An undergraduate degree from a respected university—it’s all but a necessity in today’s job market, and post-undergrad education is becoming common even among entry-level applicants. But is that shiny degree really so important that students’ parents should put off saving for retirement, or worse, liquidate their current accounts?
In fact, according to a recent T. Rowe Price poll of parents with kids 15 and younger, it might be with 52 percent of respondents saying that it’s more important to save for their kids’ college than for their own retirements, and 53 percent saying they’d rather pull money from their retirement savings than allow their children to take student loans. Granted, 62 percent also said that investing in their kids’ college education is “actually an investment in my own retirement,” but financial experts tend to disagree.
“It’s a case of robbing Peter to pay Paul, and these parents deplete their own savings and don’t have enough for their own needs” said Mike Tove, a Cary, North Carolina insurance agent. “They don’t realize the impacts of inflation, and they’re not counting on the fact that Social Security won’t be enough.” Not to mention, pulling money out of a 401(k) or IRA before age 59½ leads to penalties and potentially higher tax bracket— a two-fold hit to a couple’s savings that will make it even more difficult to make up for lost time.
In fact, that lost time is something too few couples consider, and the opportunity costs of choosing tuition over retirement savings are astronomical. “If you pull from a retirement you’ve built up for 18 years or more, you’re setting yourself almost back to square one,” said Craig Meyers of CR Meyers and Associates. Considering that the average parents of a college-bound child may have another fifteen to twenty years in the accumulation phase, an early withdrawal could halve the amount of time they have to reap returns on that money.
“I do workshops on this,” added Tove. “These people’s future is ‘welcome to Wal-Mart.’”
Parents often make these sacrifices under the assumption that their kids will support them later on, but that assumption isn’t always clear, and it certainly isn’t reliable. “These parents have to realize that if they’re going to pull from their retirement for a certain number of years, the kid’s going to have to fund them in retirement for even more years,” said Meyers. Average annual tuition costs exceed $14,000 per year at public universities and $37,000 at private schools, according to the National Center for Education Statistics, and inflation and the loss of compound interest on those funds will set parents back far further. Even for kids with excellent high school records and bright futures, it’s tough to bank on their abilities to support Mom and Dad after college.