save for retirement before college

Forget Your Kids’ College, Save For Retirement

Mom and dad are blowing up their retirement plans to make sure their kids get through college. So, obviously, we need to broadcast a public service announcement like the one you hear every time you board a plane: “Please secure your own oxygen mask before assisting others.”

T. Rowe Price surveyed 2,000 parents who have both a retirement account and kids younger than 16, and found half were willing to dip into their retirement savings rather than let them take on student loans. A similar number are willing to take on a second job.

Millennials are especially prone to this student loan savior complex, because they’ve been burned the worst by loans — 70 percent think they took on too much debt to pay for college, and 62 percent of them would rather dip into retirement to avoid their kids taking loans.

I can relate to this fear. I still have about $9,000 in student loans to repay. But if this study’s got it right, these parents won’t be doing their kids any favors. College students have 40 or more working years ahead of them, and federal programs to help deal with their student loans.

Parents have much less time, and the only help they’ve got coming is Social Security — which many don’t expect to get a dime from. The study found 64 percent of millennials think they’re more likely to win the lottery.

Fortunately, millennial parents still have enough time to be convinced this is madness.

Why parents sabotage themselves

The T. Rowe Price study says 52 percent of parents are willing to take on $25,000 or more in debt to pay for their kids’ college, with 23 percent willing to take on more than $75,000. Why? It’s all psychology — 63 percent say they feel guilty, and 58 percent feel like failures who don’t provide enough for their families.

If guilt and failure motivate you, here’s something to consider: Having debt in retirement means you’re going to struggle when you’re at your lowest. Your health isn’t getting any better, and you’re living on a fixed income — which probably means you’ll have to rely on your kids.

You’ll also have taught them that parents are responsible for putting kids through college. So while they’re spending time and money to care for you, they also have to stress about saving for their kids’ education. What do you think their retirement is going to look like?

The solution isn’t to put the whole financial burden of college on your kids, although some people do go that far — and without providing much guidance. According to the study, 47 percent of parents are willing to let their kids take on monthly student loan payments of $300 or more, with 32 percent willing to let their kids take on $500 or more.

A shocking 10 percent say they will let their kids take on as big a payment as necessary, even if it’s over $1,000 a month. That’s insane — the median student loan payment is $160, and only a quarter of borrowers have payments above $300 a month.

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The damage to retirement

T. Rowe Price recommends saving 15 percent of your salary for retirement, preferably in a Roth IRA or 401(k), before putting any money toward college savings. Then the company says to aim for at least half the cost of a four-year education, using a 529 account.

The numbers may be totally unrealistic for most people — what do you expect from an investment firm? — but it’s exactly the right attitude. You need your finances in order before you help somebody else, and you ought to be putting money where it does the most good. That usually means three things:

  • Where you won’t touch it
  • Where Uncle Sam won’t touch it
  • Where it can grow faster than inflation

Both Roth IRAs and 529 accounts hit the mark. The money can usually be withdrawn tax-free, although there are penalties for taking out too much, or too early.

Of course, most people (58 percent) are already tapping retirement for other things, according to the study. One in five has done it to pay off debts, while 13 percent have used it for basic living expenses and 12 percent have used it for a rough patch while unemployed. (That’s what emergency funds are for, and you should definitely have one of those before focusing on retirement saving.) Then there are these depressing stats…

  • 49 percent say they’re never going to retire anyway
  • 33 percent are saving for retirement with a regular old savings account
  • 49 percent report losing sleep worrying about how they will pay for retirement

And remember, this study was just of people who already have a retirement account. Among middle-class Americans, 19 percent have no retirement savings and 41 percent of people in their 50s aren’t saving at all.

The right way to handle college costs — together

Three quarters of American college students paid at least some of their college costs themselves, according to the study. A little less than half say their parents contributed, while nearly 40 percent say they got some free money in the forms of grants or scholarships.

My parents paid for about 7 percent of my bachelor’s degree, and I turned out OK, despite changing majors three times.

I had a state scholarship that covered 75 percent of my tuition, and my parents paid the rest for my freshman year — including two math classes I failed and retook in the summer. After that, it was all me.

I worked full-time in the summer, and part-time during school, to pay my own way. I had no debt as an undergrad. In grad school, I was a teaching assistant with an 80 percent tuition waiver and a stipend, plus I worked part-time and took on student loans I’m still paying off.

Parents shouldn’t have to take on a second job for their kids’ education before the kids take on one or two themselves. And they shouldn’t have to dip into their retirement fund before their kids apply for scholarships — you don’t even need good grades to win them. There are no good excuses for not applying.

But speaking of good grades, here’s one last stat: 85 percent of parents believe that “kids who contribute toward paying for college care more and work harder at getting good grades.”

Not being able to finance college for your child doesn’t mean you failed him. But if he leaves college with student loan debt and a sense of entitlement, you both failed.

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