How to save for your child’s college while also saving for retirement

Saving for your retirement and your child’s college education can be challenging, but it’s not impossible. If you make smart choices now, you can achieve both of your future goals—a comfortable retirement for you and a college degree for your child. Learn what steps you need to take to get started.

Parents with daughter playing.

Determine your financial need for each goal

When it comes to your retirement, you need to estimate how many years you have until your retirement, find out the balance of your current pension or employer-sponsored retirement plan, and calculate where your balance will be when you retire. You should also use the Social Security benefits calculator to determine how much you will receive from Social Security when you retire. Take some time to think about what type of lifestyle you would like when you retire. Will you want to travel, or will you be happy staying in one place? Do you or your spouse plan on working part-time in retirement.

As for saving for college, calculate how many years until your child starts college and the expected cost of a public or private college or university. Then answer a few questions: Do you have to save for more than one child, do your children have any special academic or other skills and talents that can lead to scholarships, and would your children qualify for financial aid. If you need help predicting your retirement and college funding needs, you can find resources online to help with these calculations.

What can you afford to put aside?

Once you figure out what your financial needs are for both goals, the second step is to determine how much money you can afford to set aside monthly. This will require looking at your family budget and listing your income and expenses. If the thought of putting together a budget is overwhelming, working with a financial professional can help. A financial professional can help you set up a budget and come up with a dollar amount that you can set aside, as well as give you advice and guidance about what life insurance and retirement planning solutions can help you reach your financial goals. After working together on a budget, you’ll decide how to save for your two goals. (Keep in mind that if your financial circumstances change, you will need to adjust the amount you’re setting aside.)

Your top priority

Getting a college education is an important goal for your child, but students have a number of ways they can cover the cost of college, including financial aid and scholarships. These funding options are not available for retirement. If you have limited funds, you should focus on building your nest egg. Waiting to fund your retirement until after your kids finish college would mean missing out on years of tax-deferred growth and compounding for your money.

Why is saving for both retirement and college important?

As noted earlier, there are a variety of ways to save and pay for college, but the options for saving for retirement aren’t as plentiful. In fact, the following three examples highlight ways in which retirement savings are being eroded. That places those who prioritize their children’s education over their own retirement in a precarious position.

  • Shrinking pensions. Many state pension plans are significantly underfunded; some are in danger of being defunded altogether. Private pensions, particularly traditional defined benefit plans, have been steadily declining. Existing defined benefit plans were hampered for many years by a low-interest-rate environment, which stunted earnings. Longer life expectancy has also increased liability. The only way to make up for these declining retirement assets is for individuals to save more.
  • Rising tuition costs. This is likely the biggest challenge facing parents and students. In 2022-23, average estimated budgets (tuition and fees; room and board; and allowances for books and supplies, transportation, and other personal expenses) for full-time undergraduate students ranged from $19,230 for public two-year in-district students and $27,940 for public four-year in-state students, to $45,240 for public four-year out-of-state students and $57,570 for private nonprofit four-year students.1
  • Raiding your retirement. Many parents, even those who were early, disciplined savers, have not been able to stave off the need to dip into their retirement savings, whether for educational expenses or to recover from economic reverses during the pandemic. However, dipping into retirement savings can yield the compounded negative effect of taxes owed on the withdrawal, a lower retirement balance, and the loss of interest on the withdrawn money.

While college costs have risen rapidly and will continue to rise, retirement is likely to be the more expensive of the two goals. If you work toward having a substantial nest egg, the result can be a comfortable retirement. You could also lower your possibility of becoming a burden on your children when you’re older. Last, but not least, this could be a teachable moment for your kids, who will see you placing retirement first, and it will help them learn about the importance of saving for their own retirements. That could end up being the best payoff of all.

How to save for your child’s college education

Most parents are all too willing to sacrifice their retirement security for their children’s education, but they don’t have to. You can make your retirement a priority and also set up college savings plans that can help you cover higher education costs Here are some popular college savings vehicles to help you get a head start:

1. 529 Accounts

These are by far the most widely used college savings plans. The growth on these savings is tax-free for college, and there are no annual contribution, age, or income limits. Contributions to your in-state 529 plan may also qualify for a state tax deduction. There may be limits on the cumulative contribution of the 529 plan account. Also, there can be adverse tax consequences if you use proceeds from the 529 plan* account for any purpose other than paying for qualified education expenses.

2. Coverdell Education Savings Accounts

These accounts impose a $2,000 annual limit per beneficiary, but they allow you to self-direct your investments, as you would with an IRA. They have the added benefit of offering tax-free treatment, not only for college but for elementary and secondary school as well. The tax-advantaged treatment of expenditures from a 529 plan, by contrast, is directed at college expenses.

3. UTMA and UGMA accounts

These accounts act as trusts for your child, allowing assets to be transferred to a minor when he or she reaches the age of majority. While they’re not specifically designed for college financing, they are often used for this purpose. Please note that assets transferred to a child in a UTMA/UGMA account are irrevocable. Once the child reaches the age of majority, he or she will control how the money is spent.

4. New York Life insurance policies

If a parent passes away, insurance benefits from a life insurance policy can help pay for a child’s education. In the case of a whole life insurance policy, cash value within the policy can be accessed while the policy owner is still alive to help pay for education expenses.2

Making college more affordable

By now, you understand that the best way to accomplish both goals—paying for college and saving for retirement—is planning ahead. So, the earlier you invest in a college savings plan, the better. If your financial circumstances make investing in a college savings plan difficult, then these strategies can help make college more affordable for your children:

  • Have your child attend a community college for two years and live at home to save on room and board.
  • Have your child take advanced placement (AP) classes in high school to complete a year or more of college in advance.
  • Suggest that your child participate in programs like AmeriCorps or Teach for America that help pay for college.
  • Have your child attend a reasonably priced state school as an undergraduate, then get a master’s degree at a name school. Your child may also want to consider deferring college for one or two years and work to earn money for college.
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Want to learn more about preparing for college funds?

A NYLIFE Securities financial services professional can help determine what’s right for you.

* 529 plans are offered through NYLIFE Securities LLC (member FINRA/SIPC), a Licensed Insurance Agency and a New York Life Company.

1Trends in College Pricing and Student Aid 2022,” College Board, October 2022.

2Please note that accessing the policy’s cash value will reduce the policy’s death benefit and available cash surrender value.