started saving at 24 yrs old and maxed out for 23 years. Once my oldest hit college, I pulled back on retirement and am cash flowing tuition. At this point with the power of compounding, there isn’t a big difference 15 years from now if I remained maxed out on retirement. Save Early, save often…

  2. I paid off my house. Turns out, the house payment I used to make was enough money to cover college expenses as they came in. I didn’t need to save anything for the kids college and they still graduated debt free. Then I have a paid off house as a bonus. Or was the paid of college the bonus?

    I’m adding this one to Fawcett’s Favorites next Monday.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    • My accountant keeps advising me not to pay off my home mortgage. I have the means to easily pay it off and the payments are not a burden. He says the only reason for me to pay it off is to call myself debt free which I admit, sounds good. He says my return on all of our investments is far greater than our 3.5% mortgage. Also the mortgage is deductible.
      I just retired and received a nice payout from my practice. I’m looking at a very attractive real estate investment ( Origin, which I heard about through your blog ) or paying off the mortgage.
      I’d be interested in your thoughts

      Ken McCalla MD


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