Balancing Saving for Retirement and Your Kids College? This is What You Need To Know

The choice between saving for retirement and saving for your child’s college education is a microcosm of the dilemma many parents face: How do you balance your own needs with the needs of your child?

The argument for putting your child first is obvious. Parents have a solemn responsibility to prioritize the wellbeing and future success of their offspring, even if it means sacrificing their own short term happiness. Most parents do this without thinking.

But if you completely ignore your own needs, you’ll end up being miserable, unhealthy and a much worse parent. The key is striking the right balance.

So when it comes to saving for retirement and saving for college, how do you find that balance?

Analyze Your Situation

Before deciding how to split your money between retirement and college, take stock of your general financial health and the status of your retirement accounts. Look at your Mint account to see if you’re ahead or behind on retirement contributions.

Use the Goals feature to set up a Retirement goal. You’ll need to link your IRA and 401(k) accounts, decide when you want to retire and input your desired annual income in retirement. The app will then decide if you’re on track or falling behind. You can play with the numbers and see if retiring a few years later gives you more leeway.

If you’re already on-track, feel free to start saving for your child’s college education. If you’re desperately behind, it’s best to focus on retirement until you’re caught up.

Choose Retirement First

When deciding between saving for retirement and your child’s education, it’s always best to choose retirement. That might seem selfish at first glance, but skimping on retirement contributions could actually make things harder for your children.

Your kids can borrow money, earn scholarships or attend community college to lessen their burden. If they still can’t afford to go, they can take a year off to work and save money.

But you can’t borrow money if you reach retirement age and don’t have enough in your nest egg. There’s nothing you can do to make up the difference – except ask your children to take care of you. Student loan debt might be expensive, but not as expensive as funding your parents’ retirement.

Make sure you’re saving at least 10-15% for retirement. You should also make sure you’re receiving any matching 401(k) employer contributions. This is free money that shouldn’t be left on the table.

If you have money left over or receive a significant windfall, feel free to stash the rest in your child’s college fund.

Another reason to prioritize retirement contributions is that money in an IRA or 401(k) doesn’t count as an asset on the Free Application for Federal Student Aid (FAFSA). By saving more money in those accounts, you might inadvertently help your child qualify for more need-based aid.

Earn Free Money for Your 529

Many states provide tax credits or deductions if you save money in a 529 account. These accounts are like IRAs for your child’s college tuition. Every state has their own rules, but about 30 states provide some sort of tax benefit if you contribute to a 529.

There’s no federal tax deduction for 529s, so the state deduction or credit is the only tax benefit. If you really plan ahead, you can calculate how much you’ll save in taxes and then increase your retirement contribution.

Use the Right Credit Card

There are several credit cards on the market that provide rewards in the form of 529 contributions.

The Fidelity® Rewards Visa Signature® Card provides 2% cash-back that can be deposited in a Fidelity 529 account. There’s no limit on how many rewards you can earn, and rewards never expire. The card has no annual fee and was named “Best Credit Card for College Savings” in 2018 by Money Magazine.

The Upromise Mastercard from Barclays has 1.25% cash back on all purchases and a 15% savings bonus when you connect the card to a 529 account.

Using one of these credit cards for your everyday purchases will increase your college savings without affecting your retirement contributions.

Talk to a College Counselor

If you’re worried about paying for college and don’t want your kids to take on significant debt, talk to a college counselor. A professional can identify schools that fit your child’s interests and your wallet. They can also provide guidance for your child’s application and essay to make them a great candidate for scholarship money.

It’s best to start the conversation way before applications are due. If your school doesn’t provide a college counselor, ask around for recommendations on an independent counselor.

Encourage your child to apply for every scholarship they’re eligible for, even if the chances seem slim or the payout is small. Every year, students leave billions of dollars in scholarship and financial aid money on the table. Just applying for lesser-known scholarships could be enough to get the money.

Have the Conversation with Your Kids

Telling your child you can’t pay for their college is a conversation no parent wants to have – but the issue won’t just go away if you avoid it. As your child starts exploring college options, sit down with them and tell them what they should expect from you financially. Lay out exact numbers if you have them.

They may be disappointed – especially if you had promised to cover tuition – but waiting until they start the application process will only turn that disappointment into anger.

Giving your kids a heads up allows them to plan realistically for college. I always knew how much my parents planned to pay toward my college education, so I was able to make decisions based on that knowledge.

I applied to more public universities instead of private institutions with a higher price tag – even though going to a prestigious private university was a dream of mine. Over a decade later and five years after making my last student loan payment, I’m grateful that I was given the information needed to make a more financially sensible choice.