How to Help Parents When College and Retirement Collide: Advisors' Advice

Slideshow September 22, 2022 at 01:27 PM Share & Print

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Clients becoming parents or expanding their families in their late 30s and beyond may wonder how they’ll save enough for both retirement and a child’s college education.

Given the growing numbers of people delaying parenthood, more moms and dads are likely to be approaching retirement at the same time their children are taking the SAT and planning college tours.

Six financial advisors recently answered our question: What advice do you give later-in-life parents on how to plan financially for both their kids’ college education and their own retirement, two milestones that may be fairly close in time?

See their responses in this slideshow. Some have been edited for length.

Dinah Wisenberg Brin

NOT FOR REPRINT

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How to Help Parents When College and Retirement Collide: Advisors' Advice

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I strongly encourage clients to focus on retirement savings first for several reasons.

First, parents always have the option to pay for college afterwards by helping to pay down children’s student loans if the parents have the capacity to do so in the future. But if parents fail to contribute to retirement accounts with tax-deferred growth, that opportunity is lost forever.

Second, in many situations, paying for children to go to college, especially when there is more than one child, can result in the parents having to ask the kids for support during the parents’ retirement. And most of my older clients never want to get in a situation where they might have to ask their children for financial support in retirement at exactly the time when the children are trying to support their own young families.

Finally, having a realistic conversation with kids about the parents’ capacity to support the children’s education is a good thing — it forces the children to make important life choices taking financial considerations into account. In almost all circumstances, this is an incredibly positive discussion to have.

— Lindsey Young, founder, Quiet Wealth

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The parents have to prioritize saving for their retirement over their child's education. The child being debt free will be no good if they have to take care of their parents financially later in life. This is kind of like putting on your oxygen mask before assisting others.

There are many options to fund a college education, there are not many options to fund a retirement.

The parents can make the intentional choice to forgo a more luxurious retirement to give their child an education, but I think there has to be a minimum level of income and lifestyle in retirement that must be met before moving to other financial goals.

— Erik M. Baskin, founder, financial planner, Baskin Financial Planning

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There are a lot of strategies, projections and scenarios one can run. But ultimately, if a consumer has to choose between funding retirement and saving for or paying for college, then they should almost always fund retirement. Students can borrow to go to college if needed, parents cannot “borrow” their retirement.

Many parents say “I’ll just work longer,” but in reality that doesn’t always work. What if the parents pass away unexpectedly, or become disabled? It is important to fund retirement as a priority, then if parents are able to do that and save for college — then that’s great. But choosing college expenses over safety in retirement is risky.

— Philip Mock, founder, 1522 Financial

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I not only help our clients with this challenge but I fit the category too. Although my wife is younger, I'm 42 and our daughter is 11 months.

The way I look at this depends on the financial situation at hand. We made sure to save heavily for retirement before having a child to better prepare to hit the brakes should higher expenses pop up.

By preplanning, we don't feel as much pressure to over-save for retirement. However, for those who did not save early, the answer is to save flexibly. Instead of putting a bunch of money into a 529 plan attached to funding college, putting money into a taxable brokerage account and Roth IRAs allow for more choice. If, down the road when college tuition looms, you get to decide how your retirement planning is looking and if you can afford to use some of the taxable/Roth IRA money for college.

The fact that the money is in a taxable account means it can be used for anything. That's the flexible part. Yes, you miss out on some potential tax savings for college funds in a 529 plan, but is the price of insurance — of not knowing what your finances will be when the kids go to school.

— Eric Roberge, founder and CEO, Beyond Your Hammock

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If parents are not on track for retirement, then the student will need to take the lead with respect to paying for college. Having a great “college experience” should take a back seat to finding a college that is affordable on a net cost basis.

A parent is “on track” for retirement if their current savings rate will allow a portfolio drawdown that will get them the lifestyle that they want.

If parents are on track for retirement, and the student is excelling academically and knows, or thinks they know, what they want to major in, then the parents can take the lead on funding college with some help from the student. The family here has the flexibility to find an ideal college — one where the “experience” may be a bit better — instead of perhaps having the student “rough it” at a less expensive college.

If parents are on track for retirement but the student is not performing well in the classroom or is a bit wishy-washy on what they want to do, it probably does not make sense to send him or her to an expensive college, as the storyline in place tells us that this may be a five- or six-year college experience. The parents may be able to afford a college that offers a better fit, but in order to hold the student accountable, the student should take the lead in funding.

— Bob Falcon, founder, president, Falcon Wealth Managers

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Parents who are later-in-life tend to be better financially prepared than younger versions of themselves may have been, but it also tends to mean that they met their partner later in life as well, so their financial plan is likely to have become more clear later in life.

So it's not uncommon to see two partners who may or may not have had similar financial habits for long periods of time, and now need to be extra sure their financial goals are on track, given either a later start, or a later point of clarity on this topic.

Later in our careers, we do tend to be reaching peak earnings potential, so a common issue I see is that people save too little for retirement early on, only to find they have excess earnings to save later on but aren't able to get the same tax relief, given 401(k) contribution limits.

This is yet another reason why it's important to start saving early, especially where tax benefits are also part of the equation, which is much less a consideration when it comes to college savings.

Finally, parents often lose sight that there are many ways to help children at various points in time, and this doesn't exclusively have to be saving in advance for college, and in ways that it may be hard to get money out once it has been put in. Examples would include buying a car, helping with rent, and money towards an eventual home purchase.

— Jeremy Bohne, founder, Paceline Wealth Management

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