How to Save for Retirement While Raising Children

Having children and raising a family can be a joyful part of life, but as any parent soon discovers, it’s expensive. Beginning in infancy and moving all the way through to college, the costs are substantial and constant. But at the same time, it’s important for parents to save for retirement. Unless you have a guaranteed pension, the responsibility for having enough money to live on after you stop working falls on you. So, while the impulse may be to always put your children’s financial needs first, doing so at the expense of your retirement savings isn’t good for you—or ultimately them.

For many parents, the goal of funding a college education begins as soon as a child is born. And it’s not a small undertaking. The average cost for a private college in the current academic year is $38,185. For a public, four-year school the price tag is $22,698 a year, according to U.S. News & World Report. Given that the average annual increase for tuition and fees at a public, four-year university has been 9% over the past 20 years, that cost will be far greater when today’s little ones are entering college.

With such a massive financial obligation ahead, it’s only natural that parents want to pour every extra dollar into a college savings plan. But financial experts say that can be a costly mistake. That’s because, unlike your child’s college education, there are no “retirement loans” to help fund your lifestyle after you stop working. And with fewer employers offering a defined benefits plan, the money you’ll need in retirement is up to you. As a result, it’s important to pay yourself first before saving money for college expenses.

A balancing act

Still, it’s possible to save for retirement and set aside money for your child’s college education. Financial experts maintain the key is balance, and a clear understanding of your financial picture. Here are some things to consider as you put together a plan:

  • Maximize your retirement savings. This is your first step and should take precedence over any college savings. If your employer offers a 401(k) or 403(b), be sure to put the maximum amount into the plan, especially if your employer offers a matching contribution. This is essentially free money and can result in a substantial amount of extra income that will continue to compound over the years. The money is tax-deferred and, since it is coming out of every paycheck automatically, you won’t be tempted to spend the money beforehand.
  • Start a college saving plan. Among the most popular are 529 plans because they allow contributions to grow tax-deferred and distributions are not subject to federal tax when used for qualified education expenses. You can earmark a certain amount each month or pay period to automatically go into a 529 after you’ve made your retirement plan contribution. Keep in mind, too, that grandparents and other relatives can open up a 529 account for your child so there can be multiple sources of savings to fund a college education.
  • Open a brokerage account. If you don’t want to tie up college savings in an account with limitations and restrictions, consider investing with a brokerage account. You won’t get any tax breaks with these accounts, but they will give you more control over your investments. With a brokerage account, there are no contribution limits or penalties based on how you use the money. You’re not restricted to using funds only for education-related expenses, so if your child decides not to go to college, the money can go towards expenses like a down payment on a home or starting a business. You can open a brokerage account with any broker, but take your time comparing them to find the best fit for your investment goals.
  • Be college-smart from the beginning. As you begin to save for your child’s education, remember that it’s important to consider all the options to keep costs in check. Perhaps it’s starting at a community college and then transferring to a four-year institution to finish a degree. It might also mean having your child take on paid internships, part-time jobs, or a reasonable amount of student loan debt while in school. Doing so will not only help reduce the overall amount of money you need to contribute, but this sense of responsibility will help to build character and financial discipline in your child. The point is to factor in from the start that you likely will not have to save every dollar to cover the cost of your child’s college education.
  • It’s not all or nothing. Once your retirement savings goals have been established and are being fully funded, it’s possible to tweak your college savings plan over the years. You might be able to designate a certain percentage of future pay increases or bonuses as additional contributions to a 529. Or perhaps you can use monetary gifts from grandparents or other relatives to make further contributions to a college savings plan. The bottom line is that you have many more options to save and pay for college than you do for retirement, so be sure to use them all.

And finally, keep in mind that as parents, we all want to do what’s best for our children. Reach out to one of our experienced bankers for more information on how you can make that happen. By prioritizing your retirement over college savings, you’re lessening the chances of becoming a financial burden to your children down the road. What can be more thoughtful than that?

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