How to Balance Retirement Goals and College Savings

Deciding if/when to retire could potentially be one of your largest financial decisions in your lifetime, so we strongly recommend meeting with your personal advisor to review your financial plan to help ensure you can afford this major life change. This decision can become more difficult if you have children who will be entering college at the same time or later compared to your preferred retirement goal.

For example, imagine you are planning to retire at age 60, but you will have one child in college and another starting college in that same year. College tuition with room and board can easily cost over $25,000 per year per student. That increased level of expenses can make retirement planning even more stressful!

For additional insight, please refer to our previous article, Navigating College Funding.

Understanding the Costs of Retirement and College

We prefer to follow the Airline Oxygen Mask approach when we discuss the decision with our clients. If you have ever flown on an airplane, you are aware of the safety protocols they demonstrate before every take off.

When the air masks come down from the ceiling, they inform the passengers to secure their own mask before assisting others. We believe the same is true in our business and that clients should prioritize their own goals and retirement plan before assisting others financially.

Airline Oxygen Mask Approach: Prioritizing Retirement Goals

One of the main reasons we recommend this philosophy is that funding college can be extremely expensive and can delay retirement by several years in some cases. In order to fully fund a college education, you may need to spend over $100,000, and that is just for one child.

Some clients have 5+ children, so that could easily be a half million dollars removed from their retirement plan. Also, the alternative to funding college would be for the children to take student loan options and repay those once they graduate.

So, if the client does not fund college, that does not necessarily mean their children cannot get a higher education. It just means they may need to take on the loans and pay them back once they join the workforce.

Financial Implications of College Funding on Retirement

However, we understand that some clients have a different mentality and may prefer to continue working longer in order to help ensure their kids do not need to have student loans. The loans can be detrimental to the financial plan of the children since the loans can drain their cash flow in their early working years.

It is ultimately up to the client to make the decision that they prefer, but it is our job to help ensure they understand the impact of the plan in either case.

Alternative Strategies for College Funding

Our retirement planning tool allows us to toggle on/off college expenses for children. This means that we can show a scenario in which they do not pay for college (or perhaps pay a limited amount) and are then able to calculate when they could potentially afford to retire.

On the other hand, we can illustrate fully paying for college and estimate how many years they would potentially need to continue to work in order to afford those additional expenses. By comparing both scenarios, the client is able to make an informed decision on which route they would prefer to take.

Retirement vs. College Savings: Key Takeaways

Deciding whether to prioritize your retirement planning or setting aside funds for your children’s college costs could be a difficult decision.
We prefer to follow the Airline Oxygen Mask approach, but we understand everyone may have their own opinion and priorities.
Whatever is decided, we believe it is important to build these potential costs into your retirement plan so that you can help ensure you understand any potential repercussions of the decision.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, James Wink, James Baldwin, and Daniel Ladzinski

Sources: