Retirement Savings vs. College Savings: 4 Stages to Ponder
Retirement Savings vs. College Savings
It’s a continuing dilemma and sometimes a continuing drama: Save for retirement or college or both, and in what sequence?
Parents these days are conflicted. College is expensive and so is retirement. Saving for college could mean amassing $200,000 or more per child. At the same time, retirement is farther in the future, but the amount needed, perhaps $1,000,000 to $2,000,000 is much larger.
What’s a well-intentioned parent or parents to do? If you fly a lot, you might recall the safety talk the flight attendant gives in case of oxygen emergency:
“If you are traveling with a child or someone who requires assistance, secure your mask first, and then assist the other person.”
The same advice applies in this saving for college versus retirement quandary, in my opinion, and those of Ross Riskin, CPA.
Retirement needs are not satisfied by loans unless you are using home equity or borrowing unsecured through credit cards or similar vehicles.
Education funding has lots of borrowing sources for both parents and children. Parents can apply for ParentPLUS loans and private loans. Students have even more loan and payback options including Stafford, Perkins, GraduatePLUS, and private loans. Income-based and public service payback plans offer a reduction of payments.
Are there any “rules of thumb”? I’m glad you asked. There are and they are detailed in a recent Journal of Accountancy article by CPA Ross Riskin. Click here. In that article, Riskin details not only the dilemma but a priority diagram based upon parental retirement savings so far (larger vs. small), student GPA, motivation towards higher learning and expression of specific career goal(s)/college major and colleges and universities that focus on that field.
For the highly motivated student, with a high GPA and specific career goals, together with parent(s) who have large retirement accounts already, putting college saving first is a good decision. This is the only stage where students come first in priority for savings.
Stages two, three and four means parental retirement savings have priority. Stage two is when the parent(s) still having sufficiently high retirement savings, but the student is not motivated, has a lower GPA, and non-specific career goals. In this case, funding for college becomes a student priority with parental assistance, says Riskin.
Stages three and four where the parent(s) have insufficient retirement savings, no matter what the student motivation, GPA and career goals/major focus, it is still the priority for the parent to focus on retirement savings. The highly motivated student, with a high GPA, and is career/major focused can gain some parental assistance. For those students with lower GPA, undecided career/major goals, and low motivation, parents should communicate that the responsibility for funding college has moved to the student.
Kind of tough love in three out of four stages, but you have to put on your own retirement oxygen savings mask first so you can save yourself and others.