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Conflict Between Retirement Savings or Funding Your Child’s Education

There is at least a perceived conflict between funding a child’s college education and building their retirement savings nest egg. The conflict usually arises from the lack of financial resources to do both while funding daily living expenses, so parents become stuck between priorities and usually wind up doing nothing at all.

A Personal Family Lawyer can help you sort out your priorities in a way that supports your family for the long-term. With that in mind, here are some guidelines on striking a balance between saving for your retirement and your child’s education:

Build an emergency fund first. Save between 3 to 6 months of living expenses to fall back on in an emergency. If you don’t have it, you will likely be forced to raid your 401(k) or other retirement account, spending more for penalties and taxes to cover the cost of the emergency.

Next, save for retirement or build a business to fund your retirement. For many parents, it’s difficult for many parents to accept that they may not be able to fully fund a child’s college education, but consider the alternative – Say you spend what you should have saved for retirement on a child’s education, but end up running out of money right when your kids are having their own families and trying to save for their own retirement. You would then be financially dependent on them – just what you (and they) don’t want. There’s a reason there are loans for education but not for retirement.

Fund your child’s education last. Only after you have funded your emergency stash and your own retirement accounts (or built a business to fund your retirement) should you funnel cash to a child’s education fund. If you invest in a 529 college savings plan, the earnings grow tax-free. Also, other people in your child’s life — like grandparents and generous aunts and uncles — can contribute as much as $14,000 per year (annual gift tax exclusion) to a child’s 529 plan.

If you would like to learn more about strategies for getting your financial future in balance, call our office today to schedule a time for us to sit down and talk. We normally charge $750 for a Family Wealth Planning Session, but because this planning is so important, I’ve made space for the next two people who mention this article to have a complete planning session at no charge. Call today and mention this article.

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