It seems like an impossible dream to many parents: saving for your retirement and your child’s college education at the same time. Still, they are both critically important. Over the course of their working lives, people with a college degree are likely to make an average of $900,000 more than someone who doesn’t have one — and to suffer less in an economic recession.1 And, people with a formal retirement plan are more confident in their future and less concerned with running out of money.2 The good news is, it’s possible to make both a reality. The key is protecting and saving.

To get started, there are some basic principles to follow. First, begin by protecting your existing assets, so you’re prepared if anything unexpected happens. That includes considering life insurance, disability insurance, and potentially other insurance that covers serious illnesses or accidents. While many people think they need to pay down debt first, this can leave you exposed. Even if you have all your debts cleared, if a serious unexpected event comes along and you have no protection, you could wind up back in debt all over again.

Once your protection is in place, become a world-class saver by putting aside at least 15-20% of the money you make before taxes. It’s really about the habit. Once you have protection in place, don’t wait. Even if you have to start small and increase the amount as you go, it’s the habit that matters, and you want to benefit from compounding — or exponential growth of your money — over time. Then, build an emergency fund of at least one year’s salary. Finally, eliminate and stay out of debt.

There are several savings vehicles to consider when saving for both college and retirement. First, for retirement planning, consider tax-deferred investments. For example, if your employer offers a 401(k) plan, your best bet may be to max out your contributions if you can and take full advantage of the employee match if it’s offered.

Deductions can come automatically out of your paycheck. This will make contributions consistent and may help you benefit from a reduced taxable income at tax time. In addition, even if you already have a 401(k), you may be able to open an Individual Retirement Account (IRA). With a traditional IRA, your contributions are tax-deductible, also reducing your current taxable income. Or, if your earnings fall within government specified limits, consider a Roth IRA. You will contribute to your account with after-tax money but benefit from not paying taxes when you retire.

To give you an example, a 35-year-old with a household income of $75,000 would need around $2.16 million to retire by age 67.3  If that person has $100,000 already saved, he or she would need to put away an additional $500 per month to achieve this savings target. This is just an estimate.

For college, the primary savings account for many households is a 529 plan, which lets you set aside money from after-tax income, and the interest won’t be taxable. Withdrawals from a 529 plan are tax-free if they’re spent on education.4 You’ll find many choices, so it’s best to turn to a financial representative for help. As with retirement, you’ll also need to rebalance your accounts when necessary.

So, what does saving for college look like? Say you have a 3-year-old. In 15 years, when your child is ready for college, the cost of an average four-year institution could be in the region of $200,000 depending on what type of school they attend.5 That means if you save about $900 a month, with an annual return rate of around 3%, you may have enough to foot the bill. Note that this is just one scenario, to give you an idea of what saving for college may require, and every case is different.

If you’re having trouble saving for both retirement and college, there are many other funding options. For retirement, by comparison, you have fewer alternatives. Scholarships, grants, loans, and work-study are all good complements to help round out college savings. Because of these various options, the percentage of freshmen paying full tuition at private colleges fell to an all-time low of 12 percent in 2017.7 And private-college freshmen on average received grants accounting for 56 percent of their tuition.8

Finally, whole life insurance is an option to consider for both retirement and college savings. It can provide guaranteed coverage for life,9 with the potential to accumulate cash value, which is money you can use while you’re alive. That cash value can be applied to retirement, college, or both.10

Even by following the basic principles above, saving for both retirement and college can be complicated. But it’s also doable. Remember, protect first and start saving right away. You can consult with a financial professional to help you along your financial journey, so you don’t have to go it alone. 

Disclaimer

2

The Guardian Study of Financial and Emotional Confidence, 2016.)

3

https://www.nerdwallet.com/investing/retirement-calculator, assumptions in calculator are:

  • A 3% inflation rate.
  • Salary increases of 2% per year.
  • A 6% rate of return before retirement.
  • A 5% rate of return in retirement (assuming a more conservative portfolio).
4

https://www.guardianlife.com/my-family/five-smart-ways-save-your-childs-education

6

The Tuition Rewards program is provided by SAGE CTB, LLC. Guardian does not provide any services related to this program. SAGE CTB, LLC is not a subsidiary or an affiliate of Guardian. Guardian reserves the right to discontinue the College Tuition Benefit program at any time without notice. The College Tuition Benefit is not an insurance benefit and may not be available in all states.

7

http://www.businessinsider.com/few-students-actually-pay-full-price-at-private-colleges-2017-5

8

http://www.businessinsider.com/few-students-actually-pay-full-price-at-private-colleges-2017-5

9

All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.

10

Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

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