Are You Sacrificing Retirement Savings for College Expenses?

If the answer is “yes,” you are among the 67% of parents who said that saving for their kids’ college education is more important than saving for retirement, according to an August 2016 T. Rowe Price Survey. The survey also produced some other insightful, “you’re not alone” data: T. Rowe Price found that 28% of parents have student loan debt (either for their kids or themselves), and 5% have student loan debt for both. The survey also revealed the average amount of student debt for parents that participated in the study was $27,078 – and that’s just for the parents themselves. The average amount of student loans for their kids was $10,768.¹

This is all interesting data, but in a way it should not be that earth-shattering. The notion that college tuition expenses are rising rapidly has been widely discussed for years now, and households all across the United States are feeling it. Indeed, the study found that 42% of parents lose sleep worrying about college costs, which is up from 28% when the same question was asked in 2014.²

The grand dilemma for many parents is, do you prioritize saving for college (or paying off student debt) over your saving for retirement?

The answer to that question is circumstantial. It depends on income, retirement savings to date, and long-term financial objectives, amongst other factors. Three quarters of parents of children age 8 to 14 say they were willing to postpone retirement to pay for their children’s college costs, and 69% said they would favor putting aside money for their kids’ college before their own retirement.²

There is, of course, a noble element to putting your children’s education before your own interests, particularly your retirement plans. Working longer, when possible, is a workable solution. But many advisors say that delaying retirement savings plans can put the family’s finances in even more jeopardy. There is a delicate balance to strike, and every family’s situation is different.

In an article titled, “Thinking about using your retirement savings to pay for college? Think again,” Fidelity Investments reminds us of an important point: with longevity on the rise, Americans will need to live off their retirement for 20 to 30 years in some cases. Where a household can take out a college loan to pay for their kids’ school, there is no such thing as a “retirement loan.”³ That is a crucial notion, and one that many financial planners agree is important to impart on clients—in many cases, saving for retirement should be a higher priority than saving for college.

There is More than One Solution to the College Savings Issue

Perhaps the most important takeaway is that there is not necessarily one right answer for how to balance college savings with retirement savings. How an investor achieves this balance will depend on a variety of factors, and it is important to discuss the details with a financial advisor. A hypothetical “priority list” could be to focus on your current living expenses first, then save for retirement, then save for college or other longer-term needs with whatever is left over.

If you want to map this out with one of our Wealth Managers, we would be happy to have a constructive conversation with you about what options may work, and how to achieve them. Just give us a call at
1-800-541-7774 or send a quick note to wealth@wrapmanager.com to get started. 

Sources:

1. T. Rowe Price
2. WealthManagement.com
3. Fidelity