Why You Should Save For Your Retirement Before You Go To Your Kids’ College

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    Choosing where to put your savings is a question that doesn’t have a simple answer that works for everyone. Decide how much of your discretion to use retirement provision, College expenses, Life insurance, a Emergency fund and other buckets of money will vary depending on your individual financial situation. Here are some arguments in favor of prioritizing saving for retirement over saving for your kids’ college expenses.

    Save as part of your budget

    The first thing you want to do is Make sure you have a budget for your household expenses. Your budget can be simple or complex, but keeping a record of your cash flow is important. Living within your means (spending less than you earn) is the most important indicator of a healthy financial situation.

    Another great tip is to pay yourself first. Without a written budget, you typically only save the money that is left over at the end of the month. But somehow, no matter how much money you make or how much you try to cut your expenses, there never seems to be much left at the end of the month. If this has happened to you, transfer a specified amount to a separate account immediately after receipt of payment. Many have found that by doing this, they have enough money to pay for their expenses and are able to save more.

    Saving for retirement

    In addition to budgeting your ongoing expenses, it’s a good idea to start saving for your future. Depending on where you are, you can have different medium and long term savings goals. A common goal is Saving for future retirement.

    There are different vehicles for saving for retirement. With the decline in employers offering defined benefit pensions, a 401 (k) plan is a common way to save for retirement. Many employers offer 401 (k) packages, and many also offer matching funds as an incentive to contribute to them. Traditional and Roth Individual Retirement Accounts (IRAs) are another great way to save for retirement.

    Saving for college

    If you have children, you may also be concerned about and want to be about the rising cost of higher education except for college. The cost of higher education is currently rising faster than the rate of inflation, and more and more jobs require higher education. It is only natural that parents want to do whatever it takes to make college more manageable for their children.

    As with retirement, there are several different ways to save for college. One popular route is through what is called a 529 plan. States are setting this up to save for college. Generally, you don’t have to be a resident of the state in question to participate in its 529 plan. Although it is common for states to offer state tax breaks to help build their own 529 plan.

    Another way to save on education or other expenses is through UGMA / UTMA accounts. UGMA stands for the law on uniform gifts to minors and UTMA for the law on uniform transfers to minors. The person who sets up the account (usually but not always a parent) is considered the “custodian”. You can transfer money to the account to help the minor, but the money will be managed by the custodian.

    Why should you save for your retirement first?

    While the exact way in which you allocate your savings will depend on your specific situation, here are some suggestions as to why you should be saving for your retirement first.

    The main reason is flexibility – you can always redistribute retirement benefits for higher education. If you have contributed to a Roth IRA, you can withdraw your contributions tax-free and without penalty at any time. While many early withdrawals receive a penalty, skilled training costs are an exception. On the contrary, you can’t just transfer money to retirement plans in 529 plans if you don’t end up using it for education expenses.

    You will find another reason when you think about alternatives. If you are saving entirely for your own retirement but not saving much for your children’s college expenses, there are several options (loans, grants, scholarships) available to you to help cover the cost of college. It is also possible that federal laws could be passed that reduce the cost of some forms of higher education.

    However, if you save and pay for a significant portion of your children’s college expenses, but save your own retirement savings, there aren’t that many options available to you. Relying on social security alone is unlikely to be enough for many people to retire. Hopefully your kids got a great college education as they may be a good part of your support in your retirement!

    While every situation is different, this can make a compelling argument to focus on your own retirement savings first, and only then start saving for college expenses.

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    Dan Miller (56 posts)

    Dan Miller is a freelance writer and founder of PointsWithACrew.com, a website that helps families travel for free / cheaply. His home base is Cincinnati, but he tries to travel the world as much as possible with his wife and 6 children.

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