• Put retirement savings ahead of college. It’s tough under the best of circumstances for people to max out contributions to their 401(k)s and individual retirement accounts (IRAs). It gets a lot tougher if you’re also raising kids and saving for college, says Mitchell Kraus of Capital Intelligence Associates in Santa Monica, Calif.
Younger parents may not be able to save as much for retirement in their 20s and 30s, when savings would have had decades to compound. But these parents can make up for lost time after the kids are out of the house, a period that often corresponds with the parents' peak earning years.
Older parents, meanwhile, have no room for error. Their children may be heading for college just as they’re readying for retirement. Unless they saved a lot when they were younger, they may need to make tough choices between tuition and catch-up contributions to IRAs and 401(k)s. Working further into your 60s is one strategy for older parents, but it’s not a reliable one. Many end up retiring before they’d planned.
They aren’t without options for saving for college, though.
For example, the child of a parent receiving Social Security benefits may also be able to collect a check, if the child is under 18.
Older parents can also use the tax advantages of 401(k)s and IRAs for college expenses, though the strategy has risks. All parents can use 529 college savings plans, which offer tax benefits as long as the money is used for education. Some parents may be old enough to tap 401(k)s and IRAs penalty-free while their kids are in school. Retirement accounts have flexibility that 529s don’t have. They’re also rarely counted in financial aid decisions, while 529 plans sometimes are.
But strategies that blur the distinction between college savings and retirement are dangerous, planners say. Your retirement needs should always come first.
“There are a lot of ways your child can go to college,” Beatty says. “There are not a lot of ways you can retire.”
Your child can take out loans, get scholarships, or pay her way through school. You can’t borrow to fund your retirement. And unless you save enough, you risk becoming a burden on your children just as they’re having children of their own.