The Juggling Act: Saving For Retirement and College

Here’s a question that parents often ask me … Should I be saving for my kids’ college education or my retirement?

Both are important financial priorities. But part of being a parent is juggling the many things that compete for our time and attention. These goals are no different—and I have some strategies to help parents accomplish both. 

Prioritize Your Retirement

Although you will most likely face college bills years before retiring, you should focus on retirement saving first. By prioritizing retirement, you are securing your own financial future, which will benefit you and your children. Qualified retirement accounts such as 401(k)s and IRAs grow tax deferred until you withdraw the funds, and they are excluded from financial aid calculations. Remember, students can apply for scholarships, grants, loans and financial aid. None of these are available for a secure retirement.

Your first step is to contribute to your retirement plan at work. If you receive matching contributions from your employer, contribute at least enough to take advantage of this additional savings. If possible, add funds up to the annual contribution limit. In 2021, you can contribute up to $19,500 (or $26,000 if you are over age 50) in a 401(k) account. 

You can also save up to $6,000 (or $7,000 if you are over age 50) annually in a Traditional or Roth IRA, if you do not exceed the IRS income limits. Your accountant or financial advisor can help determine if this contribution is tax deductible. 

Saving for College

Once you are on track with your retirement savings, it’s time to think about college expenses. Opening a 529 College Savings account is the smartest way to save for higher education. The assets in the account grow tax free, and withdrawals used for qualified education expenses are not taxed. Illinois offers an annual tax deduction for contributions made to Illinois Bright Start 529 accounts up to $10,000 for individuals ($20,000 for married couples). Other states offer tax breaks as well. 

If you do not have the full amount of tuition saved before your student heads off to college, students can apply for scholarships, grants, loans and financial aid. Some parents prefer for their student to have some “skin in the game” and will offer to cover part of the college expenses while their student works part-time to cover the rest. 

Save Early and Often

For both retirement and college, the best savings plan is to start now. A long-time horizon allows the markets to work in your favor and enables your money to grow over time. The chart below shows the impact of various monthly contributions made over different lengths of time. 

Let the Markets Work For You Over Time

Assumes Initial Investment of $2,500 and 5% Annual Return

Source: BrightStart.com

By setting up an automatic contribution on monthly basis or from each paycheck, 529 plan accounts and retirement accounts can quickly grow without much effort. You can start small and increase the contribution amounts over time. When you receive a raise or a large bonus, consider adding additional funds to your savings accounts. Instead of gifts at birthdays and holidays, friends and relatives can also contribute to your child’s 529 savings account. 

With some planning, you can use these strategies to maximize your savings for both retirement and college. The earlier you get started, the easier it is to find balance in successfully funding your long-term goals. 

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The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.