Last week, my brother forwarded me this article from the NY Times – Save for Retirement First, the Children’s Education Second. The financial planners advise that it is crucial to save for retirement before contributing to your children’s higher education. Your children have more options for education than you have for retirement. They can get loans, scholarships, financial aid, attend a community college first, or maybe just not go to college at all.
I’m sure it’s smarter to fund your retirement first and your children’s education second, but I’m one of those people that financial planners butt heads with. Currently, we are able to contribute to our 401k and our kid’s 529 plan at the same time. Life is uncertain, though, and who knows how our financial situation will change in the future. If we can’t fund both our retirement and our kid’s education, I won’t hesitate to put higher education first.
I guess it’s a family tradition to prioritize higher education. My maternal grandparents put their 9 kids through college. They reinvested any extra money in their business and never set aside a retirement fund. Unfortunately, in their later years they didn’t have much money because their business failed. They didn’t have to live in the street, though. Their children sent them money and helped support them in whatever capacity they could. The more well off would send more money than those with less. That’s the original retirement plan the human race had for centuries and I think it’s a perfectly valid plan. Of course, not everyone has 9 kids. It’s better to have a well funded retirement, but retirees all over the world make do somehow.
My parents also prioritized higher education over retirement. They put 3 kids through college. They were able to save up some money for retirement, but not enough to fund 30 years of leisurely living. We’ll have to help support them when they get older and we are already preparing for that day by asking my mom to come live with us part time.
So you can see that it’s our family tradition to prioritize higher education. A good education is the ticket to financial security and I want to give our kid a good start in life. We’re not sure how the job market will be like in 20 years, but I’m sure having a degree is better than not.
Budget for Higher Education
Of course, our budget is not unlimited. We are budgeting for 4 years of instate public college and that is projected to be $355,618. At first glance, that seems ridiculous, but we still have about 15 years to work on it. The good thing is we started aggressively and already have about $33,500 in his 529 account. The bad news is we will have to sustain this pace to have a chance to reach the projected cost of higher education. Even at 8% growth, we’d have to keep adding $800/month. That’s a lot of money to set aside every month.
Saving for your retirement first is the smart way to go, but sometime you just have to do what you believe in. If we don’t have enough to pay for higher education when RB40 Jr. goes to college, then I would cash out some of our retirement funds to help. The financial planners are right, though. There are many alternatives for the kids these days. Here are just some of them for reference.
- Financial help from the school and government – scholarship, grants, and financial aid packages.
- Student loans – if they can get a low rate, then that’s a good option. We can help pay it off later.
- Stay at home while attending college.
- Be realistic and avoid touring colleges we can’t afford. Harvard is probably out.
- Don’t have more kids. Lucky for us, Mrs. RB40 refuses to go through the childbirth process again.
- RB40 Jr. can work a bit to help pay for college.
- Attend community college for 2 years then transfer.
- Take online classes. I’m sure this will be big part of higher education in 15 years.
- No need to save for graduate school. The kid can get a job and the company might pay for a graduate degree as professional development.
- Student can work part time to help pay for school.
- Any more ideas? Leave a comment and I’ll add them here.
- Parent can work at the university and get some kind of tuition assistance.
- Parents pay for 3/4 of the higher education cost and the kid cover the rest. This is a great idea because the kid will have a stake in the game too.
- You can tap your Roth IRA to pay for college without having to pay the penalty. You’ll still need to pay tax on the amount withdrawn, though.
- As the cost of daycare goes down, put the difference into a 529. I love this idea!
- Coverdell Account – you can contribute up to $2,000/year and get a federal tax deduction.
- Purchase a rental property and use the income to pay tuition.
- Purchase a condo and have the kid live there and get a roommate to help pay for living cost. After 4 years, you can sell it to recoup the cost and perhaps make a little profit.
Graduation from college without any debt was a huge financial boon for me. I was able to start saving and investing right away and it gave me a huge step up. We don’t plan to leave much to our kid and higher education will be it. It will give him a strong platform to make his own wealth in life. Some of my friends still owe a ton of money and I really don’t want to put our kid through that. It’s always painful for me to read about Melanie’s effort to pay down her $81,000 student loans. She is almost half way, though. Hopefully, she’ll be done with it in a few years.
What about you? Are you saving for your children’s education? Do you prioritize retirement or higher education?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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