How do I save for retirement AND college? | My College Corner
Skip to content

How do I save for retirement AND college?

Aug 08, 2018

Finding a balance between retirement savings and college savings is a challenge most families need help with. If you feel overwhelmed, you’re not alone.

Consider some eye-opening statistics from Roger Michaud’s recent article “Financing Education is a Retirement Issue “
  • When it comes to a college education, 21% of parents would delay their retirement and 23% would withdraw from their retirement account 
  • 94% of parents believe college savings will impact retirement
  • 56% of parents with children in the home are currently saving for retirement
The struggle is real. Find your balance. Early withdrawals face taxes and a potential 10% early withdrawal penalty making it less of a financial plan and more of a knee-jerk reaction.
Why? Let’s consider the circumstances. Retirement planning extends beyond the typical 18 years leading up to college attendance. Many parents may have begun saving for retirement before having kids, giving them a head-start. This creates a false sense of security, where a parent may feel comfortable pulling money form retirement for college, but this is unsustainable. Here’s how families can manage both.

Retirement savings:

Securing your long-term financial goals puts you in the best position to help your children over time without making unnecessary financial sacrifices. Every dollar counts, and the tax benefits provided by Traditional and Roth IRA’s, 401(k) and 403(b) help long-term savers. Once you’ve mastered your retirement plan you can more confidently pivot the remaining income towards college savings.


Play the long game with college savings:

Take a big picture perspective, developing your patience and putting a value on consistency. Stay motivated by reviewing your financial progress, about as often as you would review your child’s report card.  As time passes the savings will grow, and your child’s academic records will help you zero in on colleges. Maintain active engagement by using simple online tools like Invite Education’s Passport for Success.There you can outline college savings and academic planning all on one platform.


Enfranchise your child:

Help your child develop their role as an active saver for college. During the early years, its expected parents and relatives will make the lion’s share of deposits in college savings accounts. Once the child begins some part-time work, have a part of those earnings added to the college savings account to help them get involved. This helps develop a habit of saving, a lesson often overlooked but needed for financial literacy education.

Forecast Financial Aid:

Savings are a part of financial aid eligibility calculations and the way the money’s makes an impact. For example, cash in a student’s checking account can weigh against financial aid eligibility by up to 20%. There’s a better way. If you’re worried about financial aid eligibility, remember;
  • It’s cheaper to save long term than to borrow and pay back loans later
  • On the FAFSA (Free Application for Federal Student Aid) money saved in a 529 plan is weighed against financial aid eligibility at 5.64% of full value, significantly less from cash found in a checking account.
In other words, college savers are not punished for their efforts. It’s the income from work declared on the FAFSA that can reduce financial aid eligibility more dramatically. Always use a financial aid estimator to forecast and plan ahead, but you may quickly determine that your income would remove eligibility for Pell or State-based grants. This reinforces the need for college savings with an early start date to allow greater time to compound, putting your family in a better position to handle college expenses as they arrive. This is especially important for families considered “middle class” as they may have just enough income to reduce financial aid eligibility, but lack the actual cash to pay college outright. A dedicated college savings strategy is critical in such cases.