For Young Parents, First Secure Your Retirement, then Save for College
With limited resources and growing family budgets, most young parents are confronted with the choice of saving for retirement or saving for a college education for their children. It could be a big mistake to think that, since you will have more time to save for retirement, you could put that off until after you’ve saved for college. Both goals are expensive and the costs for each continue to rise. But, considering that there are many ways to fund a college education beyond your savings (i.e. scholarships, financial aid, student jobs, student loans); and there is only one way to fund your retirement (your savings), it would be important to first have a solid plan for securing your retirement. Of course, as your earnings increase, so will your capacity to save for both goals; but even with that, you should consider a couple of strategies that can help prioritize your retirement plan ahead of your college savings plan.
Commit to a 10% contribution to your retirement plan: You should really shoot for 15%, but 10% should be the minimum amount of your pretax earnings that are contributed to a qualified retirement plan. That will all but ensure that you have sufficient capital for retirement. Then, you can create your family budget, including savings for college, based on your net take home income. As your earnings increase, you can increase the amount of savings for college.
Use a Roth IRA for college savings: There are a few advantages when you use a Roth IRA to save for college. First, funds can be accessed tax free to pay college expenses; second, a Roth IRA is not an includable asset when it comes time to calculate your family’s eligibility for financial aid; and third, a Roth is a retirement account, so any funds you don’t use for college expenses, can continue to accumulate tax free for retirement.
All young families that aspire to fund their children’s education should have a well-conceived financial plan that takes into account all of the family’s priorities with specific strategies for achieving them. Your most expensive financial goal is your retirement, and you really only have one shot at it (unless you want to delay it indefinitely), so everything else should coordinate with your retirement plan.