Invest In Your Retirement or the Kid’s College Fund?

  •  
  •  
  •  
  •  

 [wp_campaign_1]

Are you currently investing in a retirement account? Are you also investing in your child’s college education? Or, perhaps you do one, but not the other! What is the right thing to do? Let’s take a look at all of the possible options and I’ll let you decide for yourself.

No Investment in Your Retirement or Your Kid’s Future

I’m starting with this option because I’m hoping that none of you are currently doing this (unless you are choosing to rapidly pay down your debt first). Without a proper retirement plan, you’ll most likely run out of money when you’re old, and you can’t depend on your kids to pay for your bills because they’ll have student loans! It’s a lose-lose situation. Please do not choose this option.

Invest In Your Retirement, but Not in Your Kid’s Future

Let’s say that you’re currently 30 years old and you’re able to put $400 a month in your retirement account. If you earn 10% per year (on average), you’ll have $2.55 million by the time you’re 70.

In the mean-time though, you’ve had a couple of kids and never got around to setting up that 529 college fund. Since they assume that debt is a part of higher education, they just take on some student loans in order to continue their classes and graduate. They each racked up $50,000 in debt before they got their first job.

Now, it is possible that you are completely responsible with money and have taught your kids very well. They might find a way to graduate without taking out loans, plus they’ve learned a ton about work ethic in the process!

Invest in Your Kid’s Future, But Not in Your Own Retirement

I have seen many cases where parents feel it is admirable to invest in their children before themselves. It sounds good doesn’t it? Well, let’s take a look at how it normally pans out.

$400 a month is put into a 529 fund that yields an average of 10% per year. After 18 years, your kids are ready for college and you let them know that they each get a gift of $121,000 toward their education (that’s right, your investment turned into $242,000).

Your kids are definitely excited – after all, they get to go to any school they want (well, as long as college inflation slows down anyway). However, what happens later in life?

Mom and Dad have absolutely nothing saved in their retirement accounts. All they have is their house and a couple of cars. In order to pay for their everyday expenses, they decide to take out a reverse mortgage, which seems to keep the bills paid for a while. But, then Dad has a stroke and needs to live in an assisted care facility. This cost is much more than they can afford, so guess who’s stuck with the bill – the kids. All because Mom and Dad didn’t invest in their own future.

Now, maybe the kids are ultra-wealthy because of the great schooling they received. Perhaps the parents made the right choice and are now being taken care of by their incredibly successful children?

Invest in Your Retirement AND Your Kid’s College Education

Let’s say that instead of putting your $400 in one fund or another, you split the money up. One-half of it goes into your retirement fund and the other half goes toward education. By starting this plan at 30 years old (and when your kids are just born), your $200 in your investment account will yield $1.275 million and the other $200 a month will grant your children $60,500 a piece toward their college expenses.

This gives you the opportunity to retire semi-comfortably and it gives your children a head-start with their college expenses – even though it most likely won’t be at an Ivy-League school.

Which option would you choose and why?

If you enjoyed this article, Get email updates (It’s Free!)


  •  
  •  
  •  
  •  
  •  
  •  
  •  

Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

18 Comments

  1. I have already chosen to go with the retirement accounts and take out loans for the college tuition. The interest rates are pretty low so I will be paying off my other debt and can get aggressive on the student debt for a year or two before retiring.
    cashflowmantra recently posted..Progress on Discover Card Debt

    • Just make sure you keep making that moolah in the next few years! Nobody should have debt when they enter their retirement years.

  2. We are doing both, but retirement is taking higher priority over college. We put about $450 a month into retirement savings and only $150 in college savings. But right now, we are also building up an emergency fund, a really large one, so when that is over we plan to funnel that money into the college accounts. Since that will be needed sooner than later.
    Niki recently posted..Festival of Frugality: Superheroes Are Frugal Too Edition

    • Sounds like you have an awesome plan going! Congrats!

  3. Wow…I just touched on the same topic! My opinion is that you MUST do both and that you can’t sacrifice the power of compounding by shorting retirement funding. That being said…costs are rising and one seriously needs to consider what their total cost will be as parents. I have 3 kids so want to be ready because my parents were not.
    BE @ BusyExecutiveMoneyBlog.com recently posted..Funding the rising cost of a college education

    • It seems like we’re always writing about the same thing! Crazy. I would for sure set money aside for retirement. If there was some extra cash, then I’d put that toward my child’s (if I had one) education.

    • Yep! Start that fund! Thanks for the comment Jai!

  4. I don’t have kids so fortunately I don’t have to make this decision yet. However, I think if you do have this decision to make it is important to make sure you are taken care of first. Calculate how much your expected expenses will be in retirement and how much you need to invest each month to be able to cover these plus a little safety cushion. Then once you are confident your retirement is fairly secure if you have anything left over feel free to contribute a little towards the childrens education savings.

    Also, I don’t believe it is the parents responsibility to completely pay for thier childrens college. Helping out is great but the kids need to learn responsibility by working and paying for part of thier schooling themselves in order to really appreciate it. I’ve seen many teens fail out of college because they didn’t care since mommy and daddy were paying for it. I’ve seen others that would have been fine at a regional school but instead decided to attend a ritzy private school for a teaching degree since mommy and daddy were paying for it.
    My Money Talk Online recently posted..4 Reasons Not to Pay Off Mortgage Early

    • I agree with you 100% MMTO!

  5. I wouldn’t wish debt on my kids, but having student loans to pay off definitely made me learn how to budget wisely. Nevertheless, I’d rather teach them how to budget than have them figure it out the way I did! We plan to invest in both when kids come along. We would have had a MUCH bigger financial burden if Dave’s parent’s hadn’t invested in both retirement and their kids’ college fund. Side note but still related- if you don’t mind me asking, what kind timeline are you and the Mrs. looking at in terms of having kids? 🙂
    Jessica @ Budget For Health recently posted..Leap Day Savings

    • Great response Jessica! As for the kids, we’re actually not on the same page with the timeline…… So….kids probably won’t be happening for a while.

  6. I was raised in a family where you paid for your own college, and I think it helped me appreciate my education more. If I do decide to save for kids’ colleges (in addition to my current retirement savings), I think I will pay the college off after they put themselves through school.
    Christa recently posted..Kids and Finances: How Much is Too Much?

    • I’m not sure I would even do that. Kids need to learn some things the hard way. If you pay off the debt, they’ll never know how hard it would have been to get out. I think I’d rather help them out by paying half along the way.

  7. Good discussion. This is a hard one for a lot of people because they probably feel like they have to choose between one or the other. But as you’ve demonstrated, you don’t have to. I have been doing both for several years now. I started off with a few percent in my 401k and about $50 a month in my kids 529 plans. Over the years, I’ve raised both. But the point was that both were important so both would receive funding.

    • I’m glad that you’ve been demonstrating ‘Plan #4″! I bet it will work out for you – thanks for sharing!

    • Lol. Kids can fend for themselves right? My wife and I will have to make this decision some day, but for now, we’ll just focus on getting rid of our house loan and loading up money into our retirement accounts! 🙂


Add a Comment

Your email address will not be published. Required fields are marked *

CommentLuv badge

Related posts