Education Spending and the Risk to Clients' Retirement

Jan 15, 2019 Share This 

Save for Retirement or College?It’s a question that confounds some clients, and probably has them turning to you for guidance: Do I save for retirement or for my child’s college education?

The conflict may not be wholly financial. Choosing their retirement over their child’s education may feel selfish to some parents, and that parental guilt could be behind the potentially disastrous decisions1 fueling these recent statistics:

  • 74% of parents are funding a child’s college expenses with their personal savings accounts, despite 40% still carrying student loan debt of their own.2
  • 37% of parents said no savings goal is more important than their child’s education.2
  • About 37% seriously considered borrowing from their retirement savings to pay for a child’s college education, with another 18% unsure if they would have to make this decision by the time their child goes to college.2

Return On Investment?

Paying for college may help ease some guilt, but delaying or foregoing retirement savings contributions could result in well-meaning parents running out of money in their golden years. What then? Many assume their grown-up kids will be there to help:

  • Roughly 25% of parents saving for retirement expect their children to provide them with some financial support after they retire.3
  • About 16% of Millennial parents saving for retirement expect their children to provide financial support for more than 30% of their retirement costs.3

It’s a return on investment that may or may not come to pass. By the time parents reach retirement age, their children could be trying to save for the education of their own children – plus save for retirement and perhaps have other expenses. The children simply may not be in a position to help their aging parents financially.3

Tough Love?

Parents who are struggling with or struggled through student loan debt of their own may see trying to relieve their child of that same type of burden as “doing what’s best.” After all, college tuition rates have increased about 1,225% over the past 40 years, with an assumed annual increase of around 5% per year going forward.4

Education is not cheap, but parents do not have to shoulder the expense alone. There are funding alternatives available to college students (such as student loans, scholarships and grants) that simply aren’t an option for retirement savings.5 It may not be what clients facing this choice want to hear, but as their financial advisor you can provide objectivity in a situation they may be too close to emotionally.

Before committing to paying for college, encourage your clients to look at key areas to determine if they can afford to do so. Ask the following questions to help parents understand what they need to prioritize financially for themselves and their future before helping a child out with college tuition:

  • Does your budget cover your basic needs? If monthly bills are paid but there’s no room for discretionary spending, or if financial stress is a constant from month-to-month, financial security is likely in jeopardy. Focusing on putting more money in the bank to alleviate concerns about covering basics should take precedence over saving for — or paying for — college.6
  • Do you have an emergency fund? Life happens, and it usually comes with unbudgeted expenses. If three to six months’ worth of cash isn’t tucked away to cover unplanned events that arise in the short term, building an emergency fund needs to happen before saving for a future college education.6
  • Do you have a handle on paying down debt? Before acquiring more debt to pay for a child’s education, parents must have a clear picture of their existing debt, and a proactive strategy for paying it down. Eliminating debt-related expense could eventually mean more money in the college savings fund.6
  • Are you saving for retirement? Contributing to a retirement fund now means more years for the money to grow. There is also an opportunity to capitalize on employer plan matches and tax breaks to further shore up the golden years. Ignoring long-term financial security in retirement in favor of paying for college could come with unanticipated consequences.6

Clients considering the college vs. retirement debate may not ultimately choose the prudent path for their financial future, but you can help them manage the retirement resources they have by managing market risk and limiting loss. Explore more in our whitepaper, The Value of Risk Control Accounts in Retirement Planning. Click the button below to access this easy-reference tool now.

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1CNBC, How to balance college for kids versus your retirement, May 4, 2017

2The Street, How to Help the Kids Pay For College While Still Saving for Your Own Retirement, March 14, 2018

3Wealth Advisor, Should you save for retirement or your kids’ college? Here’s the math, November 8, 2018

4The Motley Fool, Should You Save for College or Retirement?, August 6, 2017

5Nerd Wallet, Yes, You Can Save for College and Retirement, November 13, 2017

6Forbes, 5 Priorities Parents Should Save For First, Before A College Fund, November 22, 2017


Topics: Retirement Planning