5 Ways to Balance College and Retirement Savings

Penn Mutual

By Penn Mutual | April 10, 2018

When it comes to financial planning, parents know they need to save for their post-working years. Yet there’s also tremendous pressure to save for children’s college education, especially as the price tag for education continues to soar.

More than half (53 percent) of parents say they currently save for their kids’ college, while only 49 percent save for their own retirement, according to T. Rowe Price’s 2017 Parents, Kids & Money Survey. In fact about half of parents said they’d delay retirement to fund their child’s education. And 53% said they’d use their own retirement savings rather than have their kids take out student loans.

But saving for one goal doesn’t have to mean sacrificing the other. Try these strategies to help you prioritize and handle your dual savings needs.

#1. Run the Numbers

Financing retirement and paying for education might seem like giant goals, but many people don’t know exactly how much they’ll need for either. Those figures depend on your age, financial situation and your kids’ college plans.

Getting a realistic idea of how much each will cost can help you prioritize and plan. Try an online retirement calculator to estimate how much you’ll need for retirement. And use an online college savings calculator to see how much you should put away to hit your college savings goals.

#2. Use the Rule of Thirds

One thing that might help is to stick to the Rule of Thirds when setting your college savings goal. With this, you and your children plan to cover a third of college costs from savings, a third from income while they’re in school and a third from student loans.

Using this approach takes some of the financial pressure off parents, while encouraging children to contribute to their own college costs and learn the value of education. After all, you can always help Junior pay off their student loans down the road, should you wish to.

#3. Don’t Touch Retirement Savings

Some 14 percent of parents in the T. Rowe Price survey anticipate withdrawing retirement savings funds to help cover their kids’ college costs. But this can get expensive. A 401(k) withdrawal comes with a hefty 20 percent withholding tax to cover income taxes, and if you’re under age 59 1/2 you could pay an additional 10 percent penalty on the withdrawal.

Try not to count on retirement savings for college funding. Dipping into that pot could mean a financial burden for your children in the future—when they must bear the cost of providing for you in your twilight years because you didn’t save enough.

#4. Open a 529 Account

Socking money into a state-sponsored 529 College Savings Fund offers the ability to grow your investment, tax-free, as long as distributions go toward qualified educational expenses. And some states allow partial or complete tax deductions for 529 contributions, resulting in additional savings. Let relatives know about your child’s 529, and encourage gifts to the college savings fund in lieu of extra toys or knick-knacks.

#5. Automate Savings

Put your retirement and college savings on autopilot by arranging to withdraw a set amount from your checking account at regular intervals (like paydays). This ensures continued contributions to both goals and improves the likelihood of reaching your targets. Whenever you get a raise, boost your contribution to each plan accordingly.
Saving for college and for retirement are important financial goals for many families. Working with a financial adviser can help you balance retirement savings and college funding.

This information is for educational purposes only and should not be considered specific tax advice. Depending on individual circumstances, the strategies discussed may not be appropriate for your situation. This information is based upon on our understanding of current laws, which is subject to change. Always consult a qualified adviser regarding your personal situation. Neither Penn Mutual nor its employees, agents, or representatives provide tax or legal advice.

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