Rule of Thumb: Save for College or Retirement?

Retirement savings come first

graphic showing two people on top of stack of books with a ruler and pencil. the words "financial rules of thumb" are in the middle

Joyce Chan / The Balance

When it comes to saving for retirement versus saving for college, the rule of thumb is this: Your retirement should take priority over your child’s education. However, you don’t necessarily have to choose one goal and ignore the other. 

As long as you have a solid long-term retirement savings plan in place, you can certainly leave room for other financial goals, including helping to fund your children’s college education. Learn more about why your retirement savings should remain your most important financial objective, along with some tips on how to set aside funds for college at the same time.

Key Takeaways

  • You should never save money for your kids’ college at the expense of your retirement goals. 
  • With proper planning, you can do both: Build a nest egg for your retirement years and start saving for college.
  • There are lots of financial aid opportunities for college students, but you can’t borrow for retirement.
  • A financial advisor can help you figure out how much you need to save for retirement, and suggest how to offset the cost of college for your kids through 529 plans and other tools. 

How to Decide Between Saving for Retirement and College   

When you have kids and start thinking about the potential cost of their college years, it might seem like saving for retirement is something you can put off for a while. Rafael Rubio, president/owner of Stable Retirement Planners in Michigan, says he gets this question a lot from new parents. 

“The one thing I always tell them, just like the flight attendant tells you to fix your air mask and take care of yourself first, you need to take care of your retirement first,” he told The Balance in a phone interview. “It’s not being selfish—it’s being realistic.” 

That’s because more and more, retirees need multiple sources of income in order to live comfortably. According to 2019 Federal Reserve data, eight in 10 retirees had one or more sources of private income in addition to Social Security. Denying too much money to that retirement nest egg could potentially disrupt your future quality of life.

“What you really need to do is sit down and think about your retirement income. Look at your Social Security, look at your pension, if you have one,” Rubio said. “Then figure out what you need from your retirement funds to supplement that income to cover your standard of living.”

As long as you are contributing all you can to your 401(k), individual retirement account (IRA), or other investment vehicles during your working years, then you can also make some room in your budget for other goals like college savings. 

How to Save Wisely for College

One of the best options to look into for college savings is a 529 plan, Rubio said. These accounts allow after-tax contributions to be made on behalf of a designated beneficiary (not just a child). Contributions are allowed to grow tax-deferred and can potentially be withdrawn tax-free for qualified educational expenses.

You can either automate weekly or monthly contributions, or just add to the account whenever you have extra funds available, he said. You can also ask family and friends to contribute to that plan in lieu of birthday and holiday gifts. “As long as you use the funds for academic expenses, it is going to be tax-free,” Rubio said. 

Another underused tool for college savings is opening a Roth IRA, according to Rubio. “You have to keep money in the account for at least five years, but past that, all the growth inside that account is all tax-free,” he says. Then, it could be used for anything you want, including an emergency fund, your retirement, or college savings. Money in an IRA can be withdrawn early to pay for tuition and other qualified higher education expenses for you, your spouse, children, or grandchildren—without penalty, although income tax may be assessed.

Why Prioritizing Retirement Savings Generally Works

The main reason why retirement savings trumps college savings is that while students have multiple ways to fund college, if you leave yourself short in retirement, there’s not much you can do about it.

College students have low-interest federal student loans, private loans, grants, part-time student work, and scholarships available to them to help them cover the cost of schooling. And students can also help themselves by choosing a lower-cost institution, such as a community college or public university, or a school that offers them a generous financial aid package. 

By focusing first on your retirement, you are also removing a potential financial burden from your adult children later in life. According to a survey by AgingCare.com, 54% of adults admit to having sacrificed spending money on themselves to pay for their parents’ care needs.

In a way, by focusing on your retirement, you are also indirectly helping your children.

If you wind up with ample retirement funds, even better—you’ll then be in a position to help your adult children and grandchildren financially, should they need it someday, Rubio said.

Grain of Salt

Take this savings guideline, like any rule of thumb, with a grain of salt if it doesn’t work for your situation.

Finding a healthy balance among all of your short- and long-term financial goals—retirement being the top priority—is important. If you’re hyper-focused on only one aspect of saving, it can cause financial strain elsewhere. For example, if you put all of your disposable income into a retirement account but don’t have an emergency fund, you could end up having to draw on the retirement savings during a crisis and incur penalties.

Another potential pitfall is not fully understanding the college financial aid process, causing you or your child to borrow more than necessary. This can lead to years of debt burden after graduation. Consider this: 17% of those with education debt were behind on their payments in 2019. Plus, many borrowers also carry other forms of student debt, including 23% who used high-interest credit cards for education expenses. 

Getting educated about lower-cost college options (like public universities), the difference between federal and private loans, and how to access grants and scholarships could help offset some of the costs and reduce the need for taking on debt.

Retirement First, College Second

When in doubt, stick with the rule of thumb that retirement savings should always be your priority over college savings. However, with careful planning, you could do both. 

Speak with a financial advisor to help you set priorities to meet your goals, and to customize a plan based on your family’s situation.