Is there ever a time to NOT save for college?
Thanks to the recession and the skyrocketing price of higher education, many families are forced to choose between socking away for their kids’ college education and saving for retirement. My advice may surprise you: Choose retirement. The best gift you can give your children is to be self-sufficient when you’re older. And while you can take out a low-interest loan to get an education, the same is not available for retirement.
Unfortunately, many moms and dads are not heeding this advice. A new study released Tuesday from Gallup and Sallie Mae shows that nearly a quarter of parents intend to raid their retirement funds to pay for their kids’ tuition. Not only are they depleting their retirement stash, but they could lose nearly half of what they saved because of early withdrawal tax penalties and other fees.
Of course, parents who prioritize their children over retirement have good intentions. “The current development of my children is more important than how I’ll live 20 years from now,” says Maria Romana, a 45-year-old mother of teenage twin daughters. Similar to the parents who raid retirement funds to write college checks, Maria cashed out her 401(k) to pay off credit card debt, which accumulated largely due to kid-related expenses.
Problem is, while parents like Maria *think* they’re helping their kids, their plan may eventually backfire, since not saving for retirement means their kids may have to support them later in life. The average 65-year-old is now expected to live another two decades, so today’s parents have more “later years” to plan for than ever. And Social Security benefits replace only 40% of the average American’s pre-retirement income, so kids may have to fill in that financial gap.
Think this won’t be you? Close to half of Generation Xers are at risk of running out of money for their own basic needs in old age. What’s more, saving for yourself actually helps your child pay for school, since retirement account assets don’t count against students hoping to qualify for financial aid.
Plus, saving now will pay off: Parents who put $5,000 a year toward an IRA starting at age 35 could have more than $400,000 by the time they’re 65—because there’s so much time for the money to accumulate interest, that’s double what they’d have stockpiled if they waited until 45 to start saving.
How do you rationalize saving for retirement vs. kids’ college?
P.S. The week of Oct. 17 – 23 may become “National Save for Retirement Week,” a time where the government, universities, and businesses can host financial education activities. Stay tuned for more details.
