Save for retirement or your child's college education? The case for retirement.
One of the most common debates I hear about from people such as myself 鈥� twenty- and thirtysomethings with young children at home 鈥� is whether it makes more sense to save adequately for retirement or save adequately for their child鈥檚 college education. Quite often, young career folks (like myself) don鈥檛 have the means to do both, so it becomes a choice. Retirement or college? Today, I鈥檒l look at both sides of this coin that鈥檚 central in my own life.
When I envision my life thirty years from now, one key part of that vision is that I鈥檓 not financially dependent on my children. I鈥檓 able to live the life I want to lead without them worrying about me (at least financially) in the least, particularly in my final years.
The best way to ensure that kind of a future is to focus primarily on shoring up retirement savings, even if it comes at the expense of saving adequately for the college experience of one鈥檚 children.
What are the advantages of retirement savings when you鈥檙e young? The big advantage of retirement savings when you鈥檙e young is that it has a huge number of years to grow and grow and grow. The power of compound interest has plenty of time to work in your favor.
The real numbers tell the story better than anything else. If you invest $10,000 when you鈥檙e 45 at an 8% rate of return, you鈥檒l have $46,609 when you鈥檙e 65. Invest $10,000 when you鈥檙e 35 and you鈥檒l have $100,626 when you鈥檙e 65. Invest $10,000 when you鈥檙e 25 and you鈥檒l have $217,245 when you鈥檙e 65. The earlier you sock away money for retirement, the better the deal is.
What about their education? Self-motivated students can always make college work if they choose to do so. There is a myriad of financial aid options available, plus most schools also accept transfer credits from very low-cost institutions, enabling students to fulfill many of their general education requirements at a very low cost from community colleges.
Beyond that, having a student take a large deal of responsiblity for their education forces them to learn some personal responsibility that they might not otherwise learn. It can also show them, first hand, the cost of their education 鈥� and the value of it. Those are lessons that aren鈥檛 taught by simply writing a check for them.
What if I change my mind? If you start saving for retirement, then change your mind about your choice, you鈥檙e not completely without options. Most common retirement savings plans allow you to use some 鈥� if not all 鈥� of your retirement savings to help with college education.
Most 401(k) plans allow you to borrow against them to pay for educational expenses. However, if you do this, you lose out on the returns during the years that you鈥檝e got the money out on loan. If you鈥檝e used a Roth IRA, you can withdraw the amount you鈥檝e contributed at any time without penalty, but you can鈥檛 put that money back.
Won't I feel guilty about saddling my children with lots of student loans? There鈥檚 no reason you can鈥檛 help them pay off those loans when you鈥檙e very secure in retirement. At Christmas, write a check to their student loan holder, knocking off a chunk of their loans for them. This way, you鈥檒l be making the payments from a position of total security rather than from a position where the future is uncertain.
What if this makes my children fail to get an education? From my perspective, that鈥檚 more of a commentary on the initiative of your children than anything else. If this roadblock somehow 鈥減revents鈥� them from going to college, they鈥檙e showing a lack of self-motivation that will hinder them in more ways than just not getting a degree. Without that kind of drive, they鈥檒l be hard-pressed to succeed in any high-pressure field.
They might also simply not be interested in what college has to provide for them and are intelligent enough to make that decision on their own. In that situation, a trade school or something similar might actually be the best situation for their temperment, for one example. Students who attend trade schools can often earn a very good salary doing a wide variety of skilled labor.
This makes a strong case for saving for retirement instead of saving for your kid鈥檚 education. But what about the flip side of the coin? Click here for an argument for saving for college first. Or click here for the bottom line.
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