Would you be willing to postpone your retirement by two years if it meant your children could attend the college of their choice without taking out expensive student loans?
In 2007, Savingsforcollege.com conducted an online poll asking parents this exact question. If you have kids of your own, you’re probably not surprised that over 80% of respondents said they would postpone their retirement by two full years if their child could attend the college of his or her choice without taking on more debt.
Being a parent means being willing to give up your own comfort to protect your children’s future. What’s two years of retirement compared to ensuring your kids’ academic success and financial wellbeing?
Throughout my professional career as a Chartered Financial Analyst (CFA) and personal wealth advisor, I’ve been told many times that we need to emphasize to our clients the importance of creating their own retirement nest egg BEFORE they start saving for their kids’ education. But time and again, the very first question out of my clients’ mouths had nothing to do with their own retirement. Instead, it was “How do I provide for my kids’ future and make sure they’re taken care of if something happens to me?”
As a parent of three young children myself, I tend to relate to our clients and disagree with the conventional wisdom of my industry. For any parent, kids come first.
Over the past few years, I’ve found more evidence to support the idea that saving for kids’ education should be a greater priority for an investor than saving for retirement. In addition to the emotional reasons I’ve already described, I want to share five observations in favor of this point, based on my own research
1. Tuition Cost
Did you know that college tuition inflation is increasing at 6% per year, compared to the average consumer inflation of 2% and wage inflation of 3%? College costs have skyrocketed at a pace much faster than any other expense, including health care, over the past 30 years. According to Bloomberg, tuition, room, board, and fees have increased by more than 1200% over the past 35 years. Our wages can’t keep up with this college tuition increase! And as a result, students keep taking out expensive student loans to pay for school; many are even forced to move back in with their parents after college.
2. Different Timing of Two Goals
For almost all parents, sending your child to college will come much sooner than your retirement. We all agree that kids grow up fast, and while we’re embedded into our day-to-day routine of finding them the best schools, keeping up with their activities, preparing for their birthday parties, and planning family vacations, eventually your child turns 18 and is ready for college. Are you prepared to receive your first tuition bill?
In a typical family, let’s say the lucky parents have two kids about two years apart, when they’re in their late twenties. Fast forward 18 years. The kids go to college, and the parents are still relatively young – in their late mid-late 40’s. They still have 15-20 years of professional life ahead of them to save for retirement. Based on the statistics, professional careers – and all-important earning power – pick up when employees are in their 40’s, so these parents will be able to successfully bump up their retirement nest egg even after their kids go to college.
3. Option to Postpone Retirement
In addition to the point above about earning power increasing in the later stages of most careers, parents can always decide to work longer if their retirement savings are not sufficient. However, for most 18-year-olds, college enrollment is predetermined and not flexible. Not many parents I know would choose to delay their kids’ college experience. With the average life expectancy up significantly since the 1970’s, people tend to work longer and often make the decision to extend their working life to enable a better, more secure retirement
4. Employer-Matching Retirement Plans
Many working parents have an opportunity to save for retirement through their employer-matching 401(k) plans; however, employers don’t provide an option to match college savings plans. With automated paycheck deductions and employer-matching programs, saving for retirement becomes a habit for many working professionals. In addition, government programs like Social Security have traditionally provided some peace of mind that we will be able to maintain our standard of living into retirement. But what about college savings? Employers don’t usually offer additional incentives for parents to make automated payroll deductions into college savings plans, so parents are on their own when it comes to saving for their kids’ future.
5. Raise Responsible Kids
Lastly, I am a big believer that when you invest in your children and raise them to be responsible human beings, you have a greater chance that they will take care of you in retirement. When parents spend their time and energy to ensure their kids’ success and stability, those kids in turn are more able to help elderly parents financially. According to a study by the Economic Policy Institute, college graduates earned an average of 56% more than high school grads in 2015. It’s worth it to invest in your kids and teach them the right values, so that they can support you in retirement.
Given the choice, just about any parent would choose their child’s health and well-being over their own. So if you ask me whether saving for retirement or saving for your kids’ future should come first, I can confidently say that your kids should come first. The financial industry may tell you otherwise, but if you’re ever in doubt, just refer to the five facts I’ve mentioned in this article, follow your gut, and put your mind at ease.
Author: Ksenia Yudina, mother-of-three, is a financial expert with over 10 years experience in the financial industry as well as the founder of U-Nest.com. U-Nest is an intuitive & easy-to-use college savings mobile app for parents to plan for their kids. Their mission is to help parents save for the kids’ education in the most efficient and tax-advantaged way.
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
