Saving for retirement and a college education at the same time is a challenge for many families. Financial planners advise that if funds are limited — and for most people, they are — it is crucial to fund retirement first before contributing to an education fund.
The reasoning? You, or your child, can always take out loans for college, but you cannot borrow for retirement. Planners liken the approach to the instructions given to air travelers: Put the oxygen mask on your own face before putting it on your child's. While many parents balk at the idea of burdening their offspring with student debt, shortchanging yourself now to help pay for college can backfire. You may simply be increasing the likelihood that your children will have to support you later in life.
"It sounds coldhearted, but you have to put yourself first and not derail your retirement money," said Carrie Schwab-Pomerantz, a senior vice president at Charles Schwab & Company.
She advises that those with a workplace 401(k) plan should contribute at least enough to get the maximum employer match, and preferably up to the maximum annual contribution. A fund for emergency expenses and paying off nondeductible debt, like credit card debt, also should take priority over saving for college, she said. She even suggests that putting additional money away, outside of a formal retirement plan, should take precedence over a college fund.
If that is hard to accept, consider this, says Richard S. Kahler, an investment adviser in Rapid City, S.D.: Retirement costs do not just include money to pursue hobbies or travel. The cost of leaving the workforce to care for an elderly parent can top $300,000, according to one study. And the cost of having professional caregivers and nursing homes do the job over a typical five-year period can be more than double that amount.
By comparison, the cost of attending a public university as an in-state student now averages about $23,000 a year — or almost $100,000 over four years.
"It costs kids way more to take care of a parent who hasn't taken care of themselves," Kahler said.
If, after analyzing the numbers, parents do find a shortfall in their retirement savings, they face tough choices — including spending less now, working longer before retirement or looking at less expensive schools. Ann Garcia, a financial planner with Beacon Rock Partners, said parents needed to zero in on their priorities and ask themselves: "Am I willing to work a year longer to let my kids have the education I want them to have and graduate with less debt?"
Financial planner Derek T. Kennedy said that rather than butting heads with clients who are adamant about financing their child's college education, he suggests they might aim to save for 50 to 75 percent of college costs and pay for the rest out of current income at the time, or with some contributions from the child's own employment.
Financial planners say Roth IRAs can be a good tool for families that qualify, because they can be used for either retirement or college. Rules vary depending on age and other factors. You can withdraw contributions you've made to a Roth IRA at any time without paying taxes or early-withdrawal penalties to pay for college expenses.
If you tap the earnings before age 591/2, however, you'll pay taxes on that money, but not an extra 10 percent early-withdrawal penalty, if the withdrawal is used for education. Taxes and penalties on the earnings may be avoided, too, if the funds are used for education.