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College or Retirement?

April 02, 2024

College or Retirement?

Many parents feel saving for their kids’ college costs is just as important as saving for their own retirement. It’s an understandable but potentially dangerous mindset.

Yes, the cost of college is rising, but it will always be just a fraction of the overall cost of retirement. And even if your child’s college education ends up costing in the six figures, there’s a good chance that your family won’t have to pay all of it out of pocket. Federal, state, and private grants, loans, and scholarships can all help significantly. 

Bear in mind that there are no grants, loans, or scholarships for retirement. You can always plan to help your children with college costs—but make retirement savings your top priority.

The Cost of College

However, if you are able to save for your child’s college education, the first step in creating a plan is to face up to what that education is likely to cost and then get started as soon as possible.

The cost of higher education continues to increase. The CollegeBoard annually releases the latest average tuition and fees. Reviewing the trends in college pricing will help you create a long-term plan.

With college costs rising at twice the rate of inflation, it’s important not only to set money aside, but to invest it with an eye toward keeping pace with education inflation. Every little bit helps.

Let’s say you have young children and can only invest $100 per month to start. Assuming an annual investment return of 6%, your savings may have grown to $7,170.38 after five years. By then, you may be able to bump up your education savings to $200 a month. Assuming the same 6% rate of return each year, you may have $21,511.14 five years later. By then, you may be doing a little better financially and will be able to double your monthly contribution again, to $400. At that rate, you may have more than $88,500 10 years later—which could pay a significant chunk of your child’s college costs.*

The key—just as it is with pursuing any long-term financial plan—is to get started. 

What are the options to save for college?

There are several funding options to help you save. Planning ahead for college savings can keep you from resorting to using your retirement funds for education spending when the time comes. Here’s an overview of a few education funding options available to help you understand what option may be appropriate for you.

  • 529 plans are offered by states, and contributions can come from anyone, including relatives and friends.
  • Coverdell Education Savings Account Plans, unlike 529 plans, are owned by the child and can be used for qualifying education expenses including ones prior to college.  
  • Uniform Transfer to Minors Act (UTMA)/Universal Gifts to Minors Act (UGMA) plans are plans that vary from state to state and are subject to taxes every year. These accounts are in a child’s name and the responsibility is on them to pay the taxes, though they are taxed at a lower rate. These are opened through a regular brokerage or mutual fund account.

Don’t go it alone. Get the kids involved!

Here are a few ways your children can help take on the financial costs of college:

  • Strengthening their savings account: Your children likely already know the importance of setting money aside for a rainy day, and now they have a clear, long-term goal in mind. After-school jobs or even their weekly allowance can help grow their savings over time. You can work together to set different savings goals (and build in little rewards over time).
  • Applying for scholarships: Your children can do this individually with each school they apply to, and they can submit applications to local and national opportunities. Depending on qualifications and areas of study, they may be able to start applying for awards throughout high school, not just their senior year.
  • Working: Your children may decide to work part-time (or full-time) throughout school to defray costs, or they may be eligible for a work-study program. You may choose to pay for their college up-front and have them pay you back over time with the wages earned from their post-college career.

No matter how you choose to pay for or split your children’s college education, help is available. We can meet together and with your student to explore your options and determine an effective plan. Call the office any time to schedule an appointment.

*The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. Rates of return will vary over time, particularly for long-term investments. This does not represent any specific product or service. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.