Should You Save for College or Retirement?

The cost of college is nothing less than daunting. And for parents who have been watching the price tag increase every year and hearing about crushing student debt loads, it’s led to a serious financial planning dilemma: Should you save for college or your retirement?

Financial planning is difficult because there are so many competing priorities, says Andrew Weber, CFP^® professional and senior director of Planning Philosophy, Research and Guidance at Northwestern Mutual. “Parents know they eventually need to retire, yet they are often passionate about sending their kids to college,” he says. “It’s a natural urge because most parents want the best for their kids and want to do everything they can to give them a successful start, which often points to higher education.”

And yet, the costs of retirement can seem equally overwhelming. While it’s not an all-or-nothing proposition, there is a clear answer from an objective financial planning standpoint: You should prioritize saving for retirement over college.

Why prioritize saving for retirement?

There are no loans for retirement

When you save for college over retirement, you may give your children the gift of no debt, yet still burden them in the future—because there aren’t loans to pay for your retirement. It’s akin to the announcement they make on airplanes about putting your oxygen mask on prior to your children's masks: If you pay for their education at the expense of your retirement, they may end up having to support you in the future.

By contrast, when it comes to paying for college, your children will have myriad options open to them. They can work, apply for grants and scholarships and take out loans. In addition, they can focus on finding an excellent school that’s still affordable.

Your retirement timeline might not unfold as anticipated

Retirement can seem much farther away than your child’s college years because you’re watching them grow up before your eyes. That can alter your perspective and make saving for college appear more important and timely. It’s hard to prioritize something that’s so far off, and you might think you have plenty of time to supercharge your savings during your last few working years.

But Weber points out that you can’t count on controlling the timing. “Unfortunately, you may retire earlier than you were expecting, either because of health conditions, a forced layoff or another unforeseen event.”

If you were planning on having an extra few years to grow your nest egg, it ends up being an even larger blow. Not only are you no longer contributing, but now you’re simultaneously depleting your account so that it’s not seeing market gains. And if health-related concerns cut your earning years short, you’ll also have medical expenses to cope with.

So the earlier you start saving, the more time your money will have to grow and the better prepared you will be for the unexpected.

It’s a valuable financial lesson for your children

While you might like to send your kids off to school without any financial worries, talking to them about paying for college could be a beneficial lesson for them. In fact, some parents make the deliberate decision that their child will have to contribute to a certain percentage of their education. This can be the motivation your child needs to get good grades to qualify for scholarships that lower the amount they will ultimately have to contribute themselves.

If they do have to take out loans, that process can serve as a valuable lesson about how debt works. It’s also more likely to make them factor cost into their decision about which schools they want to attend.

Weber says that putting away money can also instill a savings mindset in your kids. So if you’re forgoing a lavish vacation to bulk up your account, tell them why. “Every dollar you spend today is one that’s not available for something else,” Weber says. “If you’re making a sacrifice in the name of a future goal, whether it’s education or retirement, explain that you’re taking the long-term view, which will be better for everyone all around.”

You can save for college and retirement

The good news is that, typically, you can do both. “I like to tell people to focus on ‘and’ rather than ‘or,’” Weber says. “There are ways you can fund both responsibly without shortchanging either.” For retirement savings, Weber recommends looking to your work-sponsored 401(k) and saving up to your employer match, if it’s offered.

For those who are light in education savings, Weber encourages families to think of other ways to fund college, such as choosing a more affordable school, aggressively pursuing scholarships and having your child work part-time during their college years.

Still, you should make sure you have a plan for your retirement savings in place first. A financial advisor can help you ensure you’re doing the right things for your retirement and then help add college savings into your financial plan.

Parents typically use 529 accounts to save for college because they offer tax advantages. But keep in mind that there are also drawbacks: The funds must be used for education or you may owe a penalty. Your financial advisor can show you alternative funding sources as well, including using the cash value in permanent life insurance.

The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance cash value will reduce the death benefit and may affect other aspects of the policy.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.