Saving for College and Retirement at the Same Time

Saving money for a comfortable retirement when the time comes is something that is very important to you, but, on the other hand, you also want to help your child go to college or university. Is it possible to save for both? What will you need to sacrifice to achieve this goal? How do you find balance? Saving for your child’s education at the same time as your retirement can be challenging, but it may be possible to do both if you take the right steps now.

DivGrad_340Know your Financial Needs

You will need to determine what your financial needs are for both retirement and college. The following points are a good start:

For your retirement:

  • When do you plan to retire? 10 years? 20 years?
  • Do you have a pension plan or employer sponsored retirement plan? Are you participating in it? If you are, what is your balance? What will your balance be when you retire?
  • What amount you expect to receive in Social Security benefits? (estimate this using your personal earnings and benefit statement)
  • What plans do you have for your retirement? For example: Are you going to downsize your home? Do you plan on traveling much? Do you have expensive hobbies? Will you need to buy a new car?
  • Are you planning on working part-time during your retirement?

For your child’s education

  • When will your child start college?
  • What is the expected cost of your child’s education? Do you think they will attend a private or public college?
  • How many children are you saving for?
  • Do you expect your child to receive any scholarships based on athletic, artistic or academic abilities?
  • Will your child qualify for any financial aid?

There are many calculators that can be found online to help you predict your child’s education costs and your financial needs in retirement.

Determine how much can you afford to put aside each month

Once you determine your financial needs, figure out how much you can afford to put aside each month. In order to do this you will have to put together a budget that accounts for all your expenses and income. Once you determine how much you can put aside you will need to determine how you will split up this money.

Your retirement should be the priority

Yes, college is important, but you need to focus on your retirement, especially if you find out that your funds are more limited than you thought they were. Social security bennefits can not be as depended on as they have been in the past which makes it your job to fundĀ  your retirement. The other side is that, if you wait until your child starts college to save you will miss out on tax-deferred growth and compounding your savings. It’s important to remember, worst case scenario, your child can always fund college by taking out loans or receiving scholarships but you cannot take out loans to fund your retirement!

If it is possible, go ahead and save for both

In the ideal scenario you will be able to finance both college and retirement at the same time. The more money you save for college the less debt your child will be faced with when they complete school. Even if you put away very little, it can be surprising how much it will grow by the time your child gets to college. For example, at 8% $100/month will grow to around $18,000 in 10 years time.

A professional financial planner can help you figure out how to divvy up your funds between college and retirement if you are having troubles.They can also help you pick adequate goals and diversify your portfolio. You should treat each goal independently even if you are saving for both at the same time.

Can retirement savings be used to fund college?

Yes, but this is not a good idea. Financial planners strongly discourage this because it can leave you financially strapped in retirement. If you think that this is still something that you should be doing you can withdraw money penalty free from an IRA even if you are under the age of 60. Using your 401k will cost you a 10% penalty on any withdrawls you take out before 60. You can also potentially be subjected to a 6 month suspension if you make a withdrawal and you may also have to pay income tax on this money. It is best to talk to a financial planner before tinkering with your retirement savings to finance your child’s education.