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The Balancing Act: How to Save for Both College and Retirement

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Retirement and College Saving Strategies

It seems like an impossible dream to many parents: simultaneously saving for your retirement and your child’s college education. Still, a college degree is important. Over the course of their working lives, those who hold a college degree are likely to make an average of $1 million more than someone who doesn’t — and to suffer less in an economic recession.1 The good news is that it’s possible to pay for both a comfortable retirement and college. The key is saving.

To get started, though, there are some basic principles to follow before you dive right in. First, begin by protecting your existing assets, so you’re prepared if anything should happen. That includes considering life, health, disability, auto and other relevant insurance. 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.

Then, become a world-class saver by putting aside at least 15-20 percent 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 is 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, to make contributions consistent, and help you benefit from a reduced taxable income at tax time. In addition, even if you already have a 401(k), you can 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.2

To give you an example, a 35-year-old with a household income of $55,000 would need $1.8 million to retire by age 67.3 If that person has $100,000 already saved, he or she would need to put away 15 percent of his or her income every year, or about $690 per month, to achieve this savings target. This is just an estimate.

For college, the primary savings vehicle for many households is a 529 plan. You can set aside money from after-tax income, but the interest won’t be taxable. And withdrawals will be tax-free, if they’re spent on education.4 You’ll find many choices, so it’s best to turn to a pro for help. As with retirement, you’ll also need to rebalance your accounts, as necessary.

So, what does saving for college look like? Say you have a 3-year-old. In 15 years, when the child is of college age, the cost of an average four-year institution could be in the region of $190,000.5 That means if you save about $550 a month, 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. There’s also the SAGE College Tuition Benefit, available through some Guardian insurance policies that you can get at work, which enables people to earn up to $2,000 in annual tuition rewards. Because of these various options, the percentage of freshmen paying full tuition at private colleges fell to an all-time low of 12 percent during the past year.6 And private-college freshmen on average received grants accounting for 56 percent of their tuition.7

Finally, whole life insurance is an option to consider for both retirement and college savings. It can provide guaranteed coverage for life, 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.

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. 

1 https://ww2.kqed.org/lowdown/2016/05/16/comic-infographic-is-college-really-worth-it/

2 https://www.guardianlife.com/investments/ira

3 http://money.cnn.com/calculator/retirement/retirement-need/

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

5 http://www.savingforcollege.com/college-savings-calculator/index.php

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

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