March 26, 2013

Retirement Savings are Higher Priority than College Savings

Many people are faced with tough choices when allocating their budget and prioritizing different spending and savings goals.    If you're in a situation where you are looking at trying to juggle retirement savings or college savings then your own retirement should be the higher priority.

I'm not inventing the wheel here.   This is a common topic in personal finance.  I don't recall who I first got the idea from and it may have originally been someone like Suze Orman.  Most recently I saw Consumerism Commentary write about it with their article  Saving Priorities: Retirement vs. Kids’ Education

Some of the key reasons :
If you don't save for retirement then worst case you'll be destitute but if your kid doesn't have savings for college then worst case they won't go to college.
You can't get a loan for your retirement yet college can be financed via student loans.
Student loans aren't evil and actually have relatively good terms.
The kids can always pay their own way if they really need to.
Your kids may not even go to college.


I'd also break it down like this...

First lets split people into two groups:   Group A has low/mid income and assets.  Group B has higher income and/or higher assets.

Group A : less money
I think that most people I think are going to fall into Group A one way or the other.   Half the nation is under median income and in the low/middle income area for that reason and half the nation lives paycheck to paycheck.   Group A folks have less money to utilize for retirement or college so they face a valid choice between the two.    The key here is that Group A folks ought to be able to qualify for decent financial aid based on financial need.   If your family is struggling financially then thats exactly what student financial aid is for.
Answer : rely on financial aid for college.

Group B : more money
If you have higher income and / or higher assets then you won't generally qualify for financial aid.   However you ought to be able to save for retirement AND for college.   Remember you've got higher income and/or assets... so I don't see a good reason for you to need to make a choice between the two.
Answer : You've got money to save for both retirement and college.

I know that may be overly simplified but I think this really does cover the situation for most people.

So thats my simple algorithm :

IF you're unable to adequately save for both retirement and college THEN you'll very likely qualify for financial aid so retirement should be your priority.
  You should save for retirement
ELSE IF you have more money THEN you should really be able to save for both retirement and college.
  You should save for both retirement and college

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4 comments:

  1. I agree 100%. My situation is unusual, without going into detail I know that my children are eligible for financial aid. I also know that if I don't "stuff" the retirement fund as much as possible That I will have a rough go of it. the rest goes without saying......

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  2. We are saving for both retirement and college. I don't know if the kid will be eligible for financial aid. We'll have to see.

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  3. Wow, well-timed post. My wife and I are struggling with this now. I tend to agree with your formula, but I do think most of America actually falls in the middle: too much income to qualify for financial aid, too little to pay out of pocket. I'm considering buying a rental property for college costs. If it at least breaks even for 18 years, it may be enough to cover tuition by the time I need it.

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  4. Nick,

    I think most people qualify for some financial aid and/or can pay out of pocket for at least a local state college. You have to make a fair amount before you fail to qualify for any aid. But then aid does include loans. Upper-middle income folks may not necessarily get grants but their kids can get loans at least.

    Jim

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