While raising a family, life can feel like a three-ring circus. Between getting the kids to and from their activities, maintaining your home and keeping up with your career, who has time to focus on finances? And when you do make time to look at your long-term financial goals, you may feel conflicted – should you save for your children’s college education or your retirement?
A High Wire Act
Your kids will likely attend college before you retire. If that is the case, you may assume it makes sense to save for college before saving for retirement. However, that is a very risky approach.
True, it can cost a lot of money to go to college. But you are probably going to need a lot more for retirement. Your retirement could last well over 20 years, inflation will increase your costs during retirement and your retirement health care costs could be significant. If you put saving for college first, you may not have enough time to save for retirement once the tuition bills are paid. Instead, set money aside for both college and retirement.
Join the Parade
Luckily, employers typically offer a retirement savings plan. Since retirement plans deduct your contribution from your pay pre-tax, saving for retirement is easy and convenient. You also don’t owe federal taxes on earnings from investing those funds until you withdraw money from the plan.*1 The earlier you save for retirement, the more time your money has to benefit from compound interest.
You can save for your children’s college education in an education savings plan offering tax benefits. For example, if you set up a 529 plan account for your child, the savings in the account can grow tax deferred, and account withdrawals for your child’s qualified higher education expenses would be tax-free.**
No Free Passes
Remember that your kids have a number of potential sources of college funding. In addition to your savings, they may be eligible for scholarships and grants. They also can take out loans and work part-time to help cover their education costs.
You, however, have limited sources of retirement income. It is unlikely your future Social Security benefits will be enough to enable you to live comfortably during retirement. And fewer employers offer traditional pensions. Your retirement savings plan account may be your main source of income during retirement, so consider increasing the amount you contribute today.
To find out how to balance saving for both college and retirement, contact a Fifth Third Bank financial advisor today.