Striking a Balance Between Retirement Planning and College Saving

by | Dec 7, 2021 | Retirement

For 2022, the amount you can sock away into your 401(k), 403(b) and most 457 plans will rise another $1,000 to $20,500. If you’re at least 50 years of age, you can put away up to $27,000 thanks to catch-up contributions. The limit on “total additions” to those plans — that is your deferrals and employer contributions combined — rises to $61,000 in 2022 or $67,500 if you’re at least 50.

While you’re contemplating how much to put into your retirement fund, you may also be wrestling with the looming question of how to fund your child’s college education. No parent wants to think of their future college graduate emerging with a diploma and a ton of debt. Nor do you want to sail into retirement with substantial debt of your own and insufficient savings.

Start with the Basics

Until the early 20th Century, one of the reasons people had children was to create a support system for when they (the parents) could no longer support themselves. At least that was the role many assumed the children would take on, which still holds true to some extent in less prosperous countries today.

Assuming that’s not the position you’d like to find yourself in, avoiding it begins with some fundamental financial planning, ideally with support from a professional. The basic task is to determine the retirement income you’ll need, and how much retirement savings you’ll have to accumulate by the year you hope to retire. Be sure to consider all income sources, including Social Security. The search term “retirement savings calculator” will swamp your internet browser with links to free tools, some better than others. But they’re a valid way to get a ballpark figure.

Next, study up on college costs — both the “sticker price” and the bottom line after accounting for financial aid and scholarship opportunities. Sometimes, when various discounts and grants are factored in, the actual cost of a college degree from a private institution will come out below that of your own state’s university.

Seek Expert Counsel

There’s a thriving industry of private college selection counselors who can be helpful in identifying schools that have an interest in students with particular backgrounds, life experience, academic interests, and athletic and musical skills. Finding a good match might dramatically lower the cost of attending such a college or university.

These experts can also help you navigate the process of seeking financial aid, including how to optimize the positioning of your income and wealth status. Obviously, you want to avoid creating the illusion that you’re wealthier than you are, and that your child doesn’t need any financial support.

For example, the standard Free Application for Federal Student Aid (FAFSA) doesn’t ask about qualified retirement plans. In contrast, the College Board’s “CSS Profile” is more granular and does expect parents to include that information.

Not all schools require that you submit a CSS profile; for some, it’s optional. But many do.

The size of your retirement accounts is just another variable considered by colleges using the CSS profile. The mere fact that you have retirement savings is to be expected and won’t disqualify your child from receiving financial aid. However, if instead of maxing out on retirement savings plans, you kept more in college savings accounts such as a tax-favored 529 plan, those assets would be factored into financial aid decisions.

When you’ve gathered the basic forecasted retirement savings and college cost numbers together, you can run some scenarios — perhaps with help from a financial planning professional.

Leverage the Power of Compounding

Over time, compounding investment returns and interest income will play a big role in deciding how to strike the right balance. For example, with compounding, getting an aggressive early start with your retirement saving might make it easier for you to pull back a little and shift some dollars to college savings later. If possible, take full advantage of any employer matching contributions to your retirement account by saving at least the maximum amount eligible for those matching contributions.

The tax implications are also important. For example, if you don’t use a 529 plan for college savings, you could come out ahead from a tax perspective by favoring retirement savings.

Finally, there are important parenting philosophy considerations. Know the lessons your children may need to learn about financial responsibility. Paying for their entire college education could put your retirement at grave risk or cause you to work longer than you hoped or are able. As parents, you may want to consider whether covering all your children’s expenses is helping them or perhaps giving them a false impression about your financial situation.

There’s much to think about. But the sooner you can get a handle on the matter, the better you and your children will be when those tuition bills start coming in.