Should you save for your child’s college education or your retirement? It can seem like an impossible task to save for both, and with both being important, it can also seem difficult to choose between the two. Thankfully, there are strategies you may implement to help work toward your goals for your retirement and college savings.
Consider Prioritizing retirement over college savings
While many parents want to fund their kid’s education, if a choice has to be made, you may want to consider prioritize saving for retirement over saving for your child’s college education. Prioritizing retirement doesn’t mean you won’t save for your kids’ college, but it does mean that your priority will be helping ensure you have the money needed to retire. Your kids may have other opportunities to pay for college through scholarships, grants, and student loans. You, however, only get one shot at saving for your retirement, so it should be your priority between the two.
Determine your goals
Before you can determine what you need to save for college and retirement you have to get clear about your goals for both. According to CNN Money, you will need to replace 80 percent of your pre-retirement income to live comfortably in retirement. The numbers may change based on how you plan on living once retired, but the 80 percent figure can help act as a starting point when deciding how much you need to start saving now for retirement. If your child attends a public in-state college, you’re potentially looking at six-figure price tag per student. One study suggests the cost of tuition could be as high as $205,000 for a four-year degree by 2030. Once you understand the numbers, you can then make plans on how much you’re going to save to work toward your desired financial goals.
Maximize retirement savings
If you are prioritizing retirement savings over saving for college, you may consider maximizing all of the retirement savings opportunities available to you. If your employer offers a 401(k) match, make sure to take full advantage of the plan and if you haven’t already, consider opening a Roth or Traditional IRA as well. A Roth IRA will allow for tax-free qualified withdrawals once you’re ready to retire, while a traditional IRA will allow for you to defer taxes on contributions until you’re ready to withdraw them, potentially lowering your tax liability today.
Maximize college savings
Retirement plans aren’t the only ones that allow you to help maximize savings opportunities. College savings plans also can also offer potential tax benefits. Check to see if your state offers a 529 College plan. 529 college savings accounts may allow for tax-deductible contributions (depending on the state in which the plan was opened) and tax-free withdrawals for qualified education expenses. If your state doesn’t offer a 529 plan then you may look into a Coverdell Education Savings Account or ESA that operates similar to a 529 plan.
Find a happy medium
Ultimately, once you’ve set goals and crunched all of the numbers you may find that you can’t afford to save for retirement and college at the levels you like. Instead of being discouraged by this reality try to find a happy medium where you can pursue most of your stated goals. Maybe you decide to retire at 67 instead of 65 to give you more time to save for retirement or you only fund two-thirds of your child’s education utilizing other methods to finance the final third. Whatever you decide, be sure it’s a decision you’re happy with, and you start taking action today, as the future will be here before you know it.
This content is designed to provide general information on the subjects covered. It is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.
Gary Marriage Jr. is the founder and CEO of Nature Coast Financial Advisors, which educates retirees on how to protect their assets, increase their income and reduce their taxes. Marriage is a national speaker, delivering solutions for pre-retirees, business owners and seniors on the areas affecting their retirement and estates. He is an approved member of the National Ethics Bureau, and has been featured in “America’s Top Hometown Financial Advisors 2011” and was selected to contribute to a book with Steve Forbes titled “Successonomics”
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