Save For Retirement Or Child’s College Fund?


By: John M. Campanola, Agent New York Life Insurance Company Special to the Boca and Delray newspapers

If you’re raising a family, juggling competing financial goals is a constant challenge. One of the major quandaries is whether to save for your retirement or for your child’s college education. While you want the best for your children and your parental instincts probably lean toward saving for their higher education, it’s helpful to remember that while you can borrow to pay for college, you can’t take out a loan for your retirement.

The harsh truth is that one in three Americans has nothing saved for retirement, and 56 percent have less than $10,000 saved for their golden years. So it’s critical that you start saving for retirement as soon as possible.

One of the reasons you should start saving now for retirement is the magic of compound interest.

Let’s say you save $1,000 a month, or $12,000 a year, for 10 years. If you start at age 25 and leave the money sitting in a retirement fund to accrue at an average return rate of 7 percent, by the time you’re 65 your ending balance will be more than $1.4 million.

But what if you saved the same amount for 10 years but started at age 35? If you left the money in a retirement account until age 65 with the same average return rate of 7 percent, your ending balance would be only $734,539. The 10-year delay in beginning retirement savings results in the reduction of savings at age 65 by nearly half.

For this reason, it makes greater financial sense to put your money toward retirement, since contributions made toward your children’s college fund will be spent earlier than your funds for your nest egg, so there won’t be as much time for it to compound. Your money won’t have as much time to grow, and you’ll be getting less bang for your buck.

In order to free up money to put toward saving for a sufficient nest egg, look toward alternatives to plan for your child’s higher education that won’t necessarily compete with your retirement savings.

You might consider a 529 savings plan, which is a fund that can grow tax-deferred and can receive contributions from relatives.

A Coverdell Educational Savings Account (ESA), also known as an “educational IRA,” is another way to build an education fund, tax-deferred. A major difference between a 529 savings plan and a Coverdell ESA is that the latter can be used for primary and secondary education, i.e., kindergarten through 12th grade. Proceeds from a 529 plan have to be applied to qualified higher education expenses in order to be tax-advantaged.

Also, did you know that in 2014 alone, students neglected to claim over $3 billion in free federal aid? The reason was simple: They failed to fill out the Free Application for Federal Student Aid (FAFSA). By filing the FAFSA, your child will be eligible for student loans, grants, scholarships, and work study from colleges and at the federal and state level.

If you’re concerned about not having enough saved for retirement, you’re not alone. Only 12 percent of Generation Xers are very confident they’ll be able to fully retire comfortably, and 86 percent are concerned that Social Security will not be there for them when they retire, according to the Transamerica Center for Retirement Studies (TCRS) 17th Annual Retirement Survey.

When it comes to saving for retirement, start now—and start small. You can also look into ways to supplement your retirement, such as an annuity, which can guarantee income during your golden years. Getting the wheels in motion for future savings will help ensure that you have enough to retire with ease.