Money Talk: College or retirement? A savings dilemma
My Edmonds News is pleased to introduce this new column by Edmonds resident Erin Eddins.
If you’re a parent with less-than-deep pockets, you’ve probably wondered which savings goal is more important—your children’s education or your own retirement. After all, good parents put their kids’ needs above their own, right? Maybe not, in this case. When it comes to prioritizing your savings, most financial experts would argue strongly in favor of retirement. Here’s why.
A Different Animal
The either-or question (college or retirement) masks the fact that these are two different types of financial goals. Consider:
• College-bound students can seek out scholarships, grants and loan programs. But the security of your retirement depends entirely on you.
• A college student’s income tends to rise steeply after graduation. The same may not be true of your income after retirement.
• Contributing toward college costs can build a child’s self-esteem. Running short of money in old age will do nothing for yours.
If your kids are still small and your income is sufficient, you may be able to save for both college and retirement. However, funding your retirement first and fully is critical to your own financial security— and to your long-term ability to help your children.
Once your retirement savings program is firmly in place, don’t just open a bank account. Better choices may include 529 Plans, which allow savings to grow tax deferred and offer tax-free distributions; Coverdell Education Savings Accounts, more limited in contribution level but applicable to elementary and secondary school expenses; and trusts to benefit a minor, which are popular with grandparents who want to help with college costs while possibly minimizing estate taxes.
Coddle Your Nest Egg
If you can’t easily manage both retirement and college savings, focus on tax advantaged retirement plans. Many employers match some part of 401(k) retirement contributions. If you cease contributing to yours to save for college instead, you’re leaving that match money on the table. Another benefit to retirement plans is that you’re less likely to dip into the money for short-term needs over the years.
Even more important, assets in IRAs and similar plans generally aren’t included when the federal government and individual colleges and universities calculate your Expected Family Contribution (EFC) to education costs. It makes sense to contribute as much as you can to these accounts.
If tuition bills are looming and you’re short of cash, think very hard before tapping those retirement savings. Although funds in an IRA may be withdrawn penalty-free to pay qualified educational expenses, the entire withdrawal is regarded as family income for purposes of student aid. Cracking open that nest egg could damage both your retirement and your child’s chances for financial assistance.
A Parent’s Best Gifts
Encourage your kids to take some responsibility for college costs, whether it’s saving summer job income, researching scholarships, taking out student loans,
or a combination of these. The sense of involvement and accomplishment this brings can be a great gift. An even greater gift will be the peace of mind your children
will enjoy, knowing that their parents have crafted themselves a comfortable future.
A resident of Edmonds, Erin Eddins is a Certified Financial Planner® professional and Chartered Financial Consultant® with an emphasis on investment and retirement planning. She specializes in pre- and post-retirement planning strategies, Social Security maximization, and investment management.