By Paul C. MacDonald, CLU, ChFC, EA | PGI Financial Services, Inc.
When it comes to financial planning, one question that often comes up is whether to prioritize funding for a child’s college education or for your (and your spouse’s) retirement. This is a difficult balancing act, particularly because the need for college funding often comes up late in a person’s career when they tend to be making the most income and have the resources to contribute more to a company-sponsored retirement plan. Generally, the best answer is to fund your retirement first and if you have the resources to help your children with college, then make that a secondary priority. Let’s take a look at why this is often the best choice.
The first consideration relates to sources of funding. Retirement used to consist of what we refer to as the “Three Legged Stool” of pensions, social security and personal savings. For many, that has now become the Two Legged Stool as most companies have eliminated pensions and social security is not exactly on solid ground. The federal government is going to be forced to make some difficult choices with social security. Those may consist of raising the ages for early and regular retirement, and possibly reducing or even eliminating benefits for those at certain high income levels. Therefore, the burden of saving for retirement is going to fall on you.
Funding for college can come from many sources. College financial aid, scholarships, grants and student loans are just a few of the choices. The internet provides the ability to search through thousands of scholarship choices. Today there are scholarships for just about everyone and everything, and with a little work, a student can land a variety of these to help offset costs, often times regardless of academic performance.
The second consideration relates to the cost of education, particularly the wide range of costs between institutions. A student can choose to go to a state technical or community college for the first two years of education for little cost, while completing general education requirements toward a degree or even earning a certificate in a trade. Several local companies will even pay for that option for those desiring to enter a specific field, such as HVAC. Beyond that, there are choices between in-state and out-of-state education, as well as public versus private and even online education, which can be done through many major colleges and universities today.
Retirement costs tend not to be as variable. Most people have a set lifestyle they wish to maintain, and unless one downsizes, the mortgage, taxes, insurance, utilities, maintenance and groceries tend to be the same as what they were. Healthcare costs also rise as we age, adding another large expense. Once we stop working, the options for covering these large expenses tend to come from savings, and once spent, savings can be difficult to replenish. Sending your kids to college may be important, but saving for retirement should take priority.