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?
Published or updated March 4, 2013.
{ 9 comments… read them below or add one }
You can look at this from the opposite angle as well. If you don’t save enough for retirement, your children may have to forego things in order to support you in your old age(and that is their choice to make). That’s probably why I think the emphasis should be on retirement, but not to the total exclusion of kid’s education. As you say, a balance is probably required. Having seen parents progress to old age, I have to go with retirement first, though.
CeeCee is right. It has to be a balanced approach because funding retirement & education expenses are both equally important.
My husband and I recently started saving for retirement. We’d love to live comfortably when we’re old and we don’t want to be a burden to our future children. We’ve seen a lot of our friends struggling to support their parents, because they don’t have a retirement plan. However, kids’ education should also be a priority. I agree with the first two comments that there should be a balance between the two.
When my son started college 3 years ago, I told him to take courses one semester and work the next. He will be finishing 4-year college in 6 years. You don’t have to finish it in 4 years. He has no debt whatsoever, getting good education and good experience as well.
I think its a fine balance because as a parent I want to make sure that my daughter gets the best possible start to her life and that in my opinion includes the opportunity to go to college (whatever form it takes) but at the same time you can’t forgo thinking and planning for retirement because if you don’t plan for when you’re older who will? I would happily sacrifice some of my comfort in favor of giving my daughter a better start. But I would think twice about sacrificing my ability to live reasonably (food + shelter) in my retirement to give her that start.
I guess it would really depend on what you consider a reasonable retirement and what the schooling cost. If either the schooling or retirement are on the high end then reality is this is a first world problem. There are options in both cases and with a little planning you can find the balance; sacrificing your whole retirement so your child can go to Harvard without any student loans or assistance is not realistic or a wise decision.
I’ll disagree with the comments above. I think that if you can’t save enough for your retirement, you have no business putting your kids through college. That doesn’t mean that there can’t be a balance. People who have retirement covered (or at least have a plan to make up for college years) can hope over to the saving for college train. But if you’re balancing saving partially for college and partially for an underfunded retirement, you’ll miss both goals.
I would say it really depends on what you expect to be spending in retirement. For example of you’re expecting to spend $100K per year in retirement because that’s what you’ve become comfortable with you can probably decrease that and help put your kids through school. Conversely you shouldn’t be sacrificing being able to live in order to put your kids through Harvard. It was just a matter of finding a good balance especially when there are options available for getting through school.
I wasn’t suggesting partially funding retirement I was more suggesting decreasing your retirement expenses if you’re in a position to do so.
I want to believe that i feel retirement should take precedence. The reason i say retirement over school is those with a good system for completing applications can get good amounts towards school through scholarships. There are also many programs such as coursera.org that allow for education on the cheap. As these programs develop (15 or so years before my children begin college) you may be able to get an Associates Degree for next to nothing. Using scholarships gould result in a Bachelors for next to nothing. I have yet to find a way to live in retirement for next to nothing (moving to a less expensive area or country helps but still requires a decent nest egg).
Based on my actions schooling takes precedence. We currently put allowance into a fund for school, but do not currently contribute to retirement. I expect there are a lot of people in similar situations regaurding this. Wanting to say one thing and acting another.
I worry. My mom (along with several other relatives, plus scholarships plus my own part-time work) put me through college without loans.
Now, she’s facing layoff with 28 years into her employer. If she somehow sticks it out for 30 years, she will have a larger pension.
I seriously have doubts that it will be enough for her.
My parents have made plenty of bad financial decisions, and I don’t know if she’d make a choice to put the money in an IRA vs. my college tuition. But if I could go back, I’d rather take out a loan and have her have that money available to her.
For my own family, we put retirement over the college fund. We only opened 529s for our children in late 2011, after we were already maxing out our IRAs. We’ll also fund 401k/whatever ahead of the 529s, but I think we should be able to do both. Still, if things came down to it, we’d cut the 529s before the IRA.