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Retirement or College: Which Should You Fund First?

Making big financial decisions by yourself can seem like a real gamble sometimes.  You don’t want to make a wrong move that may cost you big over the long term, but you also know that if you make no move at all, you’ll never reach your goals.  

Many parents find themselves in this situation when it comes to saving for their kids’ college education. They figure that college bills will come due before it’s time for them to retire, so what they often wind up doing is redirecting their ongoing savings from their retirement accounts into a college savings account for their children.   

This, we believe, can be the wrong choice.  If you only have enough money to save for one or the other, we suggest that you fund your retirement savings first before you put any money away for the kids. 

Why is it better to do it that way? Well, think about it like this: you know when you’re on an airplane and they tell you to put your oxygen mask on first if there’s a loss of cabin pressure, before you help your child with theirs? They do that because nobody wins if you become incapacitated while trying to help your kid. And this is a good lesson to remember when facing the “college-or-retirement” dilemma as well. 

Here are three reasons why you should put yourself ahead of your kids in this particular instance. 

First, if you stop funding for your retirement, you’re missing out on any potential gains you may have seen by making regular contributions to your 401(k) or IRA over the next decade or more.  If history is any guide, that could be a lot of money left on the table. And even if the markets took a downward turn, you’d forfeit the opportunity to dollar cost average and buy cheaper shares. 

Next, by missing out on 10 or 15 years of retirement savings contributions, you may wind up having to work a lot longer than you’d planned because you can’t afford to retire.  A decade or more of saving and investing in your 30s and 40s can make a big difference in the size of your nest egg after you hit age 60 or 65. Your kids could wind up having to support YOU instead, which may also jeopardize any potential inheritance for them. 

The third reason you should fund your retirement first is that there are several options available to you when it comes to financing a college education: things like student loans, scholarships, certain government grants, or maybe the community college option for a year or two. Not to mention some potential tax credits along the way.  But when it comes to retirement, there are no grants, scholarships, or loans for you – you’re completely on your own. 

There’s a kind of parental impulse to put the needs of the children first, and that’s a good thing.  But if you find that you have to choose between funding future college expenses and funding your own retirement – choose your retirement.  Your kids, and your future self, will probably thank you someday. 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that this information, or any component thereof, serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

A dollar cost averaging strategy does not guarantee a profit or protection from loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low-price levels.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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