How to Balance Saving for Retirement With Saving for College

BY GoodCall

How to Balance Saving for Retirement With Saving for College

The rising cost of getting a college education is making it even more difficult for many parents to balance saving for retirement and helping their kids pay for college. Should parents prioritize saving for retirement over college savings? And, is it still possible to balance saving for both at the same time?

To help answer these questions, GoodCall collected insight from a wide range of financial industry experts, including top financial bloggers and journalists as well as leading financial professionals. Their responses reveal that despite the challenges, there are important steps parents can take to strike a balance between saving for retirement and saving for college. Here’s what the experts have to say about finding this balance:

Use logic to make financial decisions

John SchmollSaving for retirement or saving for college is tough, but when you try to save for both at the same time, it can be a real challenge. Both require purposeful attention, not to mention a significant investment over time, explains John Schmoll, financial industry veteran and founder of Frugal Rules. What happens when you need to do both…at the same time? Balancing the two can make most feel like they’re walking a tightrope.

There are alarming numbers on both sides of the fence. The Federal Reserve reports nearly a third of non-retirees have no retirement savings. The Wall Street Journal reports the average student in the class of 2016 has over $37,000 in student loan debt. While these statistics are alarming, you shouldn’t lose hope; it is possible to juggle both with relative success.

The debate over saving for retirement versus saving for college is an emotional one. It’s important to remember that. It’s also important to remember that you can’t allow emotion to drive financial decisions.

That can be easier said than done. You want the best for your children. You don’t want them to have a lot of student loan debt. The thought of your child graduating with six-figure student loan debt is heartbreaking for most parents and with good reason. Still, logic must reign in this decision. It’s a noble and praiseworthy goal to provide for your children to go to college. However, to do so at the risk of your retirement planning is simply not logical.

This may sound cold. It’s really not. The last thing you want to do is be a burden to your adult children because you sacrificed retirement savings to put them through college.

Consider goals & price of college

When you look at the cost of attending college, you see the price tag. It’s okay to feel shocked, as college is expensive. There are many things that go into the cost of a college education and there are ways to manage that. This will depend on the age of your child, of course, but consider some of the following:

  • What majors should they consider?
  • Can they cut down costs – such as starting at a community college?
  • Do they even want to go to college?

financial literacyThe key here is to help your children think through these ideas. Look at it not only from what it’s going to cost but also how the decision will set them up for success after graduation.

You also want to help them see how your retirement planning plays into the bigger financial picture. Take it as an opportunity to make them more financially literate by showing them how to manage retirement planning responsibly.

Maximize savings opportunities

Saving for retirement and college at the same time requires maximizing savings opportunities. You are much less likely to find success by not doing so. With that in mind, you need to take advantage of what you have available to you.

Max out 401(k) employer matches

First, consider retirement planning. Does your employer offer a 401(k) with a match? If so, you certainly want to take advantage of that as it has the added ability to lower your taxable liability. If you can max out your 401(k) each year, then even better.

Use a Roth or Traditional IRA401k-IRA-529 plan-Coverdell ESA

You should also look for other ways to add to your retirement savings. Depending on your financial situation, you will want to consider either a Roth or Traditional IRA. The IRS allows you to contribute $5,500 for 2016 or $6,500 if you’re over 50. You will want to focus on one of these, in addition to your 401(k) before saving for college. Most experts will say these planning methods take priority over saving for college.

Reap the benefits of a 529 plan

The opportunities don’t stop with retirement planning. There are opportunities available to save for college. The first and most generous option is a 529 plan. Depending on your state of residence, you can reap tax benefits for contributing to a 529 plan for your children. Beyond the 529, there are other options, such as a Coverdell Education Savings Account (ESA).

Cut your expenses

Maximizing opportunities sounds great, but what can you do on a limited budget? This is where purposeful spending comes into play. Analyze your expenses to see what value they bring into your home. If there are ways to cut some of those expenses, funnel them to retirement or college savings.

Automate savings transfers

Automate transfers into both your retirement and 529 accounts. This helps lessen the pain of the funds going out and makes sure both are taken care of each month.

Gift money goes to a 529 account

Send any extra money your children receive – whether it be birthday money, Christmas money, etc.– directly to their 529 accounts. They may be small amounts, but they add up over time to beef up their college saving accounts.

Remember to keep a long-term view. Saving for retirement is a one shot deal. You don’t get to do it over again. Paying for college, on the other hand, is not that way. You can finance college through a number of channels – loans, scholarships, 529 plans and funds you set aside.

Using cash-back rewards to boost savings

Donna FuscaldoSaving for college often requires a multi-pronged approach, especially if you’re balancing saving for retirement and future higher education expenses. For families who use 529 accounts to save, rewards credit cards can represent one way to maximize savings opportunities for college, at least when used responsibly, explains Donna Fuscaldo, financial and higher education journalist.

A handful of companies, including Fidelity Investments and Sallie Mae, offer cash-back credit cards, the rewards for which go directly into a qualifying 529 college savings plan. The cash you’ll earn on purchases ranges from 1% to 5%, giving you the potential to make a little bit more money for college, depending on how much you shop.

Though the rewards may be modest, leveraging other ways of saving for college for can help out if you’re juggling college savings and planning for retirement. “You’re not going to get rich off something like this,” Matt Schulz, a senior industry analyst at, tells Fuscaldo. “But if you can save more money while making purchases you are already going to make anyway, then it can be a good thing.”

How to use credit cards to save for college

In order for a 529 cash-back rewards credit card to make sense, you have to be disciplined enough to pay off your balance each month. Because these cards give customers decent cash back percentages, you’ll end up paying more in your APR. According to Kevin Luss, owner of Luss Group, APRs can range from 14% to 19%.

Not to mention, there can be a limit on how much you can actually earn each year. Let’s say the credit card gives you 1% cash back.  In order to save $1,000, you would have to charge $100,000 over the course of a year. So realistically, you’re probably looking at a couple hundred dollars or less per year, based on your spending habits.

While taking on a credit card just for the sake of racking up points isn’t a smart way to save for college, it might be a good idea for people who are in the market for a credit card anyway, can afford to pay it off each month, and want to supplement their college savings strategy.

Here are three options for credit cards that allow you to earn extra bucks to put towards college savings:

Fidelity Rewards Visa Signature Card

The Fidelity® Rewards Visa Signature® Card earns you 2% cash back, which is automatically deposited into one or more of the eligible Fidelity brokerage, IRA, 529 or Cash Management accounts.  The Fidelity Rewards Visa Signature Card doesn’t have any annual fees or limits on rewards.

Upromise MasterCard by Sallie Mae3cropped

The Upromise MasterCard credit card by Sallie Mae gives customers up to 5% cash back when they make eligible purchases through the or at Upromise participating restaurants. Users also get 2% cash back on in-store purchases from participating department stores and eligible movie theater tickets. The cash back reward rate drops to 1% for all other purchases. There are no annual fees for this card or limits on total cash back.2_cropped

Bright Direction 529 Visa Rewards card

There are a handful of other credit cards that give you cash back for college, including the Bright Directions 529 Rewards Visa® Card, which gives you 1.529% cash back on everyday purchases. For example, a family with an average monthly budget of $2,500 for food, gas, and activities can accumulate an additional $458 over the course of a year using this rewards credit card. Once $50 or more has been accumulated in rewards, the money is automatically deposited each quarter into the Bright Direction account you designate.

Any extra savings that can go toward college will help you balance saving for this and retirement at the same time. However, experts say that if you use credit card rewards to help you save, be careful that you aren’t creating a situation where you overspend just to earn rewards.

Financial industry expert advice

GoodCall asked three leading financial industry experts:

What one recommendation would you give to parents about balancing saving for their retirement and saving for college for their kids?

Following are their financial recommendations for making saving for retirement and college work better for families.

Maria Bruno Vanguard Investment

“Most parents understandably want to provide for their children’s college savings. But this should come secondary to retirement since there are aid and grant opportunities which can ease the bite of college tuition. There really aren’t such programs for retirement.

Additionally, the shift from defined benefit to defined contribution retirement plans means that individuals themselves will need to plan for their retirement income. Maximizing the utilization of tax-advantaged retirement accounts (such as 401k and IRA) affords one of the best ways to build wealth in order to meet this goal. Vanguard’s recommendation is to save 12-15% of one’s salary for retirement. Keep in mind though that this target includes both employee deferrals and employer matches.

Meanwhile, parents concerned about their children’s college can encourage family members to direct gifts to their children’s 529 college savings plan. This is one way to pool resources and engage family members. Birthday and holiday gifts can add up. Plus, there are advantages to grandparent-owned 529s as well, from the grandparent’s standpoint.

This doesn’t preclude parents themselves from saving for their children’s college. However, we believe it’s a good idea to meet with a financial planner to assess your personal situation. Vanguard also offers free online tools to help parents assess options and costs of financing college.”

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Joseph Santos-Merrill Edge“Investing in education is a goal that should be set with other life priorities, like retirement. Instead of tapping into your nest egg to cover tuition costs, consider all funding sources to avoid jeopardizing your own financial health.

It’s never too soon or too late to start saving. Every dollar saved is one less you may need to repay with interest.

Starting to save early allows more time and opportunity for your investments to grow—and can reduce the amount you have to borrow. Setting aside even a little can make a big difference in helping you meet the future cost of college.

While it’s cheaper to save than borrow, student loans can be a tool to help close any gaps between your savings and the cost of tuition. If paying cash for college means skimping on another financial priority—like your retirement savings—student loans may help.”

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James Nichols Voya Financial

“While the balancing act of saving for retirement and college can be difficult, there is one thing to always keep in mind: “you can take out a loan for a college education, but you can’t take out a loan for retirement.”

After you are comfortably saving your own retirement through your employer or on your own; one of the most important strategies I would recommend to manage the balancing act of saving for college and retirement is to start the college saving process from day one.

As soon as your child is born, open a 529 or similar college savings account. As they grow up you can work to fund this account in any small way that you can, from birthday checks to annual bonuses. Additionally, other family members may wish to contribute directly to the 529 on your child’s behalf.

While doing this, your retirement account should also continue to grow from reinvested dividends and, hopefully, positive returns. As you advance in your career you’ll also likely have a larger income which will allow you to contribute to both a 529 and your retirement account simultaneously.

If this is not in reach, you can also make catch-up payments with one or the other if you see major shortfalls along the way. Ultimately, while your strategy might mean that your children will still need to apply for scholarships or take out loans, at the end of the day you will know that you did everything you could to help plan in advance.”