Prioritize Retirement and College

[LivingAlmostLarge]

Can I ask how do other parents prioritize college versus retirement savings? I think we're saving a lot for retirement because we got a late start and we didn't have any parental help so we've had to save for homes, cars, schooling on our own. Our parents helped us in undergrad which was great, and we did have some loans but not 100% so we are both grateful.

So we are now 33 and 34 and are having our second kid, and we've been doing the $2k/year into an ESA but that's really all we can afford right now. We've prioritized other savings like retirement, newer car, home repairs, paid back our own student loans, trying to move and buy a SFH.

I can definitely see how in 5 years we probably will have more flexibility and more disposable income, but right now I don't think it's going to happen.

Should we cut back on retirement and other savings a little to fund college more? We save probably 25% for retirement, 10% for other stuff like home, car, etc. We aren't spendy people we live on less than half of what we make, but I wonder if we're shorting our kids?

[jpg7n16]

Some food for thought:

The reason you go to college is to have a better future. So your parents paid for a portion of your college to ensure a better tomorrow. How can you have a better financial tomorrow, if you don't save towards it?

My college education taught me to prepare for my retirement.


In my book, save for retirement 1st. Make sure you're on track there. If you're saving 15% a year, and are on pace, I see nothing at all wrong with using additional savings to help your kids through college. Or using additional funds to help your kids pay off their SLs.

I certainly see something wrong with the clients who say that they're 48 and just now thinking about retirement because they've been so focused on other things, like getting the kids through college.


The standard industry saying: you can borrow for college, but you can't borrow for retirement.


And I'm not a parent, but I have 2 parents. I would MUCH rather my parents saved for their retirement, than saved for my college. They're now nearing retirement age and struggling - which is a main driving force for why I went into this field.

Do your kids a favor and don't make them worry about how you're going to make it when you retire.

[disneysteve]

I think we're saving a lot for retirement because we got a late start

So we are now 33 and 34

We save probably 25% for retirement, 10% for other stuff like home, car, etc.

You say you got a late start saving for retirement but you are only 33 years old. How is that a late start?

Have you used any retirement calculators to figure out how much you need to save to meet your goals? Saving 25% of your income at such a young age is great and I'm sure that will get you where you want to be, but I suspect that trimming that back a bit would also allow you to reach your goals while freeing up some money for college savings. Remember, the rule of thumb we always use is 20% of gross income for savings - 15% for retirement and 5% for other needs. You are doing 35% total, well over the 20% target.

If you want to help the kids more, I think you can certainly afford to do so without having a major effect on retirement.

[kork13]

Agreed with both JPG and Steve... Retirement first, then education savings.... always. But if you know you're on track for retirement, there's nothing wrong with diverting some for educational purposes.

Personally, I would err on the side of more saved in retirement, less saved for education. If you find that you have more than you need for your retirement needs, you can always write a check to pay for education expenses or pay off student loans.

[LivingAlmostLarge]

Nope jpg I want to pay for college but am worried that we aren't on track to save enough. Maybe a portion but I'd like to pay 100% and have kids have more than what we had. My DH does too. It'd be nice to be able to pay for things other people got either a wedding, house DP, first car, etc. I appreciate the fact that our parents helped us at all.

And my DH says now, I'd rather my parents save every penny trying to fund their retirements then give us anything. That way they use their money for them and not giving us money when we're okay. So in 20 year hopefully they won't run out and expect us to give to them.

DS, I feel like we got a late start at 28 and 26 (DH turns 35 this year). We wasted many years post college in graduate school and didn't have savings vehicles. Granted we might not have seeing as we had student loans anyway and car loans and house DP, so maybe either way it was a moot point. I think I tried it once and it said that we were way behind on saving. I worry because we haven't bought our final home and I have no idea how that will affect our future budget.

Kork, maybe that should just be the final plan. We save for retirement and pay for school loans tying it to grades. So hopefully either way we have enough, but if something should happen we still can retire.

[jIM_Ohio]

The middle option is stop earmarking money for one need or another, and focus on creating liquid investments in taxable accounts. Tough call what you will need in 10 years, add flexibility to the plan, and don't focus on account labels.

[sblatner]

Not sure what retirement savings accounts you are using but with Roths, you can withdraw the principal anytime. We are saving money in Roths for retirement but we know that we can use those funds to pay for college if we need them. Roths are not as restrictive as 401ks and regular IRAs. You might want to fund your 401ks to the match and then put any excess in Roths.

Also, we have two kids entering college in the next four years. We paid off our mortgage last fall and plan on using our "mortgage payment" to help with college costs. We are 15-20 years older than you and bought our house in 1994 and haven't moved so it was easier to pay off the loan.

Also, we have told our kids that they will take out the maximum Stafford loan amount each year (I think it totals around $20k for four years). Interest does not accrue until they are done with school. If we are in a position to help them pay it back, we will. If not or if they have good jobs, they can pay it back.

I like what someone said about saving in taxable accounts. That money can be used for anything. I think it is smart to have balance - retirement pre tax, retirement post tax and taxable accounts.

[scubatim84]

Is your ESA a 529 plan? If not, why? The first thing you want to do is make sure you're getting the appropriate tax benefit for college savings for your kdis, since these should be pre-tax dollars at work.

The second thing is I don't see why $2,000 a year wouldn't be enough...this seems very high. College is getting more expensive but not that much more. How old are your kids? If they're young, I would think $2,000 a year should be more than enough. The main thing you should be trying to do is not so much pay for their college, since they should have the incentive to get a good degree which will enable them to pay off student loans, but make it affordable for them. This may simply translate into enough supplemental income such that they can get through school with only 25K in loans. Keep in mind they will be working part-time (or should), which will help pay for colelge as well, and hopefully they aren't planning to go to an ivy.

I think as long as your kids don't plan on spending $100,000 to get a bachelor degree in Art History, they should be fine.

[LivingAlmostLarge]

Jim, would you really scale back now to 15% for retirement? I feel insecure not maximizing our Roth and 401k contributions. We've always been taught to save the maximum for retirement and it makes us both really nervous. We thought we'd just build from there and try to live on less.

sblatner, we fund 401k and Roth IRA to the maximum each year. Not the max but the $27k this year. For our taxable savings we do the company ESPP for 10% maximum and just roll it into a taxable account ever 3 months. We are hoping to move soon in the next year or two into a final home not sure what it will cost, but we are paying down the mortgage on time and just saving to put more down if needed.

scuba the ESA is a coverdell. Why not a 529? It caps out at $2k and basically the same thing. They are two and about to be born. I want to pay for it 100% if they maintain good grades. I won't pay for failing out, but I would like to reward them with no student loans from undergraduate and I can't promise further at this point. It depends but we'd like to try.

art we have vacations and entertainment covered. We aren't super spendy and it's pretty generous now our budget. The big elephant really is college. I wonder if we are going to regret it in 5 years not having saved more earlier? And our parents are not in a position to "gift" us with a college fund like so many other people I hear from.

[moneybags]

Not sure what retirement savings accounts you are using but with Roths, you can withdraw the principal anytime. We are saving money in Roths for retirement but we know that we can use those funds to pay for college if we need them. Roths are not as restrictive as 401ks and regular IRAs. You might want to fund your 401ks to the match and then put any excess in Roths.

I second the Roth idea. In addition to being able to pull funds out for college, these funds will not be considered in the calculation for financial aid. Retirement funds are not included as money parents (or kids) have saved for college.

[snafu]

Due to poor family planning all those years ago, we have two sons in university at the same time. 22 years ago post secondary saving plans didn't exist here and initially they had weird rules. We did put a small savings plan in place thanks to grandparents who gave annual Government Savings Bonds as birthday presents and encouraged us to add small sums each month. Based on our experiences we made it clear to both DSs that we expected them to have 'skin in the game.' As a uni prof DH saw too many immature students make a mess of their 1st year. Our guys knew they needed to pay tuition and we'd help with the rest.

Our elder son benefited from two years in Community College since the program was general studies and courses were fully transferable to University. He was able to fund that entirely with part time and summer employment. He has continued to university in another city having gained several scholarships using funding for transportation only. DS2 founds grants, work study and his frat bros appreciate his cooking skills enough to forgo his rent and fees. He gained skills by working in restaurants since he was 16 y/o. While I objected and threatened, he got a job as Dishwasher in a nearby restaurant. It turned out to be a really smart move because he quickly realized if he didn't make the marks, he could look forward to being a wet, smelly dishwasher like the guys he worked with!

We are planning for both guys to take a gap year and travel overseas. If they continue to be interested they'll work in a 3rd world country to expand their horizons and fund living expenses. DH and I are willing to fund course work in another country so long as they return to complete their degrees here.

[sblatner]

scuba the ESA is a coverdell. Why not a 529? It caps out at $2k and basically the same thing. They are two and about to be born. I want to pay for it 100% if they maintain good grades. I won't pay for failing out, but I would like to reward them with no student loans from undergraduate and I can't promise further at this point. It depends but we'd like to try.

Not sure if you mean that 529s cap out at $2k per year...if so, that is not true. They all have different rules but I know California's has a $350k max per beneficiary. The max might be $13k per year (the annual gift allowance but I seem to remember you can prefund a few years upfront).

We have not used 529s as we were worried about how they are invested and do have friends who had kids entering college in 2009/2010 and their funds were worth less than what they invested. Turns out it wasn't worth it for them. You have a long time horizon so would probably be okay. You can dollar-cost average your investment by putting money in each month and then would buy more when the fund goes down and less when it goes up.

Otherwise, from what I have read about your situation, I think you are doing really well. Again, with the Roths, you have 16 years for your oldest child before college. 16 years times $5k per year for a Roth contribution is $80k. That would hopefully be enough for college. You could do $2k per child in a college fund (and maybe more later after you figure out the house situation) and then use your Roths if you need to.

[jIM_Ohio]

Is your ESA a 529 plan? If not, why? The first thing you want to do is make sure you're getting the appropriate tax benefit for college savings for your kdis, since these should be pre-tax dollars at work.

The second thing is I don't see why $2,000 a year wouldn't be enough...this seems very high. College is getting more expensive but not that much more. How old are your kids? If they're young, I would think $2,000 a year should be more than enough. The main thing you should be trying to do is not so much pay for their college, since they should have the incentive to get a good degree which will enable them to pay off student loans, but make it affordable for them. This may simply translate into enough supplemental income such that they can get through school with only 25K in loans. Keep in mind they will be working part-time (or should), which will help pay for colelge as well, and hopefully they aren't planning to go to an ivy.

I think as long as your kids don't plan on spending $100,000 to get a bachelor degree in Art History, they should be fine.

What qualifies you to give tax advice? The blue highlighted part is just plain wrong and misguided at best.

I could go on, but brevity works.

[jIM_Ohio]

Jim, would you really scale back now to 15% for retirement? I feel insecure not maximizing our Roth and 401k contributions. We've always been taught to save the maximum for retirement and it makes us both really nervous. We thought we'd just build from there and try to live on less.

Re-read my post...
keep saving, just change the type of account used. Still 25% savings rate, just apply differently with flexibility as the reason. It will cost you in taxes (so invest wisely), and you will reap the rewards in tax credits (assuming they exist), flexibility (still high net worth).

You would then subject yourself to capital gains taxes and risk of legislation changing the education tax credits. You gain flexibility.

[kv968]

Re-read my post...
keep saving, just change the type of account used. Still 25% savings rate, just apply differently with flexibility as the reason. It will cost you in taxes (so invest wisely), and you will reap the rewards in tax credits (assuming they exist), flexibility (still high net worth).

You would then subject yourself to capital gains taxes and risk of legislation changing the education tax credits. You gain flexibility.

Not to speak for Jim (and sorry if I'm misinterpreting what you're saying) but to add some of my numbers to his thinking...

If you're saving 25% for retirement in a Roth and a 401k maybe shave a little off the 401k and put in a taxable account.

I don't know your numbers but say 10% of that 25% fully funds both of your Roths. Out of the 15% that then goes to your 401k's, maybe take 5% or so and put that in a taxable account using some index funds (tax-efficient). That way, although it might still actually turn out to be retirement money in the long run, you'd have the money readily available for whatever you may need in the meantime (i.e. tuition).

I'd just run some numbers first and make sure that you've got your retirement taken care of first. Like jpg said, you can take a loan for college but not for retirement.