Increasing education costs have led to young adults and their parents accumulating significant amounts of debt. According to the National Center for Education Statistics, it costs about $100,000 to attend a four-year public university, and nearly $200,000 for a private four-year school.* Even for new parents with the benefits of a longer time horizon, the savings required to cover private college tuition is projected to be more than $800 per month.* The inflation rate for education is higher than inflation as measured by the consumer price index, which eats into investment returns.*
The pressure to build retirement savings has also grown due to longer retirements and uncertainty about Social Security and Medicare. Some people may feel it boils down to saving for college vs. saving for retirement. Compounding this dilemma further, many offspring are returning to the nest post-college. With an increasing number of young adults still requiring some support until age 30, new parents can’t afford to delay saving for retirement, as it may take longer than anticipated for children to be independent. So how might a family elevate some of these pressures?
Find a happy medium. Even when finances are tight, there are several strategies you may be able to use to make the most out of your income:
* Pay yourself first – make sure you are making sufficient contributions to your employer’s retirement plan or individual retirement account. Generally, people in their 20s and early 30s should be contributing at least 10 percent of their gross income annually to qualified retirement plans, or up to the maximum $5,500 IRA contribution.
* Start a college savings plan such as a 529 plan – after-tax contributions are made and grow federal tax-free. When the funds are used for qualified education expenses, there is no tax on the deferred investment growth, either. Friends and family can also contribute to your 529 plan, which can be a great gift idea. Timing is important because the sooner you start saving for college, the smaller the drain it will be on your budget, leaving you more money to fund your retirement.
* Consider the alternatives – whenever facing conflicting financial priorities, weigh the availability of alternatives before dedicating funds to any one bucket. For example, even if you aren’t able to cover 100 percent of your children’s college expenses, plenty of alternatives exist to bridge the gap. Merit and independent scholarships, work-study programs and federal loans can all help qualifying families achieve their goals. For the 2014-15 school year, parents on average paid 32% of college tuition from income and savings, according to Sallie Mae, surpassing scholarships and grants for the first time since 2010.** The rest came from grants and scholarships (30%), student loans (16%), student income and savings (11%), parent borrowing (6%), and relatives and friends (5%).
Parents should always try to put themselves first when it comes to saving for retirement. The reason is simple: Saving is a primary way you may fund your retirement, especially if Social Security is unlikely to replace a significant portion of lost income. Remember, there are no loans for retirement.