The College Saving Dilemma
Making your own financial decisions 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. So what they often wind up doing is redirecting their savings from their retirement accounts into a college savings account for their children. This, we believe, is the wrong choice. If you had only enough money to save for one or the other, it would be to fund your retirement savings first before you put any money away for my kids.
Why do we believe this is the better move to make? Well, think about it this way: you know when you’re on an airplane and they warn you to put your oxygen mask on first if there’s a loss of cabin pressure, and then assist your child with theirs? The reason is that 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.
Next, since you’ve missed 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. Your kids could wind up having to support YOU instead, and any potential inheritance may be gone as well.
The third reason is that you have several options 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.
We all want to put the needs of our children first. It’s a kind of parental impulse, and it’s a good one. But if you find that you have to choose between funding future college expenses and your own retirement – choose your retirement. Your kids, and your future self, will thank you someday.
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
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 the presentation (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.
Rick Plum is a registered representative of, and offers securities through, Lucia Securities, LLC (“LSL”), a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and holding company for its affiliated broker/dealer LSL. Registration with the SEC does not imply a certain level of skill or training.