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College costs have risen much faster than inflation over the past 30 years, and as a result, a dilemma that many parents face is how to finance college and still save for their own retirement.
Saving for college and saving for retirement are two of the most common goals our clients have. The problem, of course, is that in many cases these two goals are competing for the same savings dollars. While we will need a lot more money saved for retirement, we have less time to save for college. This can add to the urgency for both goals.
College savings is really a retirement problem for two reasons. In phase one of the savings plan, college and retirement compete for the same piece of the pie. We all have a finite number of dollars we can save each month. In phase two of the college plan, the spending phase, the current tuition bills compete for cash flow; cash flow that might otherwise go towards retirement savings.
Shortfalls in savings and cash flow might be addressed by spending retirement savings, either through outright withdrawals or through loans against retirement accounts. After effects can be felt long after college graduation as potential retirement savings is redirected to pay off the loans taken against the retirement accounts.
The bottom line is that we believe your future must come first. Unlike college, there are no grants, scholarships or loans for retirement. On top of that, retirement is lasting longer and costing more. A century ago, life expectancy in the United States was 45 years. A few decades later when Social Security began, it was 63 years. Today, a woman turning 65 is expected to live until 86, and a man is expected to live until 84. (Source: Social Security Administration)
Retirement can easily stretch into 30 years, up to a third of your lifetime. Previous generations retired because they had to; they simply couldn’t work anymore. Today, many people consider retirement to be the culmination of their life’s work – an opportunity to enjoy life. Instead of sitting on the front porch with a glass of lemonade, today retirees are immersing themselves in hobbies, spending time and money traveling, dining out and pursuing all manner of recreation. While these are all positive developments in retirement in the United States, they will take money. And if you prioritize college savings over retirement savings, you could find yourself living with your very well-educated children.
Also, many employers match some portion of your retirement savings. This is basically free money. For example, if your employer matches 3%, the employer will contribute one additional dollar for every dollar you contribute up to 3% of your total salary. At the very least, you should be contributing enough to fully capture the match. Also, remember that retirement assets do not typically affect your student’s ability to receive financial aid. (Source: Forbes.com)
In the meantime, college has gotten steadily more expensive. According to data from the National Center for Educational Statistics, college tuition has experienced a 5.95% inflation rate since 1980. A college education that cost $20,000 in 1980 would cost about $270,000 today.
If you find that you have neglected your retirement savings to save for or pay for college, it’s important that you get back on track as quickly as you can. Make a plan and implement it. Work towards contributing the maximum to your retirement plans. For 2026, you can contribute up to $7,500 to an IRA, plus, if you are over 50, you can make an additional $1,100 contribution. You will be able to contribute up to $24,500 in a 401(k), with an additional $8,000 catch-up contribution if you are over 50. Those ages 60 to 63 are eligible for a “super” catch-up, which adds another $3,250 to the limit. (Source: IRS.gov)
Do what you can to save for college, but don’t neglect your retirement savings. We all have a limited amount of resources available to us. There are ways that students can help defray the costs through school choice, grants, scholarships, part-time jobs and loans.
Important Disclosure:
Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
