Parents love their children so much that they'd lay down their lives for them if necessary. But that doesn't mean they should save for their children's college educations rather than saving for their own retirement.
Some parents seem confused about the best way to save for both retirement and college, and need help prioritizing. While funding options such as student loans are available as possible sources of money for college, there are no loans for retirement, and the consequences of inadequate retirement savings can be much worse than not having enough saved up for college.
According to Sallie Mae's study, "How America Saves for College, 2014," total accumulated college savings have risen 30% over the last year. This is encouraging news, of course, because college costs are high and rising quickly. However, the study goes on to say that families are not necessarily choosing the right vehicles for college savings: Only 29% of the college savers in the study are using 529 plans, despite the fact that these plans offer many benefits.
Meanwhile, 18% of the families in the Sallie Mae study are using retirement accounts to save for college. This is problematic for several reasons:
- Early withdrawals from a retirement account could involve penalties.
- Money withdrawn from a 401(k) or traditional IRA could generate an income tax liability.
- The additional income can reduce financial aid.
- Early withdrawals from retirement plans mean that fewer dollars are accumulating for retirement, which can be devastating over the long run.
All of this means that parents who make withdrawals from their retirement accounts in order to help their children pay for college may become a financial burden to their children after they retire.
One of the problems of not placing retirement as the top priority or making early withdrawals from retirement plans prior to actually retiring is the uncertainty surrounding the date of retirement. While parents may think they still have plenty of time to work and save, they may actually have less time than they think.
The Employee Benefit Research Institute produced a study indicating that nearly half of retirees quit work earlier than planned. The reasons for early retirement were sometimes positive - they could afford to quit. But other times, the reason for quitting early had to do with unexpected events such as job loss or poor health.
While saving for retirement and college are both important, the priority needs to be saving for your retirement. College can come second. Be sure to consult with a financial advisor to learn more about how to set goals and save effectively for all of your savings needs.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The article has been written by Hartford Funds' Investment Team. Hartford Funds is not receiving compensation for it. Hartford Funds has no business relationship with any company whose stock is mentioned in this article.