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Juggling the Costs of Retirement vs. College: Our 5 Best Tips 

Arguably the biggest and most emotionally significant goals, retirement and college, often arrive around the same stretch of time.

If you're like most parents, you may be asking…


What comes first: my retirement or my child's college?


Let’s say your child wants to attend UCLA or USC. In 2021, UCLA’s tuition and fees are $13,249 for California residents and $43,003 for out-of-state students, while USC’s cost of attendance is $77,459 for all students regardless of their residency. Add that to your own retirement savings needs, and it’s easy to see why you could get overwhelmed with competing priorities.

On top of that, you may be part of the growing body of parents who are helping children with other big financial goals, like buying their first home. It’s easy to see why the timing of your kids’ and your own milestones could cause you to fall into a pattern of either/or thinking. 

Not sure how to handle this double responsibility?

We offer clear, actionable advice to help you make informed decisions so you can feel confident saving for both college and retirement.


Get in touch to start the conversation today!


Here are our biggest recommendations for balancing the costs of college and retirement.


1. Keep your retirement front and center.

Why should your retirement come first?

  1. You only get one shot at saving for retirement. Don’t sacrifice your financial future to fund your children’s college education.

  2. You have plenty of options for financing an education — public and private scholarships, grants, and loans — but not for retirement.

  3. When you’ve planned well for retirement, you won’t become a burden to your children later in life.


2. Save early, and save enough.

Of course, the earlier you start, the better. Saving early increases your time horizon, giving your investments more time to grow and making it easier to finance college.


Option A: 529 Savings Plan

Most parents will do well saving for college through a 529 Savings Plan, a specific type of tax-favored college savings account. The money in a 529 plan grows tax-deferred, and distributions used to pay for college are tax-exempt.

Elliot Kallen, Founder of Prosperity Financial Group, Financial Advisor, Wealth Advisor, Financial Planner, Wealth Planner

A Word With Elliot

I get a lot of questions from parents worried about the rising costs of college. Here are my answers to some of the most common questions I hear:

  • You, your relatives, and even your friends can set up monthly contributions — perhaps in lieu of birthday or holiday gifts.

  • As with any investment, it’s possible to lose money by investing in a 529 college savings plan. 

  • By investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state’s plan (be sure to check, as not all states offer tax breaks).

  • You might also decide to help with a certain percentage of student loan debt after graduation, which buys you more time.

  • Contributing to a 529 plan won't qualify you for a tax deduction on your federal taxes, but it might get you a deduction on your state income tax bill. 

Option B: 401(k)

Contribute enough to your company 401(k) plan to get the maximum employer match so you aren’t turning down free money. If you've got an employer who will match your contributions dollar for dollar up to 6 percent, you’ll effectively double your investment right then and there.

For instance, if you earn an annual salary of $200,000 and your company matches 50 percent on the first 6 percent that you contribute, then you should save that 6 percent for an additional $18,000 per year towards retirement ($12,000 of your own plus a $6,000 employer match).

In addition to the employer contribution, you will also get a tax break and investment returns on that savings.


Option C: IRA

You can also contribute up to $6,000 ($7,000 if you’re 50 or older) in an IRA. Both Traditional and Roth IRA accounts include more investment options than an employer-sponsored plan.

» All Your IRA Rollover Questions, Answered


Another compelling reason to save through qualified retirement accounts (i.e., 401(k)s and IRAs)? They are excluded from financial aid calculations, which can increase the likelihood of receiving need-based aid. 


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Need help understanding the fees and tax implications of investing in each type of account?

We’ll help you do a side-by-side comparison of the benefits of saving more in your 401(k), contributing to an individual retirement account or Roth IRA or funding a 529 College Savings Plan.


Even as college looms, there are plenty of ways to balance the costs of education and retirement. Your Fiduciary Financial Advisor can help you develop a comprehensive financial and investment plan to reach your savings goals.


3. Consider your child’s financial aid package.

A common misconception is that the federal government looks at your retirement money when calculating how much financial aid your child qualifies for. This isn’t true — if you have money in a retirement account, it is not going to hurt your chances for qualifying for financial aid.

So, what is factored into financial aid eligibility? Money in a 529 Savings plan and distributions from retirement accounts, including Roth IRAs.

Elliot Kallen, Founder of Prosperity Financial Group, Financial Advisor, Wealth Advisor, Financial Planner, Wealth Planner

A Word With Elliot

Still confused about how to time your retirement and child’s college costs?

Here are my final tips:

  • To increase your chances of receiving financial aid, wait until after your child graduates (assuming they are not going on to grad school) to take distributions from retirement accounts.

  • Your 401(k) distributions for higher education expenses will incur income tax and, if you are under age 59½, a 10 percent early withdrawal penalty.

  • IRA distributions going toward college costs will not trigger the early withdrawal penalty, but you’ll owe income tax.

  • If you’re under age 59 ½, Roth IRA withdrawals for college expenses will be subject to income tax only on the portion of the withdrawal that comes from investment earnings.

4. Find creative ways to reduce college costs.

Your child received an acceptance letter from the college of their dreams. The problem is, you don’t have the full amount saved by the start of fall semester.

The good news is, most students don’t pay the school’s full price for tuition, fees, and room and board. The College Board reports that, after taking scholarships and grants into account, students typically pay far less — up to 20 to 40 percent less than the full “sticker price.”

And if you still don’t have the full amount saved by the time tuition is due, you still have plenty of choices:


Start college early

To cut costs, encourage your child to get an early start on their college education. Your child can take AP classes, complete night classes at your local community college, or test out of college courses through CLEP exams.


Family gifts

You’re generally limited to a $15,000 gift per year to any individual without being subject to gift taxes. However, the educational exclusion allows you to circumvent the gift tax. That means friends and family can contribute to your child’s 529 plan and academic future.


Defer four-year university

Your child can take their first two years of general classes at a local community college before transferring to a four-year university.


Grants

You can apply for grants from colleges, states, and the federal government. Most are awarded based on your financial need; the amount is determined by the income reported on your child’s Free Application for Federal Student Aid (FAFSA).

For example, at Stanford, students with families with incomes below $75,000 receive a full ride and free room and board.


Student jobs

Your college student can work during the summer as a tutor, research assistant, or intern. During the school year, Resident Advisors (RAs) receive free room and board, utilities, cleaning supplies, parking permits, toilet paper, and more. Not only does this help relieve college costs, it builds work experience and potential job references.


Loans

Student loans are another low-cost form of financial aid. Undergraduate loans are charged an interest rate of just 3.73 percent and come with flexible repayment plans.


Scholarships

Even if your student isn’t an athlete, thousands of students receive academic scholarships every year. Scholarships are given out for merit, for minority status, and for certain backgrounds, like military families. Several small scholarships can add up quickly.


5. Compare loan interest rates to your investment returns.

A T. Rowe Price survey found that half of parents would rather dip into their retirement money for college costs than let their children take on student loans. In making this decision, compare the interest rate and fees you would be charged for a loan to the returns you are earning on your investments. Is the interest rate on the loan higher than the interest rate on your retirement savings? It might make more financial sense to minimize the debt. However, if your child qualifies for federal loans at super-low interest rates, it might be better to borrow for college.


We Can Help

With so many ways to pay for college, it’s possible to strike a balance in your own life between college and retirement. After all, saving for retirement should never be placed on the back burner.


Next steps:

» Talk to a Prosperity Specialist about opening a 529 College Savings Plan.

» Read our in-depth guide to College Planning.

» Talk to us about retirement planning. Call (925) 314-8500 to learn more, or visit our office in San Ramon.

Send Us a Message

Our professional team is here for you. To learn more about Prosperity or to speak with a representative, please call us or complete our request form.


DISCLOSURE: Advisory Services offered through Prosperity Financial Group, Inc., an independent registered investment advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.


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