Balancing Act: Saving for Both Retirement and College


Michelle and Mark are worried about their financial future. “We want our one-year-old son, Raymond, to go to college, but we’re concerned that in 17 years, the cost might be more than we can afford,” says Mark. “We also need to save for our retirement,” adds Michelle. “Can we reach both of these goals?”

Michelle and Mark aren’t alone. Millions of Americans are finding it a struggle to balance the high cost of higher education while saving for their own retirement. If you’re one of them or would like to help someone faced with this situation, put your worries aside. Fortunately, there are steps you can take to help overcome this double-sided planning hurdle.

For example, because Michelle and Mark won’t need their money for 17 years, they decided to begin investing now and often. Starting a regular investment program long before needing the money can potentially work in their favor. That’s because of compounding — which is what happens when previous earnings from an investment remain invested and, in turn, earn more money.

They also decided to make the most of their contributions by investing in vehicles that would generate important tax benefits. They chose to funnel $100 each month into a 529 College Savings Plan, which would allow their contributions to benefit from tax-deferred growth and tax-free withdrawals. Meanwhile, they also set aside $200 a month into an IRA. When they receive raises, Michelle and Mark will increase their contributions to both accounts.

Getting a Late Start

Sandy and Paul have a different issue. “We don’t want to be a financial burden on our kids when we’re older, so we’ve always opted to max out our 401(k)s and IRAs, which limited the amount left to contribute to a college fund,” says Sandy. “Now our twins are 16, and we’ve only managed to save $8,000 for their college expenses.”

“Fortunately, my parents have helped out by investing $22,000 in UGMA custodial accounts,” says Paul. “We should be eligible for loans and maybe the girls will receive scholarships. It won’t be a cake walk, but at least we should be able to get them through college without sacrificing our retirement.”

Planning Is Key

If you’re feeling overwhelmed while investing for long-term financial goals, why not create a workable financial plan and begin to invest regularly? Over time, even small sums of money invested could potentially add up. And by all means, don’t forgo investing for your own Golden Years. After all, there are no retirement scholarships. Investing in an IRA has many benefits. For example, assets held in an IRA will not affect your eligibility for financial aid, and if need be, usually you can make penalty-free withdrawals for qualified higher education expenses.1 With a traditional IRA, you may benefit from a tax deduction now while your earnings grow tax-deferred. With a Roth IRA, you make contributions with after-tax dollars, but qualified withdrawals will be tax-free.

Don’t Go It Alone

These are just some ideas for stashing away money for both college and retirement, but don’t make important financial decisions in a vacuum. Remember the role that your financial consultant can play in helping you solidify your financial future. He or she has the experience and the resources to help you evaluate your situation and may be able to help you maintain your financial equilibrium.

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1 Nonqualified withdrawals may be subject to a 20% withholding and a 10% federal penalty tax in addition to ordinary income tax.