All good parents want the best for their kids, and if you have kids nearing college age you're probably in the age group who knows all too well what taking out student loans means. It's understandable that you don't want to put your kids behind the eight ball the way you were, graduating with tens of thousands of dollars in student loan debt.
When so many of us live paycheck to paycheck, we have to make some hard choices. Should you prioritize saving for your own retirement or paying for your kid's college tuition? The answer is clear cut, and we're going to give it to you.
Spoiler alert, retirement comes first.
It Hurts You
Now that we've answered the question of what comes first, retirement savings or college tuition savings, allow us to explain.
Your kid has a lot longer to pay off any student loans they take out than you have to save for retirement. A few decades more. People have kids at different ages, and people go to college at different ages. In general, parents are in their late 30s to late 40s when their kids go to college, and most kids go to college at 18.
If the average retirement age is the early to mid-60s and most people graduate college in their early to mid-20s, you have about two decades to save for retirement while your kids have about 40 years to pay off their student loans.
Because time is the biggest factor in investing, the more time you lose, the more money you leave on the table. The amount of money you need in order to retire is far greater than the cost of college, even with the skyrocketing cost of a college education, so you don't have any time to lose when it comes to saving for retirement.
It Hurts Your Kids
How can helping your kids avoid the trap of student loan debt possibly hurt them? It hurts them if, in order to pay for their education, you neglected your own retirement savings and they have to give you financial help or even allow you to move in with them after retiring.
You might think you'll just continue to work, but what if you can't? Perhaps your health breaks down to such a degree that working isn't possible. Or maybe you lose your job late in life and find what many older workers in the job market have found, it's hard to get a job when you're over a certain age.
Employers are sometimes reluctant to hire older workers. Even if you own a business and are older yourself, you may have some preconceived ideas about older employees. They may think older workers don't have up to date skills, will cost more in insurance expenses, and demand a higher wage than younger counterparts.
Maybe your health is fine but your spouse's is not, and you have to retire in order to care for them full time. That's potentially two salaries lost.
Another thing to consider is childcare. Many young families rely on grandparents to help with childcare given how expensive it is, more expensive than college in some areas! If you have spent a chunk of your retirement money in order to pay for your child's education, you may have to continue working and will, therefore, be unavailable to help with the grandchildren.
You meant well when you wrote that tuition check, but doing so may have financial and other consequences for your children in the future.
How Much You Need to Retire
Because everyone's situation is different, there is no one number we can point to and say, "Here it is. You need $X to retire." There are, however, some rules of thumb and guidelines we can use to at least give us a ballpark number.
Some retirement experts believe we need $1 million to $1.5 million to retire. Another calculation tells us that we need 10 to 12 times our current income.
The 4% rule tells us that we can withdraw 4% of our retirement investments savings to live on each year for 30 years without running out of money. If your yearly expenses were $40,000, you would need to retire with $1,000,000 in your retirement accounts, 4% of $1,000,000 is $40,000.
How Much to Pay for College
As little as you can! Your kids should apply for every bit of financial aid they're eligible for and as many scholarships as they're qualified for. In fact, applying for scholarships should be your kid's full-time job during their last two years of high school.
There is no limit as to how many scholarships someone can earn. Apply for the high dollar ones and the smaller ones too. In fact, concentrate on smaller scholarships. There is a lot of competition for the big money scholarships while many small ones go unrewarded. Even scholarships worth only a few hundred dollars can go a long way towards helping to pay for things like textbooks.
We don't mean things to do instead of going to college, rather we mean alternatives to the traditional path of going full time to the best college you can get into directly after high school, which is a very expensive path indeed.
Getting your prerequisites done at a local community college can not only save money on tuition but in living expenses, too. Kids can attend near home and live at home rather than having to pay room and board at an out of state (or city) four-year college. Then they can transfer to a "big name" college for the last two years and still have that fancy name on their diploma.
There is no law stating that people have to graduate in four years. Rather than attending college full time, attend half time and work a part-time job simultaneously. Sure, it will take longer, but you can gain work experience while earning money to help pay for college. Potential employers love work experience!
There is also no law stating people must go to college directly after high school. Instead, you could work for a year or two (or more). Again, you would gain work experience and save money for college.
If you do want to help your children pay for college, consider a 529 plan. There are two types. The 529 College Savings Plan allows invested money to grow tax-free and to be withdrawn to pay for educational expenses. A 529 Prepaid Plan lets you prepay part or all of the tuition for an in-state public college, which locks in the tuition cost at the time of payment.
529 Plans are operated by each state. If your state gives a tax deduction for contributions made to a 529 Plan, this is one of the best ways to save for college.
It's What Parents Do
We know most parents put their children before themselves, and this is usually a good thing. But as you can see, not when it comes to saving for retirement or college tuition. Saving for your own retirement over your kid's college tuition might seem selfish at first glance, but it's really the best thing for you and your kids.
Because when you don't have to move in with them one day, they'll thank you!