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Retirement or College: Which Savings Goal Comes First?

By: American Heritage06.15.23

As every parent knows, juggling is part of the job. When it comes to financial matters, though, knowing which ball to keep airborne is not always clear. Case in point: Should you prioritize saving for retirement or for your child's college education?

Financial planning is similar to parenting in that the decisions are complex and not always straightforward. While the best choice for you will depend upon your unique situation and needs, a few general considerations can help you create an informed strategy.


Prioritizing Retirement Usually Makes Sense

First things first: Saving for retirement should arguably take precedence over saving for your child’s education, and for good reason. When it’s time for your child to pursue a college education, they will have a myriad of financial aid options to help cover expenses, including scholarships, grants, and loans. When it’s time for you to retire, however, few options exist to support you beyond Social Security and the money you have worked for and saved throughout your life.

Your dedication to these retirement savings will dictate the lifestyle you enjoy during your golden years. Factors like inflation, increased healthcare needs, and the pursuit of hobbies and travel can make your retirement years just as expensive as the life you lead now while working, if not more so. Every dollar put toward retirement can make a difference in the ease with which you navigate your future finances. Plus, the longer you have money invested, the more it can grow by the time you retire. If you don’t save much for retirement until your child is in college, it will be almost impossible to make up lost ground.

Beyond your own comfort, how prepared you are for retirement could impact your child’s life as well. If your retirement funds run dry prematurely, your remaining financial needs, such as housing and medical care costs, will likely fall to your child. Preparing for retirement is, in a sense, safeguarding your child’s future finances against these unexpected expenses.

Remember, retirement isn’t just a phase of life; it’s a long-term financial commitment. People live much longer now than they did several years ago. Without a solid retirement fund to support you, those years could be more stressful than celebratory. Maximizing your retirement contributions – and wisely investing those contributions – can help create a robust financial foundation for your retirement. Here are a few tips to keep in mind:

  • If eligible, invest in an IRA through your financial institution or a 401(k) through your employer.

  • Max out your IRA/401(k) contributions every year. These accounts offer tax-deferred growth, so extra contributions can make a big difference over time. 

  • Take advantage of any employer-matching opportunities through your workplace retirement plan, if available.

  • Invest in assets that have the potential to offer a solid rate of return while fitting with your personal risk tolerance. A financial advisor can provide guidance in this area.


What About Funding Your Child’s College Education?

All of this is not to say that saving for your child's education isn’t essential – it absolutely is. Tuition has skyrocketed over the past several decades, and you don't want your child to graduate with overwhelming amounts of student debt. Take a look at your monthly budget to see how much you can afford to set aside for college without trimming your retirement savings.

If you have some breathing room in your budget, one excellent savings option is a 529 plan, or a qualified tuition plan. This tax-advantaged savings plan is designed explicitly to help you save for future education expenses. It’s like a piggy bank just for your child’s college education, with the bonus feature of tax-free growth and withdrawals, as long as the funds are used for qualified education expenses.

Those funds can go further if your child attends an in-state college. Attending a school in the same state that you currently live in could qualify your child for in-state tuition rates, which can lead to major savings. In the 2022-2023 academic year, for instance, the average in-state tuition at a four-year public university was $10,940, while out-of-state tuition at a four-year public university was $28,240. That’s a difference of over $17,000 a year.

Financial aid can help bridge the gap between your savings and college expenses. Scholarships, grants, and work-study programs provide funds that don’t need to be repaid. Student loans, either federal or private, can help cover remaining costs, but they do have to be repaid with interest. If your child does require loans to cover their college expenses, make sure they understand what to expect when it’s time to repay them. These resources, combined with savings you’ve designated for your child’s college expenses, can help make your child’s dream education a reality.


Planning Is Key

Financial planning is not a one-size-fits-all endeavor – it is a dynamic journey that requires regular reviews and adjustments. With strategic planning and decision-making, you can balance saving for retirement and your child’s college education in your budget.

At American Heritage Credit Union, we can help bring both your retirement goals and your child’s education dreams to life through products and resources like Sallie Mae student loans and our Investment & Retirement Center. As part of our IRC, we offer investment advising, education planning, and an assortment of retirement saving options, including IRAs. 



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