When money is tight, you have to make choices. Which is why if you're putting money away into your child's college account while trying to also save up for a retirement, you may well wonder -- what should be the priority?
Certainly there are some reasonable arguments for making your savings priority be college -- and then retirement. After all, if you're a parent, you probably feel that your kids' needs should come first. Assuming you had your kids before your mid-40s, college may be coming a lot faster than your retirement. You might also feel that if you've been cash poor and buried in bills your entire life that you can take whatever is coming in your not-so-golden years, but you're absolutely not going to let your financial situation spoil your kids' chances at financial happiness.
All understandable arguments, but spoiler alert: Financial experts generally will always tell you that retirement should be your first savings priority. Saving for your kids' college tuition comes second. That's assuming you aren't rich and can't easily fund both goals, of course.
Still, if you're somebody who is financially struggling and feel you should pay for your kid's college education before your own retirement, you might ask: Why is retirement the main priority? If you've ever wondered why the experts recommend retirement savings over college, here's a rundown of the retirement-first arguments.
You can borrow for college; you can't borrow for retirement. Not that seniors haven't tried to. Last year, the Employee Benefit Research Institute analyzed numbers from the Federal Reserve and found that the average debt senior citizens carried in 2010 was $50,000, up 83 percent from what seniors were carrying in 2001. But obviously, planning your retirement on the premise that you'll let your credit cards fund your golden years is a dangerous strategy.
Meanwhile, while you can't borrow for retirement, your kid "has the ability to apply for scholarships, grants, federal work study programs and student loans, either unsubsidized or subsidized, to aid in the cost of education," says Darren Jurick, associate vice president at Ameriprise Financial, a financial planning firm, in Plantation, Florida.
Your kid can also go to college on the cheap -- and still get a quality education -- by attending community college for two years and then transfer to a bigger university. You can retire on the cheap, too, but you don't want to do it too cheaply. If you're dumpster diving for food, that's not exactly a quality retirement.
Spending your resources on retirement may make more financial sense, from a numbers standpoint. Wayne Connors is a managing partner at 401k Investor, LLC, a company headquartered in Glastonbury, Connecticut that runs a website that helps do-it-yourself investors build their retirement portfolios -- and so you'd expect him to be on the side of funding retirement over college. And he is. But as he puts it, the interest rates for student loans, at least the ones your kids will take out, are still less than what you can make by putting money in investments for retirements.
"You can take out student loans for 3.8 percent, or you can put your money in a diversified investment portfolio across stocks and bonds, and you're going to average closer to 8 percent. If you look at the numbers with the same dollar amount, investing in retirement, you're going to be way ahead," Connors says.
Still, everyone's financial situation is different, and whatever you do, proceed carefully. Borrowing for student loans is expensive -- and is becoming more expensive. The 3.8 interest rate that students are paying for federal loans is climbing to 4.6 percent this July. And if you're a mom or dad, and you're borrowing money through a Direct PLUS Loan, available to parents of an undergraduate, the interest rate will be 7.21 percent July 1. If you borrow a lot of money for your kids' college at 7.21 percent or some other future high rate, you're going to have to pay it back -- and that money you're paying back could have been used toward your retirement.
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By prioritizing your college over your retirement, you could hurt everyone in the long run. If you put all of your financial eggs in the college basket like a 529, but you never really get your retirement nest egg in order, your children may get their diploma, and they might get a satisfying, high-paying or financially stable job -- exactly the outcome you hoped for.
But imagine that as you approach retirement or leave the workforce early, something goes wrong. Maybe you get sick, and you have to retire sooner than you dreamed you would. Then imagine your financial problems festering. Suddenly, because your retirement funds are so anemic, you need a financial lifeline, and the only people you can turn to are ... your kids.
By having ignored your retirement needs for all of these years, putting money toward their college at the expense of your retirement, you could potentially bring them down now. And even if you believe that you wouldn't turn to them, you're their parent. They may feel that they have no choice but to lend you a financial hand -- possibly at a time when their own finances were just starting to take off.
"In the long run, you're much better off allocating those funds to retirement so your kids won't have to," Connors says.
Look at it this way, says Brent Lindell, a financial advisor at Savant Capital Management, an investment and wealth firm in Rockford, Illinois. "If you're on a plane, and the oxygen masks drop down, put yours on first, and then you can assist the others sitting around you," Lindell says, citing the universal rule every parent is supposed to follow in the event of a plane emergency.
Lindell says the rules apply here, too, and as weird as it may sound if you're a parent always putting your own children's needs before your own, you may be helping your kids in other ways if you're prioritizing your retirement account before their college education.
They may run into financial problems well into adulthood -- say, when they're trying to figure out how to pay for their own retirement and their children's higher education. If you're financially healthy and willing, you can help them, or maybe even put away some money for your grandkids. But if you're in financial ruin because you only saved for their college diploma, you can't.
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