Saving for Retirement vs College: Kid’s Career Plans or Funding Old Age?

Being a new parent is challenging enough without having to consider how you’re going to balance your two biggest savings goals: saving for your child's education and saving for your retirement. On the one hand, you want your kids to go far in life, and giving them the tools to succeed often means saving enough money to pay for them. On the other hand, you've worked hard, and you deserve to spend your golden years relaxing at the local golf club on a Monday afternoon. 

So, kids or retirement? You'll likely want to save for both, but figuring out how to allocate your savings between the two goals is a balancing act. Here's how to navigate your options.

Saving for both retirement and a college fund can feel like a juggling act, but the truth is there's one ball you should probably focus on more than the other, and that's your retirement. It can be tempting to pour your extra cash into your kid's college fund and forgo some of your retirement savings, but it makes more sense to put yourself first.

The biggest reason for this is that there are many different ways to pay for college, including scholarships, financial aid, and loans. Meanwhile, there's only one way to pay for retirement. While you can always retire a few years later in order to help your child avoid student loan debt, you worked hard for the money you're saving and deserve to enjoy your retirement as early as you can. That being said, it's possible to balance both so you don't end up retiring late and your kid doesn't end up in mountains of student loan debt.

When you retire, you need as much money as you possibly can, especially as you won’t have any income. So, instead of trying to balance your retirement and college contributions, aim to fill your retirement accounts with the maximum amounts first, then start saving into your college accounts.

Start with maxing out tax-advantaged retirement accounts, as those offer great benefits in terms of saving money on taxes. If your employer offers a 401(k) plan, make sure you're contributing as much as possible, especially if they'll match your contributions. That’s essentially free money. If you earn $80,000 annually and your employer matches 50% of your contributions on up to 6% contributed, then you would receive an extra $2,400 per year for retirement in "free money." Additionally, in a 401(k), you can save up to $19,500 tax-free (more if you’re aged 50 or over) without counting the contributions from your employer. 

You can also contribute to an Individual Retirement Account (IRA) and receive major tax benefits. The maximum amount you can save in a traditional IRA or Roth is $6,000 ($7,000 if you’re 50 years old or more). You should try to max that out each year before moving on to other savings and investment goals.

Once you've maxed out your tax-advantaged retirement accounts, you can start to funnel any additional disposable funds toward your child's college education. To save for your child’s college education, 529 plans are a popular option. 

Maximum contributions to your 529 plan will depend on the state you live in. This is usually at least $235,000 per beneficiary. However, this money is able to grow tax-free and be withdrawn tax-free as long as it’s used on qualified expenses (related to education). There are also plenty of alternatives to 529 plans that can offer you more flexibility, especially if your child doesn't end up needing the funds you save.

The question of how much you'll need to save doesn't have a single answer. Average annual tuition costs for the 2021-2022 school year are as follows, according to U.S. News & World Report.

• $10,388 per year at a public institution for in-state tuition
• $22,698 per year at a public institution for out-of-state tuition
• $38,185 per year at a private institution

The good news is that you don’t need to pay for 100% of the costs by yourself—in fact, the vast majority of students don't pay full tuition. Scholarships, financial aid, and loans help to cover those costs. Therefore, the amount you actually need will depend on things like your student's academic performance and financial aid eligibility.

Many experts suggest aiming to save one-third of the cost. Keep in mind that tuition goes up every year, so take inflation into account. That said, there are prepaid tuition plans that can help you lock down today's rates.

While that’s still a lot of cash to save, it’s much less to aim for than you’d need if you paid 100% of the costs. If you still don't think it's doable to max out your retirement savings and save enough for college, focus on helping your child make the most of alternative ways to pay for college like those explained below.

There are several ways to fund a college education if you don’t quite meet your savings goal or would rather put more money toward retirement. Here are a few.

Many college students receive scholarships that help pay for their education. You can find scholarships that reward students for athletics, excellent academic achievement, extracurriculars, volunteer work, and more, as well as need-based scholarships. Make sure your child does well in school and gets involved, and when the time comes, have them apply to any and every scholarship program they qualify for.

Financial aid includes federal grants which are determined by a student’s financial need and expected family contribution. The Federal Pell Grant, for example, currently offers a maximum of $6,495. The majority of students who receive the Pell Grant have a family income of $40,000 or less. However, every student should apply for financial aid to find out if they qualify for any help.

Low-cost student loans are available with flexible repayment plans. Federal student loans typically offer the most flexibility and fairly low rates, so it can make sense to max those out before resorting to private loans. Some people also qualify for their student loan debt to be written off if they work in certain fields and make regular, on-time payments for a certain period of time.

A part-time job during term-time or employment during the summer break helps students to pay towards their own college expenses. Plus, it’s also great employment experience, especially if they find a paid position in their future field of work.

Students can also reduce their education costs by attending two years of community college and transferring to a 4-year college. It's also worth going to an in-state public university even if it's not a dream school if that's the only way to avoid taking on too much debt. Staying at home and commuting is another way to spend less on college.

Apart from maxing out retirement accounts and college savings plans, there are other ways to invest your funds if you still have more money to save. Investing in real estate or investing in individual stocks can offer better returns than those funds if you make the right moves. 

A real estate investment platform like Fundrise enables you to invest in multiple properties via a REIT rather than having to physically purchase a property and flip it or rent it out. This gives you an 9% to 12% return on your investment, with quarterly dividends being paid out.

You could also try investing in a Robo Advisor like Wealthfront. Robo Advisors are automated digital platforms, driven by algorithms. They collect information on a user, then invest in certain assets using the data. Wealthfront offers a target return of 7% to 10% on diversified index funds, providing a low-risk method of investing any extra cash you have.