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The Answer is Simple -- Save for Retirement Before College

May 25, 2016

They're both priorities, but if you had to pick the most important...

As parents, we want the best for our children.  We work hard to provide opportunities for them so they can start their lives a step ahead of our own as they grow up, and oftentimes, we believe these opportunities begin with providing a good education.  Naturally, as loving parents, because we give so much to our children, a question often arises in client meetings: “should I save for my children’s college education or should I save for retirement?”

Saving for college as well as saving for retirement require a huge financial commitment on our part. Unfortunately what we have left over after paying for life’s necessities oftentimes forces us to make a decision between saving for one over the other.  

Saving for college:
Parents who choose to save more money for their children’s college costs have their hearts in the right place.  First, retirement is far into the future compared to the more immediate need of having to pay for college so time can feel like it is on our side.  Second, if they were to save for college, their children may graduate debt free and thus, possibly start their lives a step ahead of the previous generation.

In theory, the above may sound great, but here are some of the challenges:

  1. Even if your child graduates free of student debt, are they really going to be financially responsible by not having any consumer debt?  If you were to think back upon your own experience, did you fall into consumer debt while in college OR did the debt occur after you started working?  
  2. Assuming your child graduates debt free and is financially responsible throughout his or her college career, what if he/she can’t secure a job that will cover the bills?  Sure he/she can move back home and live rent free, but could you see how he/she might need to ask you for some financial assistance, especially if he/she is not working?
  3. What if they go back for graduate school?  Who’s going to pay for that?  Your immediate response could be “well, they are on their own at that point”, but wouldn’t they need to take out a loan for grad school and thereby negate your initial intent of not having debt when they finish school?
Saving for retirement:
Because of the aforementioned challenges, when faced with choosing between one and the other, it often makes more sense to save for retirement rather than to save for college.  

Why should we consider taking care of ourselves first?
  1. Your social security income will probably not be enough to cover your cost of living in retirement.  Therefore, the burden of supplementing that income will fall on your shoulders.
  2. If you don’t have enough money saved for retirement, the support you may need could ultimately fall on your children’s shoulders.  While it’s ok to put some money into your children’s college savings accounts from time to time, it’s important to realize that in order to take care of your family, you need to take care of yourself first.   
Could saving for retirement over college present challenges?  Possibly.  Saving more towards retirement means that you will have fewer financial resources to tap into when the time comes to pay for college.   However, keep in mind that your child can borrow for college, but you can not borrow for retirement.  A good way to determine if saving for retirement over college is right for you is to calculate how much money you will need to retire and compare that with a projection of your current retirement assets.  If the numbers show that you will have to cut back significantly on your retirement lifestyle, then you should consider directing your additional savings towards retirement.

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Written by: Mike Loo

With over 20 years of experience in the financial services industry, Mike Loo has spent the majority of his time committed to learning all aspects of financial, tax, and estate planning, especially in the areas of wealth accumulation, distribution strategies and wealth transfer strategies.  In this very competitive industry, Mike helps clients understand that all financial areas are equally important to reaching their goals.  He believes in a complete overview approach for all of his clients.

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