In the absence of generational wealth, you will likely need to choose between different financial goals as you navigate your working life. These decisions can present important trade-offs, and making the wrong choice could spell disaster for your family’s financial future.
One of the most common financial decisions you have to make is deciding how much of your limited savings will be allocated between your own retirement and your children’s college savings. These are often distant financial goals when you begin saving, so making an unwise decision could spell trouble for decades to come. On the other hand, a wise savings plan could secure the retirement of your dreams while supporting your children throughout their college years.
What happens if I don’t save enough for retirement or my child’s education?
When deciding between financial goals, you should consider the tradeoffs. In the case of prioritizing saving for retirement or your child’s education, the question becomes: what are my options if I don’t save enough?
Scenario 1: Underpreparing for Your Child’s Education
If you allocate your savings to retirement and find yourself unprepared for your child’s educational expenses, your options could include:
- student loans paid by your child. This is the option parents typically try to avoid since it means your child would start their career in debt. However, student loans could be a viable option to allow your child to attend the college of their choice even without sufficient savings.
- parental loans. These are a type of student loan where the parent is the borrower. If you take on parental loans, they will add an additional monthly payment to your expenses which can impact your financial plan. However, parental loans can allow your child to attend the school of their choice and allow you to cover the cost even if you have not saved enough money.
- withdrawing from a retirement account. Typically, you can only withdraw from a 401(k) for a qualified reason. Educational expenses can sometimes qualify for a hardship withdrawal, but criteria depend on the plan document. If you qualify for a hardship withdrawal from a 401(k), you typically owe tax and a 10% penalty on the amount you withdraw. With an IRA, you can withdraw funds at any time, for any reason. However, if you are under age 59 ½, you can owe tax and an early withdrawal penalty. For 401(k)s, education expenses are not a qualifying reason to waive the 10% early withdrawal penalty but for IRAs the penalty can be waived if funds are used for qualified educational expenses in some cases.
- borrowing from your 401(k). If your plan allows it, you can also consider a loan from your 401(k). While this type of loan still comes with a monthly payment, you would be repaying both principal and interest to yourself in most cases.
If you underprepare for your child’s education, these options could help your child attend the school of their choice. On the other hand, these alternatives can come with additional debt for you or your child.
Scenario 2: Underpreparing for Retirement
For many people, underpreparing for retirement is a significant obstacle. If you allocate your savings to your child’s education, then find that you have not met your retirement savings goals at your chosen retirement date, the repercussions could include:
- working longer. You can be forced to delay retirement if you reach retirement age and do not have enough savings to fund the standard of living you envisioned.
- lowering your standard of living. If delaying retirement is not a viable option, you may need to cut expenses in retirement. This can mean moving to a less expensive house, forgoing vacations, or reducing your monthly food and recreation expenses.
- reducing your estate. You could be forced to use some of the funds you planned to leave as an inheritance for your heirs to meet your income needs in retirement.
- being unprepared for unexpected circumstances. Retirement often comes with unforeseen circumstances such as medical expenses and long-term care costs. If you don’t save enough for retirement, you could be blindsided by these expenses.
As you can see, the trajectory of your life could be changed permanently if you are underprepared for retirement. Then, once you’ve stopped working, you have even fewer options to meet your needs. This often leads to an unwanted reduction in your standard of living.
How do I decide whether to save for retirement or my child’s education?
Saving for a child’s education is an admirable goal, but first you must make sure that your own financial wellbeing is established. To do this, partner with a trustworthy financial advisor to understand your current financial situation. This often includes a thorough review of your income, assets, expenses, and liabilities. Your financial advisor will also help you put your financial goals into words and understand how much each of those goals will cost.
Once you know your goals and current financial position, your advisor can help you determine if your goals are feasible. This often includes an analysis of your guaranteed sources of retirement income and estimated expenses to determine your Required Rate of Return™ [RRoR™]. If your RRoR™ is reasonable, then you can begin working toward other goals, like saving for your child’s education.
Partner with Meld Financial to Organize Your Financial Goals
At Meld Financial, we have spent nearly four decades helping clients achieve their financial goals. Our team of tax, legal, and investment professionals has the experience to help you plan for a comfortable retirement while saving to pay for your child’s education.
Our comprehensive financial plan, Financial Fingerprint®, is quick to assemble, easy to understand, and simple to modify as your circumstances change. With this plan and a partnership with an experienced financial advisor you can understand your goals and stay on the path to achieving them.
Contact us to get started.
