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Which First: College or Retirement Savings?

According to a report by T. Rowe Price company, more families have saved for college than have saved for retirement and more than two-thirds of families have prioritized college savings over saving for retirement. THIS IS WRONG, WRONG, WRONG! As a parent, I get it. We want to put our kids first and saving for their college seems like the noble and right thing to do. It’s your moral obligation to take care of your kids, right? How about this idea: taking care of yourself is also part of being a parent. And aside from the philosophical argument, there are three good reasons to save for retirement first before you save for college.

  1. Time. If you wait to save for retirement until you have saved for college, you won’t have enough time to save for retirement from a cash-flow standpoint and you will have wasted the opportunity of the miracle of compound growth of early savings.
  2. Alternative financing. Your kids can borrow for college but you can’t borrow for retirement. I know student loan debt is growing and threatens to sink the U.S. economy, blah, blah, blah. Your kids will find a way to pay off their student loans and they are many alternatives to do so (did you know that over 50% of young adults with student loans are eligible for some sort of student loan forgiveness program?).
  3. You may retire earlier than you think. There are a multitude of reasons: you or your spouse may get sick and be forced to quit working earlier than you plan; your job may go away and you can’t find a new one; you may find that you can’t keep working as long (or as hard) as you thought you could.

And what are your alternatives if you retire before you want or with less saved than you need? Ask the kids to take care of you? Live on less? Plan to die earlier? I don’t like any of these options, do you? And don’t plan on working when you retire either. The research shows that very few retirees actually end up working in retirement.

Instead, try this.

  1. Figure out how much you need in order to retire as early as possible? I’m not talking about retiring at age 50; be realistic. When could you retire and how much will you need?
  2. Calculate where you are today with your retirement savings and the gap between where you are today and the number you calculated in step #1.
  3. Start saving the amount you need to get to your retirement financial goal.
  4. Only then can you start to save for college for the kids.

Focus on taking care of your retirement first. This might be the best thing you can do for your kids.