Saving Priorities: Retirement vs. Kids' Education

Having the ability to even ask this question might be indicative of having “first world problems.” Throughout the world, the concept of retirement is foreign. Financial independence doesn’t fit into the concept of life. That isn’t to say that all residents of underdeveloped nations are struggling with life, but the benefits that we live with in the modern world, a result of hundreds of years of changing societal structures, culminating in the type of capitalism we enjoy today, have provided opportunities for a type of independence that could formerly only be had by being born into a certain family.

Although most people who read this article might feel frustrated when their cash flow forces a choice between one’s own retirement or financial independence and providing the best educational opportunities for one’s children, even being able to select one option is a luxury.

Putting that aside for a moment, the reality is that many families must contend with this type of decision.

Traditional financial planners are generally clear on the matter. First, save for retirement. Then, if you have anything left over, provide for your kids’ education. This approach is solidly based in accepted theories.

Your kids can always pay — or at least help pay — their own college bills. A college education and retirement have one thing in common: they are both becoming more expensive. The costs of education increase far ahead of average inflation as colleges deal with less support from the government, a recovering economy with a smaller pool of potential donors, and poorly performing endowment funds in recent years.

While it’s not always recommended from an educational perspective, many college graduates would never had succeeded without the ability to work, earning money to help pay for their own education.

There are opportunities to borrow money for college, but nothing feasible to borrow for retirement. The goal in retirement should be out of debt. If you plan to live on a fixed income, dealing with debt payments is a hassle that would be much better eliminated. Pay off your mortgage before retiring so as much of your limited income as possible can go to you, not to lenders, not for assets you purchased years ago.

For now, student loans are generally good deals. Low interest rates combined with tax incentives are designed to make a good education more affordable for more people. There are no incentives to borrowing for retirement; the children are our future, not the seniors living in retirement communities.

The problem with the concept of saving for retirement in full before beginning to think about your children’s college education is that saving for retirement is never complete. It’s easy to underestimate the amount of money needed to retire. A few years ago, I estimated that in order to generate an annual income in retirement equivalent to a $50,000 salary, in thirty years I would need to have accumulated a nest egg of $3 million, assuming inflation at 3 percent and a safe withdrawal rate of 4 percent.

Most people are targeting a nest egg much smaller, and they’re probably underestimating their needs.

One reason why financial planners and advisers are so quick to instruct their clients to save for retirement ahead of other priorities is because it goes against the typical parental instincts. Parents who want to be the best role models for their children and at the same time want to provide them with any opportunities possible are more likely to put others’ needs ahead of their own. Parents are often willing to sacrifice some of their own comfort to ensure their kids can live a better life.

Good advisers want to encourage parents to fight against that instinct, and here is why:

• If you don’t think about your retirement, no one else will. You are the person who cares about you the most.
• Building financial independence sets a good example for your children, who might learn not to rely on others for financial assistance.

Just like in matters beyond the financial, parents have the tough job of finding the balance between providing for their children and providing them opportunities to grow into independent adults. Every child is different and every situation is different, so there’s no way to prescribe an approach to the question of where to direct limited funds that works for everyone.

Families with ten children might have tough decisions to make about planning for education, while households with one or two children might not feel as much financial pressure. Families where one child plans to be an investment banker while the other intends on being a teacher might have two different approached to education funding.

I’m more in favor of a balanced approach between retirement and education for children in the family. Having children means making sacrifices. Any parent — and I am not yet one — can tell you that having children changes your life, and often requires losing a selfish attitude. Retirement is, frankly, a selfish desire. The idea of financial independence requires saving money rather than spending it on other people, and even if you are fortunate to have enough to do both, any money you save is money you could have provided to others who need the support. For some, the event of having children is the first time that they consider the financial needs of others, even if those “others” are included in the same household.

You can’t just expect parents to put the needs of their children aside in favor of their own selfish retirement desires, and that’s why those who give financial advice raise the issue. But the idea of having enough for retirement is a movable goal. You will never have enough for yourself. You will always want more. There will always be something else you could plan for yourself. At the same time, the financial assistance you provide your children for their education can allow them to keep focused on performing their best while at school and avoiding the distractions of a full-time job in addition to their classes.

How do you prioritize saving for your own retirement and for your kids’ education?