Northwestern Mutual: How to Balance Retirement and College Savings

Many parents have a common question when it comes to saving for the future: Is it better to save for retirement or college? The answer will be different for everyone because individual situations are unique—although from a financial planning perspective, there tends to be a clear answer. This is where a trusted  financial advisor can help by offering education about the pros and cons of different options and how they apply to each person’s unique situation.  While the path to those milestones will span many years, the following actions may be a good start.

Envision specific goals

Every long-term savings objective starts with a vision. When it comes to a retirement plan, that means considering an ideal retirement age, location, and lifestyle. A person who wants to retire early and travel the world may have different savings goals than someone who wants to work until 70 and continue to live in the same town.

Parents may also consider goals for their children’s education, too. Of course, each child eventually determines their own educational path. Yet it’s still wise to consider what portion of education expenses they intend to and can afford to pay.

Goals may change over time but can still provide a foundation for financial plans.

Set strategic priorities

Many parents want to help pave the way for their children’s futures. That can lead to a desire to put college savings above retirement. However, from a purely financial perspective, it typically makes sense to prioritize retirement savings over a child’s college fund. While that may come as a surprise, there are several reasons to get on track for retirement first:

• While loans, grants, and scholarships could help pay for college, there are no such loans for retirement.
• Despite rising education costs, retirement typically costs more. Retirement funds may have to stretch for decades, while undergraduate degrees only take a few years to complete (in most cases).
• Not every child decides to attend college, but most people eventually retire.

Keep in mind that focusing on retirement planning first doesn’t mean neglecting college savings altogether. Financial planning is all about balance. Perhaps it means contributing less to college savings—but still contributing. And while it usually makes the most financial sense to put retirement first, it may not be the best choice for everyone.

Explore all options

Many investment and saving options are available for both retirement and college. Flexible options could make balancing retirement and college savings easier. The following are two flexible choices, but tracking down the best fit typically requires research and professional guidance.

529 Plan

A 529 plan is a state-sponsored college savings account. Deposits in a 529 plan can grow tax-deferred, and withdrawals for qualified educational expenses are tax-free. In the past, parents would have to transfer the account to another beneficiary if their children didn’t attend college or had no qualifying educational expenses. As of 2024, parents can move a certain amount of unused 529 funds into a Roth IRA if they meet certain requirements.

Roth IRA

A Roth IRA is a retirement investment account funded with post-tax contributions that receives the benefit of tax-free growth. While these accounts are typically used for retirement, the money can also be used to pay for college expenses.

Start saving early

“With cost-of-living increases and increased medical expenses, it’s difficult to estimate how expensive retirement may become—but it’s likely safe to say it will be one of the largest expenses most people will cover in their lifetime. Likewise, on average, college costs $38,270² a year as of 2024,” said Zach Wineland, Chief Strategy Officer, Partner and Private Wealth Advisor with Fortivus Wealth Group, Northwestern Mutual, State College, Pennsylvania. “Therefore, it’s never too early to start saving for retirement or a child’s college education. To make the most of compound interest, it’s important to start saving and investing for both goals as soon as possible.”

Financial priorities may fluctuate as income and household expenses change. While budgeting and planning ahead are important, prioritization is key to finding the right balance that allows someone to save for retirement and college.

Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance
Company (NM) and its subsidiaries in Milwaukee, WI.

Source: Northwestern Mutual

Contact: Don Klein, 1-800-323-7033

¹ https://www.cnbc.com/2023/12/28/a-major-barrier-to-529-plans-goes-away-in-2024-thanks-to-secure-2point0-.html

² https://educationdata.org/average-cost-of-college