By Cam Goodwin, CFP | Guest Column for the Nashville Business Journal | August 2016
The increasingly high cost of higher education has a lot of parents in a very real dilemma: should retirement savings efforts be put on a temporary hold (or reduced) in order to save for children’s education. It’s a legitimate question and one that more and more investors are facing. For the purpose of this column, let’s examine some perspectives on why retirement should take precedent over education saving even in the face of increasing tuitions.
In most cases, a child’s financial needs for education arise before retirement age. So chronological thinking would indicate that you build that investment fund first. Another common decision-driving factor is emotion. For most parents, educating their children is one of their largest — and possibly most costly — parental obligations. This generates a sense of urgency that can drive short-sighted decision making.
Assuming that you are not able to simultaneously fully fund retirement and education savings, stay the course and keep retirement in the priority seat. Here’s why:
You can borrow for college. You can’t borrow for retirement.
Interest rates on student loans are normally not too excessive. According to bankrate.com the current average is 4%. It would be to your advantage to borrow for college and continue to invest for retirement if you felt your retirement portfolio could generate an average rate of return in excess of your borrowing costs. A qualified advisor can help you develop an investment strategy with this goal in mind.
Consider also that there are other means for securing education financing. These would include grants, scholarships, part-time jobs for the student, and other creative ways to meet tuition needs. Helping your kids to identify these avenues for savings may not provide the same satisfaction as cutting a check for the full cost of college, but it certainly lends itself to helping them prepare and understand the need for building their own investment strategy for the future.
While the current mindset in today’s society is that a college education is essential for a successful career, it still goes in to the “want” versus “ need” category in the investment world. You want your children to be educated, but you need retirement savings to do things like eat and shelter yourself once you are no longer earning an income.
Ideally, you can fund your retirement savings while also putting any extra money toward an education-saving vehicle. There are a lot of good options available for building an education portfolio, and with the help of a Certified Financial Planner professional, you can identify a plan and a strategy that will work for investment needs for your future and the future of your children.
For parents, the welfare and security of their children is often their greatest emotional and fiscal investment. As it relates to education, it is important to separate out the emotional component and keep the focus on a solid retirement plan so your savings are intact when the grandkids start showing up; keeping in mind that helping to educate your children’s children can be an equally rewarding experience complete with all the emotion you have to give.