Retirement vs. Funding Your Children's College Education

As many parents start ramping up their retirement planning efforts, their kids are also preparing for an important next step in life: higher education. It may seem overwhelming to manage both at once, but it’s important to face some very hard decisions. If you’re thinking about slowing down and reducing your retirement savings, or contribute more to college savings accounts relative to retirement, ask yourself a few questions:

• Is this a sacrifice I can afford to make?
• Are there other ways to get the money we need?
• How much is my child willing or able to contribute?

It’s no secret – college is very expensive, whether your child attends a university close to home or in another state. According to the College Board, the average cost of tuition at four-year private universities is up to $33,480. After room and board, you could possibly spend about $45,000 a year or more. Although in-state universities may be cheaper, the expense is still great. Closer to home here in Madison, WI; a UW-Madison equivalent education is costing over $27,000 per year, all-in.

Putting a Plan in Place

One of the first things to do after evaluating the costs of tuition is to consult with a financial planner. They will help you assess your goals, look at your current retirement plan, and provide objective, realistic advice on whether or not your finances can meet your expectations. Many families find it easy to consider tapping into retirement savings to fund their children's higher education, but that may not be the best alternative.

While evaluating your financial standing, you may realize your retirement savings can’t withstand such an expensive hit and you need to look at other options. Now is the time to draw your children into the conversation and make decisions as a family.

Avoiding the Guilt Trap

Parents, rightfully so, always want the best for their children. Our modern society puts a priority and covering the cost of higher education, even if it means delaying or short changing our own retirement. As the cost of college continues to rise, your kids should take a vested interest in their education and be willing to contribute. Think about this – what if you paid for a very expensive college and your child decided that’s not what they wanted to do anymore? You’ve wasted precious retirement dollars that you may not be able to replace.

Most financial advisors tell parents to prioritize retirement savings for good reason. You can borrow funds to pay for college, but nobody lends money for retirement.

While many parents want to cover the full cost of higher educations, it's important to set a target that is realistic. Can you afford to set enough aside to cover just tuition & books? Let your child know that and that they will be required to cover the rest, either through working while in school or taking out student loans. Besides, having some skin in the game is a good opportunity to teach your children about finances and how the loan repayment plan will work. Even the logistics of taking the money the are paid from working and what to do with it, and how to budget, creates an incredible learning opportunity.

Having a stake in their own future will be meaningful, helping to take some of the burden off of you. Being practical about the situation and empowering your child to make a commitment to their education teaches responsibility and guidance for the future.

Working with a financial advisor can help set goals and offer solutions where everyone can have a vested interest in paying for college, and you won’t compromise your retirement. Besides, no one wants to go knocking on their child's door in 40-50 years asking if they can move in because mom and dad ran out of money. Be strategic, be intentional, and develop a plan to meet your education funding objectives.

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