Many Millennials carry the burden of student loan debt and are determined to prevent their kids from facing the same challenges. However, this concern often leads parents to prioritize saving for their children’s education over their own retirement, which financial planners warn can lead to regrets later.
The Key Takeaway: Prioritize Retirement
There are no loans for retirement. Financial planners advise parents to focus on their own financial security first while finding balanced ways to support their children’s education. Here are three strategies to consider:
1. Save Early, Then Pause
Start building your retirement savings early and consistently. When your children begin college, pause retirement contributions temporarily to free up cash for tuition, then resume saving once they’ve graduated.
Example: Katie and Tom saved aggressively in their 401(k)s until their kids started college. They paused contributions during the college years but let their existing savings grow. By retirement, they still had millions in savings while helping fund their children’s education.
2. Set Limits on College Funding
Decide in advance how much you’ll contribute to your child’s education to avoid overcommitting. This might include:
- Covering in-state tuition only.
- Paying 50% of college costs.
- Offering a set amount per semester.
Example: Mike and Beth committed to funding their son’s education at a state university. By saving $435/month in a 529 plan, they’ll have enough for his tuition without sacrificing their retirement.
3. Prioritize Retirement and Help Later
Focus on maxing out retirement savings during your career. Once your kids graduate and start working, you can assist them financially through gifts to Roth IRAs or other savings accounts, giving them a head start without jeopardizing your retirement.
Example: Funding a Roth IRA for a 22-year-old child could grow to over $2 million by retirement, helping them secure their financial future.
The Bottom Line
Parents who compromise their retirement to pay for their children’s education may risk their own financial stability. Instead, find ways to balance both goals. Teaching kids about financial responsibility and modeling smart savings habits can be one of the best gifts parents can provide.
This approach ensures parents can help their children while safeguarding their own future.
To read more about saving for college and retirement, read 3 ways to balance saving for education and retirement.