Should you prioritize your own future over your child’s education? This is an emotionally charged question that leads many parents to fund college at the expense of their own retirement. However, with proper planning, you may be able to fund your retirement and still offer financial support for college.
Your retirement savings come first
It can be challenging to prioritize funds for an event that may be decades away over more pressing financial matters, like your child’s education. Deciding to cut back savings or allocate funds for other purposes can be risky, however, especially if you’re banking on financial resources that may not be available when you need them later on.
One of the best ways you can help your child is to ensure you won’t be a financial burden on them in the future. That means prioritizing saving for your retirement now — not holding off retirement contributions in lieu of paying for their college expenses.
Once you retire, your savings often becomes your main source of income. You’ll most likely depend on it to live, eat and pay for medical expenses that aren’t covered by Medicare. Keep in mind that nearly two-thirds of Americans retire before they reach 65, according to a poll from the Transamerica Center for Retirement Studies. You may end up using your funds to cover your basic needs for as much as 20 or even 30+ years.
Education for your children is important, but it’s secondary to your long-term wellbeing.
Tips to save for retirement and college
While building your nest egg takes priority, there are also several options to help financially support your child’s college education. Take a look at the following suggestions to save for both:
- Take advantage of catch-up contributions. Once you’ve turned 50, you can start contributing more money to your retirement accounts. In 2019, you can save up to $25,000 in a 401(k) and up to $7,000 in an IRA.
- Use your time wisely. Start early to use time to help grow the value in your retirement and education savings accounts. Take advantage of employer-provided 401(k) or similar retirement programs, especially if there is an employer match. After that, look into a Coverdell Education Savings Account and a 529 plan to maximize your education savings potential.
- Consider grants, scholarships and finance programs. Start researching early, as there are college scholarships available for children as young as 5 years old!
- Research all college options. In-state public colleges are generally less expensive than private or out-of-state colleges. If an out-of-state college is preferred, check to see if they have reciprocity agreements with your home state.
- Look into work-study programs. Many schools provide part-time jobs for students to help them pay for school while keeping up with their studies. These programs vary based on a student’s financial needs.
Keep in mind: Assets in retirement accounts don’t affect financial aid
When you complete the Free Application for Federal Student Aid (FAFSA), most money and assets owned by parents impact the student’s eligibility for financial aid. However, the value of retirement accounts (including 401(k)s, Roth IRAs and traditional IRAs) are often not counted when determining the expected family contribution.
With proper planning, there are options to help you prioritize saving for retirement and still financially support your child’s education. Contact us if you’d like to discuss the most beneficial and tax-savvy options for your situation.
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