How Can I Save for Retirement and College at the Same Time?

Saving for the future is a top financial priority for most people. If you have children, then saving for their college education may also be an important goal for you. Or, you may want to pursue an advanced degree yourself.

Putting away money to afford both retirement and higher education can be quite expensive. Many families face the challenge of balancing retirement and college savings. 

Fortunately, you don’t have to make a choice between them. There are several smart strategies that can help you strike the right balance.

Why Is Saving for Retirement Important?

Getting ready to retire with financial security is the endgame for most people. Retirement often requires a substantial amount of money so you can maintain your desired lifestyle after you stop working.

There are various sources of retirement income—including Social Security and pensions—but they may not be sufficient to cover all your expenses. You’ll need substantial retirement savings, too.

One rule of thumb is to have saved 25 times your expected annual expenses by the time you retire.

In a recent survey by Schwab, U.S. workers said they believe they need to have saved $1.8 million in order to retire. That works out to having about $72,000 a year throughout a 25-year retirement.

Saving enough money for retirement is important for several reasons:

• People are living longer, which means your retirement could span several decades. More money is needed to ensure you don’t outlive your retirement savings.
• The cost of living increases over time, so goods and services will continue to cost more in the future. 
• As people get older, they’re more likely to require more medical care. Health expenses also are affected by cost-of-living increases.

Having enough savings and budgeting for retirement help to ensure you’ll be able to maintain your lifestyle, pay for medical expenses and cover other financial demands after you stop working.

Why Is Saving for College Important?

Retirement is a goal that comes at the end of our career, but college usually occurs before you enter the workforce. Many people spend a good portion of their earliest working years paying back student loans. 

If you have children, you might want to save money to pay for your kid’s college education. College expenses can vary, depending on which school your child chooses to attend.

According to the Education Data Initiative, the average 1-year cost to attend a 4-year higher education institution in the U.S.—including tuition, room and board, books, supplies and living expenses—is $36,436.

And those expenses have been rising at a rate of about 2% each year over the past decade.

There are ways to cut college costs, such as attending a local school and living at home, attending a public college vs. a private college, or attending an in-state school vs. an out-of-state school. But if your child has their heart set on a pricey college, your annual expenses could rise to more than $55,000.

Overall, your child may expect to pay between about $100,000 to $200,000 for a 4-year undergraduate degree program. If they have student loans, interest will add to that amount. 

You can give yourself an advantage by starting to save money for college many years in advance. By planning ahead, parents can help finance their children’s education without jeopardizing their own financial future, including their retirement. 

How to Determine Your Retirement and Education Savings Goals

Balancing the anticipated costs of higher education and retirement presents a unique challenge. Although college is a large near-term expense, retirement hinges on saving early and often. Thankfully, there are ways to achieve both goals.

When making the decision to save for retirement, college education or both, start by considering the trade-offs. Here’s what to think about as you assess your families’ situation and prioritize what’s important to you:

1. Evaluate your time horizon for saving money. You might save for your child’s education for 18 years, but you’ll have your whole career—at least 40 years—to save for your retirement. The main reason why you should start saving for retirement as early as possible is to earn as much money as you can. The sooner you start putting away money for retirement, the more time your investments have to grow through compound interest.
   
   College savings accounts have less time to earn interest, since children will enter college in their late teens or early 20s. Fortunately, earning a college degree typically takes far less time and is far less costly than affording a long retirement.
2. Think about your financial flexibility. Prioritizing retirement savings provides financial security in your later years. This reduces the risk of outliving your savings. Meanwhile, prioritizing college savings can lead to more flexibility in the near term. Helping to fund your child’s education could help them avoid the need for large student loans.
3. Look for available tax benefits. Contributions to retirement accounts often come with tax advantages. This includes tax deductions or tax-free growth. Some college savings plans also offer tax benefits. For example, 529 plans offer tax-free withdrawals for qualified education expenses.
4. Explore potential financial aid. The amount you’ve saved so far for retirement generally won’t impact your child’s eligibility for financial aid. On the other hand, a large college savings balance may reduce the amount of need-based financial aid your child is eligible to receive.
5. Consider future earning potential. Focusing on retirement savings ensures you’ll safeguard your financial independence in your golden years. This can be critical if you’re unable to work. Meanwhile, investing in education can lead to increased earning potential for your child—and for yourself if you’re pursuing your own degree. Both play important roles in achieving financial independence. 
6. Take stock of your values and life goals. Prioritizing retirement savings helps ensure you can afford your desired lifestyle in retirement. In contrast, prioritizing college savings affords important educational opportunities for your children.

If you choose to save for both retirement and college, the trade-offs listed above will help you prioritize your savings allocations. You may decide to lower the amount you’re saving for one goal while focusing on the other. As your priorities change, you can readjust your savings amounts.

Strategies to Save for Retirement and College

Saving for retirement and college at the same time can seem like a daunting task. The right strategy can help you contribute to both critical goals without feeling cash-strapped. 

Here are some savings strategies to help protect your retirement dreams while saving money for your kids’ college education:

• Start saving money early. The earlier you begin saving for both retirement and college, the easier it will feel to reach your goals. Compounding interest works wonders over time!
• Set clear savings priorities. Determine how much you can comfortably save for each goal. Your retirement generally should take precedence over savings for education expenses. Remember: Loans are available for college but not for retirement. 
• Make use of tax-advantaged accounts. Maximize contributions to qualified retirement accounts such as 401(k)s and IRAs. For education expenses, consider 529 plans or other college savings accounts, which can offer tax benefits in some states.
• Automate regular savings deposits. Set up automatic contributions to both retirement and college savings accounts. You could set up direct deposits or 401(k)/TSP contributions from your paycheck, or automatic account transfers, to make the process of saving easy and painless. This ensures consistency and discipline in your savings strategy.
• Adjust your contributions over time. As your financial situation evolves, revisit your savings plans. You might decide to change how much money you’re setting aside. Windfalls, pay raises or savings from reducing expenses can be opportunities to save more money toward your goals.
• Involve others in education savings. Teach your children about the value of money by involving them in the college savings process. Encourage them to contribute a percentage of their part-time earnings or gift money to their accounts. This can help them appreciate what it takes to go to college. Additionally, let family members know you’ve set up a 529 plan and encourage them to contribute to it.
• Explore financial assistance options. Investigate scholarship opportunities, grants and financial aid options to reduce the burden of college costs. On the retirement side, see if your employer offers a matching contribution for qualified retirement accounts. An employer match can give a significant boost to your retirement savings.

Saving for Retirement and College at the Same Time Is Possible!

Balancing retirement and college savings is a challenging task, but it’s not impossible. By carefully planning, setting priorities and using tax-advantaged savings accounts, you can set aside money for your retirement and college education goals. Striking the right balance will ensure you’re prepared for a comfortable retirement, while providing the best opportunities for your children’s future. 

You can find more useful resources here to help you learn how to save and prepare for college. And be sure to check out how Navy Federal can help, with options to save for retirement and college. 

Need to talk with someone about how to balance saving for both goals? Visit a local branch or reach out to our financial advisor team today.