Personal Finance

Saving for College and Retirement -How to Prioritize

Should you prioritize saving for your kid’s college education ahead of your own retirement? The short answer is no. Your retirement savings should take precedence. Still, you don’t necessarily have to choose one goal and ignore the other but focus to fund both with each paycheck.

We recommend as part of your financial plan to have a balanced approach to your long-term retirement savings goals while considering all available college funding resources. Recent data by Sallie Mae suggests that the average household pays for 43% of the total cost of college with the parents’ income/savings, 11% through the student’s income/savings, 29% via scholarships, grants, and 18% through borrowing. Thus, how families and students decide to pay for the cost of college requires a complete understanding of their unique circumstances.

Consider that college typically lasts four years, while your retirement may last 20 to 30 years. While student loans can be a liability for graduates, not having enough in savings to last a multi-decade retirement could place a greater burden back on yourself and on your adult children. Always remember the saying to “pay yourself first” as you cannot put your retirement on a credit card.

Budgeting for College and Retirement

The notable “three-legged stool” metaphor for planning retirement income is now an outdated symbol for the trio of common sources of income: Pensions, Social Security, and personal savings. Pensions are almost nonexistent and Social Security benefits may be reduced by 2034, leaving the burden of retirement income on retirees themselves to foot the bill. You can plan to work through your retirement years into your 70’s and 80’s, but that may not always work out as planned. While you can take out a loan for college, you can’t put your retirement on a credit card.

The first step for your cash flow balancing act would be to earmark 15%- 20% of your paychecks for retirement savings as a rule of thumb. Next focus to carve out discretionary cash each month for college savings. Consider utilizing a combination of both a traditional college 529 – and private state sponsored college 529 plan. While a traditional 529 plan allows you to invest cash into a brokerage account, private (state) college 529 plans allow you to buy tomorrow’s tuition at today’s prices in the form of tuition certificates.

Consider that the cost/benefit of attending a name- brand private university may not always “pay off” and end up placing a significant burden on college graduates. A few great tips on planning for college to help minimize future expenses include:

*Start at a local state college or community college for the first two years.
*Find paid internships or part time jobs.
*Evaluate applicable scholarships and grants.
*Utilize student loans responsibly to cover any gaps.

Economic benefits of education

 Saving for college is a core component of any financial plan alongside other major goals such as retirement or buying a home. With all of the market and economic uncertainty of the past decade, customizing a financial plan to each individual or household’s needs, ideally with the guidance of a trusted financial advisor, has never been more important.  

According to the Bureau of Labor Statistics, job prospects improve as educational attainment increases. For example, the accompanying chart (above) shows that unemployment rates were 6.2% for high school graduates but only 3.5% for those with 4-year bachelor’s degrees. Similarly, the median annual earnings of those with high school diplomas was $40,450 compared to $66,700 for college graduates. Not surprisingly, these patterns continue for advanced degrees as well.

Of course, these statistics are averages that don’t consider individual circumstances or differences within each education level. Pursuing college and advanced degrees may not be for everyone, and there are many personal factors that must be considered. For instance, today’s very low unemployment rates may make the opportunity costs of attending a 4-year college less attractive to some, including those who attend trade schools or benefit from on-the-job training. In contrast, poor economic periods such as during the global financial crisis may make the benefits of college more pronounced.

Additionally, these particular statistics don’t consider the choice of college major or type of employment. It’s clear that those studying highly employable subjects, such those related to engineering and financial services, will likely have greater job prospects. Regardless, the broad data make it clear that there are many economic benefits to higher education.

The cost of a college has increased faster than inflation

The other side of the equation is that the sticker price of a college education has increased 800% over the past 40 years. Even after adjusting for inflation, the cost of college has increased dramatically across all types of institutions, as shown in the accompanying chart. The real, inflation-adjusted cost of a private 4-year college degree rose 176% from 1981 to 2021, while public universities saw prices climb 252%.  

Unfortunately, these inflation rates for education have also outpaced wage gains. Thus, those saving for college will need to save earlier, save more, take advantage of investment returns, and borrow. Certain investment vehicles with tax benefits, such as 529 plans, have been created to encourage earlier college savings in order to take advantage of compound returns over time.

Student loans are a major burden  

Unfortunately, borrowing for college often results in high levels of student loan debt upon graduation. At the individual level, this is a burden on graduates that must be factored into every financial and career decision. In the worst case, it may mean that graduates are unable to take as many risks or pursue their true passions if it means they are unable to generate the steady income needed to repay their loans.

At the aggregate level across the economy, student loans have ballooned over the past 20 years to $1.6 trillion, outpacing other non-mortgage consumer debt. This has led to macroeconomic concerns with some comparing the size of student loan debt to the subprime crisis prior to 2008. While it’s difficult to say exactly how this will impact the economy, there are important differences to subprime loans such as grace periods, forbearance, parent cosigners, and more. Still, it’s possible that high levels of student debt could act as a drag on the economy due to its influence on career decisions, reduced consumer spending, and more.

Of course, the student debt crisis has become a key political issue. The current administration recently sought to cancel up to $20,000 in federal student loans for qualified borrowers. However, the Supreme Court has ruled that this is an overstep of the executive branch and invalidated the action. Politics aside, this has resulted in uncertainty for those with student loan bills coming due.

The bottom line? Deciding how to pay for college while simultaneously saving for retirement is an important component of any financial plan. Saving for your children’s college education early, making appropriate investments, and using attractive vehicles, ideally with the guidance of a trusted advisor, can help to increase the odds of financial success.

For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email 

Note: Diversification does not ensure a profit or guarantee against loss.  You cannot invest directly in an index.

Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Saving for College and Retirement topic. 

You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), and it advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.

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