How to Save for Both Retirement and Your Child’s Education

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Which Comes First: Retirement or Education Savings?

Saving for retirement and your child’s education are both crucial financial goals, and you may feel conflicted about which to prioritize. The good news is that you don’t have to choose one over the other—it is possible to make progress toward both simultaneously. The key is to create a plan and be intentional about your savings strategy.

Why It’s Important to Save for Retirement

While your child can finance college with student loans, you can’t borrow your way through retirement. Neglecting your own future might keep you in the workforce longer than you’d like and make it harder to live the life you want when you retire. It could also cause stress for your family if you aren’t financially prepared to age comfortably.

The general rule of thumb is to save 15% of your income for retirement when you’re in your 20s and 30s, then increase it to 20% in your 40s and beyond. According to Fidelity Investments, you can expect to spend 55% to 80% of your current income during every year of retirement, a calculation that can help you get an idea of how much you’ll need saved.

Why It’s Important to Save for College

The average annual cost of college tuition and expenses in the United States is $36,436, according to the Education Data Initiative. Scholarships, grants, and federal work-study jobs can help reduce your child’s out-of-pocket costs, but paying for college can still be challenging. Your child may assume student loan debt that takes years to pay off—and those monthly payments could derail or postpone their other financial goals.

How to Save for Both Retirement and College

It is possible to save for your retirement and your kids’ college at the same time, with a little planning and preparation.

1. Set Goals and a Timeline

Your timeline, retirement vision, and kids’ college plans will all come into play. Here are some important things to consider:

• How far out are you from retirement?
• When do you expect your children to begin college?
• What kind of retirement do you see for yourself? Can you estimate how much it will cost?
• Are you planning for your kids to live at home and go to a local college, or attend in another town or state?

Your answers should shape your long-term goals. If it feels overwhelming, consider working with a financial advisor who can help you set attainable goals that align with your income and timeline.

2. Determine How Much You Can Set Aside

Once you’re clear on what you’re working toward, you can break those big goals into smaller savings targets. That might look like:

• Choosing a monthly retirement savings goal and updating your 401(k) or individual retirement account (IRA) contribution amount
• Setting a reminder to increase your retirement contributions once or twice a year
• Revisiting your budget and deciding on a monthly education savings goal

The 50/30/20 rule earmarks 50% of your take-home pay for regular bills, 30% for flexible spending, and 20% for financial goals such as saving and debt payoff. Retirement and education savings fall into that last bucket. If your budget is stretched thin, start where you are. Saving even a small amount each month can add up over time.

3. Max Out Your Employer’s 401(k) Match

If you have access to a 401(k) match, do your best to take advantage of it—it’s essentially free money for retirement. Many employers will match some or all of an employee’s contributions, up to a certain point. The average match is 4.5% of an employee’s pay, according to a 2023 Vanguard report. Even if you’re building your child’s college fund, contributing enough to secure a 401(k) match could help supercharge your retirement savings.

4. Open a 529 Savings Plan

A 529 savings plan can provide a tax-friendly way to save for your child’s education. With these state-sponsored investment accounts, your contributions can go toward mutual funds, exchange-traded funds (ETFs), and other assets—allowing your money to grow at a faster clip. You won’t be taxed on investment earnings if 529 funds are used to cover qualified education expenses. That includes tuition, room and board, course materials, and more. Your contributions may also be exempt from state income tax.

5. Automate Your Contributions

You’ll be more likely to stick to your savings plan if your contributions happen automatically. It removes the hurdle of having to manually transfer money from one account to another each month. You can time it so that these transfers happen right after you get paid—that way you won’t be tempted to spend that money on something else. Contributions to your 401(k), which are tax-deductible, are typically made through automatic payroll deductions. But you can automate contributions to an IRA, 529 plan, or brokerage account. You can also modify your automatic transfers if your income or financial situation changes.

How to Help Your Child Pay for College

Even if you’ve saved as much as you could, it’s possible that your education savings won’t cover the full cost of college. Here are some options that can help your child close the funding gap:

• Consider a less expensive college or beginning at a community college.
• Allow your child to live at home while they’re in school.
• Help your child find and apply for grants and scholarships.
• Encourage your child to work during college. That might be a part-time job or a work-study arrangement.
• If your financial situation changes, help your child update their Free Application for Federal Student Aid (FAFSA). It may help them qualify for need-based aid.
• Consider federal student loans, which often have better interest rates and borrower protections than private student loans.

The Bottom Line

Saving for retirement and building your child’s college fund may feel like competing goals, but it’s possible to work toward both at the same time. Setting clear goals, making a plan, and automating your savings can go a long way over time. Working with a financial advisor can help you strategize based on your financial situation.

It’s important to teach your child good financial habits as they head off for college. With Experian, they can easily pull up their free credit report at any time. That can help them catch potentially fraudulent activity and better understand how credit works.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you achieve your financial goals!

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