Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about saving; specifically, whether it’s better to save for your children’s education or your own retirement.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “These Are the 4 Best 529 Plans in the Country” and “2 Ways to Retire Comfortably After Raising Kids.” You can also go to the search at the top of this page, put in the words “investing” or “retirement” and find plenty of information on just about everything relating to these topics.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Alex:
“Stacy, we’re very concerned that our kids (one 11, the other 13) won’t be able to attend college, but we’re also concerned we’re not putting away enough money toward our retirement. (We’re both in our mid-40s.) Obviously, we’d like to do both, but is one more important than the other?”
Us or them?
According to a 2018 survey from T. Rowe Price, 74% of parents said saving for their kids’ college education is a higher priority than saving for their own retirement.
This isn’t surprising. The cost of college, along with the massive amount of debt used to fund it, has been making headlines for years. And, of course, the knee-jerk reaction for many parents is, “My kid’s future comes first.”
While understandable, this is bad logic. The reasons are simple:
- College lasts four years; retirement can last more than 20.
- There are lots of options for funding college: low-cost loans, scholarships, grants, work-study and more. There are few options for funding retirement.
- Your employer may offer matching funds for retirement plan contributions: That’s free money.
- Retirement plan contributions offer greater tax benefits than college savings plan contributions.
- Running out of money while in college isn’t great, but it’s better than running out of money in retirement.
- If you support your kids in college, they may end up with the burden of supporting you in old age.
In short, the logic behind here is the same as when you fly commercial: first put on your oxygen mask, then help your kids.
Obviously, this isn’t a binary choice. It’s possible, and preferable, to save for both college and retirement. But if you are wondering which is the greater priority, now you know the answer.
What about Social Security?
One might argue that Social Security will provide some guaranteed retirement income, while there’s nothing comparable to provide for college expenses.
While it’s true that many of us will receive Social Security, it’s likely not going to be enough to fund a fulfilling retirement. Social Security was developed to keep seniors from a diet of dog food, not to provide a prosperous retirement.
The average Social Security monthly benefit at full retirement age is currently $1,464. If you’re sure you’ll live comfortably on your expected benefit, or have an additional pension coming, super. But depending on where and how you live, Social Security alone may not cut it.
While your kids can work to partially meet their expenses in school, do you look forward to spending your 80s working?
What’s a parent to do?
If you find yourself in a quandary, here’s my advice.
- Start early. My parents started saving for my education when I was born, and I started saving for retirement the day I got my first job. It doesn’t have to be a lot: Every bit helps. “Small and soon” is better than “large and later.”
- Always get the match. If your employer matches retirement plan contributions, always contribute enough to get the full match. There are few opportunities in life to collect free money. This is one of them.
- Track your expenses to uncover hidden money. Use a budgeting program like You Need a Budget to see where your money is going. Plug spending leaks, find areas to save and put that money into a dedicated college account.
- Use a college savings plan. Special accounts known as 529 savings plans let you accumulate money tax-free and withdraw it tax-free for education expenses. You can learn more about them here. Friends and family can contribute, as can your kids as they work or earn an allowance.
- Learn about financial aid. You’ll feel more comfortable as you understand the options for both attending and financing college. Don’t wait till the kids are 17. Start poking around now.
- Make a little extra. There are lots of ways to earn a little more on the side. Here are 107 of them.
Hope that answers your question, Alex!
Got a question you’d like answered?
You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!
The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Also, questions should be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!