All parents want the best for their children. Considering workers with a bachelor’s degree make approximately 58% more than those with a high school diploma, it’s understandable that many parents believe a college education is the best opportunity for their children to succeed financially. But rising college costs mean the burden of student loan debt is increasingly weighing on today’s college graduates. Consider this: Americans today owe about $1.5 trillion in student loan debt, which is more than double compared to the previous decade.
That leaves parents facing mounting pressure to fund their children’s college education in hopes of giving them the best opportunity for success. At the same time, parents are staring down another hefty financial goal: saving for retirement.
When faced with the choice — college or retirement — what should you do? The tough reality is that you might have to choose between the two. Before you decide whether to save for retirement or college, know your options so you can make the best choice for your family. Here’s what you need to know.
Funding Retirement: The Ball Is in Your Court
The reality is, financial support for seniors and retirees is limited — and it continues to dwindle. Pension plans are falling by the wayside; the Federal Bureau of Labor Statistics reported the number of company-sponsored pension plans fell from around 103,000 in 1975 to under 47,000 in 2017. Planning to rely on Social Security benefits? Think again. In December 2020, the average monthly benefit for retired workers was $1,544, according to the Social Security Administration. But based on 2016 data from the Bureau of Labor and Statistics, households run by a person 65 or older had about $3,800 in monthly expenses.
And unlike financial aid for education, there are no loans to cover retirement necessities such as housing, utilities and groceries.
That means funding your retirement is up to you. By contributing to a 401(k) or IRA, you can help offset any shortfalls between your expenses and your pension or Social Security payments. Continuing to work into your golden years might also be an option but beefing up your retirement savings is a better one. You have to prioritize retirement savings or you risk placing the financial responsibilities of your care in later life on your children.
Paying for College: Explore Your Options
There is good news: There are plenty of options to fund college education that don’t include taking on debt, as well as options that can significantly reduce student loan debt.
Your student can seek scholarships, apply for financial aid or participate in a work-study program to help cover their higher education costs. A recent Sallie Mae report found that students used a combination of income, savings, loans and scholarships to cover nearly 50% of the cost of their educations. Plus, scholarships and work studies are resume-builders.
Students can also attend community college before going to a university to reduce the costs of tuition.
Another Option: Flexible Savings Vehicles
Rather than fretting about saving for college or retirement, focus on establishing a nest egg. While some investments are subject to strict rules — a 529 plan must be used for education and funds from a 401(k) can’t be withdrawn until age 59 ½ without penalties — other investments offer more flexible (although maybe not the same tax advantages).
Investing in an IRA makes it possible to start saving now and decide whether to allocate those funds to higher education or retirement in the future. This is because you have the option to withdraw funds penalty-free, so long as they’re used for tuition, books or other qualified educational expenses for a spouse, child or grandchild.
Mapping Your Personal Savings Plan