How to juggle saving for retirement and college
Five ways to keep your finances on track
Every parent wants what’s best for their child.
But ensuring that there is enough money to pay for retirement needs and education costs means planning ahead and finding the right balance.
“I use the ‘airplane oxygen mask’ concept,” advising parents to secure their own mask before assisting their children, says Delvin Joyce, a financial planner at Prudential.
With college tuition increasing and grants and aid decreasing, parents are figuring out new ways to finance costs.
In fact, families have become savvy higher education consumers, with 73% choosing an in-state school and 50% of students opting to live at home to reduce college costs, according to “How America Pays for College 2017,” the national study from Sallie Mae.
Here are some steps you can take to successfully save for both retirement and college.
Keep contributing to your 401(k)
“If your employer kicks in 50 cents for every dollar you contribute, that’s an immediate 50% return on your money,” says Beth Kobliner, author of Make Your Kid a Money Genius (Even if You’re Not).
“Remember, your kid can borrow for college (ideally with federal student loans), but you can’t borrow for retirement,” she says.
Kobliner says parents should continue to save for retirement while their child is in college. Funds in a qualified retirement plan, such as a 401(k), 403(b), IRA or pension are not reported assets on the FAFSA (The Free Application for Federal Student Aid).
Invest in a 529 plan
These education savings plans are a great way to build savings while reaping tax benefits.
“They can be used for a four-year college, graduate programs, technical school or community college, and the earnings are not subject to federal and state income tax,” says Molly McCormack, a Durham, N.C.-based wealth management director at TIAA.
Some states even offer income-tax deductions or credit for contributions. Qualified 529 plan expenses include tuition, room and board, and books and supplies, and the plan can be transferred to a different qualified beneficiary without penalty or taxes, says McCormack.
With the passage of the Tax Cuts and Job Act in December, families can now withdraw up to $10,000 per year taxfree to pay for K-12 education expenses.
Save everything you can
Amanda and Matt Ponzar of Alexandria, Va., have been saving for retirement since their first year of marriage. “Everyone can save a little something,” says Amanda, 40, a chief marketing officer at a non-profit. Her husband Matt, 44, works for the Department of Defense.
Nearly 20 years later, they’ve saved a nice nest egg for retirement. Plus, the couple is saving for college for their two boys, now in elementary school. Each year, they contribute up to $36,000 per year to their 401(k) and 403(b) plans, and save roughly $4,000 per child annually in their boys’ 529 plans.
In 2018, the max contribution limit increased to $18,500 per person for
401(k)s. While there’s no limit for 529 plans, contributions totaling up to
$14,000 per child will not incur a gift tax. For parents whose finances are a bit tighter, financial behaviorist Jacquette M. Timmons advises: Follow the 80/20 split. “With 20% being the amount that represents your financial ‘help,’ whether that’s 20% of the total college expenses,
20% of room and board, or 20% of your net pay,” she says. This approach allows you to define how you’ll help without sacrificing your future.
Look for alternate ways to pay less tuition
“AP (advanced placement) programs or transferrable online courses can help your child earn college credit early, speeding up the path to graduation,” says Adrian Ridner, CEO and co-founder of Study.com, a site dedicated to making education affordable.
Ridner estimates that taking this route can save you as much as $1,000 per course at a public university, or $3,000 per course at a private university. It’s a good way for your child to get some of those prerequisite courses out of the way.
However, before your child enrolls in any course, make sure the desired college will accept the courses and count the credits toward graduation.
Only “help” if you can
“I see a lot of parents doing harm to their own financial situation in order to provide assistance,” says Jim Keenehan, a senior consultant for AFS 401 (k) Retirement Services, LLC, in Bethesda, Md.
If you’ve got a retirement nest egg that’s on track, adequate emergency savings and no high-interest debt, then you may be able to help your kids, he says. Otherwise, Keenehan advises: “Give them the gift of financially fit parents who will be able to afford their own retirement.”