Saving for Retirement and College Costs at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child's education at the same time can be a challenge. But take heart — you may be able to reach both goals if you make some smart choices now.

Know your retirement needs first

The first step is to determine your retirement needs. Answering the following questions can help you get started:

How many years until you retire?

What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?

Do you or your spouse expect to work part-time in retirement?

How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, ssa.gov. You can also sign up for a Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits).

Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?

Then look at the college needs

After you've considered your retirement needs, ask the following questions about your child's college education. Many on-line calculators are also available to help you predict your retirement income needs and your child's college funding needs.

How many years until your child starts college?

Do you have more than one child whom you'll be saving for?

Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?

Do you expect your child to qualify for financial aid?

Will your child attend a public or private college? What's the expected cost?

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you'll need to prepare a detailed family budget that lists all your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you've come up with a dollar amount, you'll need to decide how to divvy up your funds.

Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there's no such thing as a retirement loan!

If possible, save for your retirement and your child's college at the same time

Ideally, you'll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child's college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you're unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you're pursuing both goals at the same time doesn't necessarily mean that the same investments will be suitable. It may be appropriate to treat each goal independently.

Help! I can't meet both goals

If the numbers say that you can't afford to educate your child or retire with the lifestyle you expected, you'll probably have to make some sacrifices. Here are some suggestions:

Increase your earnings now

You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.

Expect your child to contribute more money to college

Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.

Defer retirement

The longer you work, the more money you’ll earn and the later you'll need to dip into your retirement savings.

Send your child to a less expensive school

You may have dreamed you child would follow in your footsteps and attend your alma mater, or that they would attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don't feel guilty – a lesser-known college or a state university can provide your child with a similar quality education at a far lower cost.

Think of other creative ways to reduce education costs

Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead of four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Reduce your standard of living now or in retirement

You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.

Invest more aggressively

If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.

Work part-time during retirement

Working part-time during retirement is becoming a more popular option for many people, whether it's to support a certain lifestyle, stay involved with your local community, find satisfaction from work, gain insurance benefits, or help support a child's education. Some retirees choose to find jobs in the same professions, while others choose it as an opportunity to do something else, perhaps indulge a professional interest they couldn’t explore earlier in life.