3 Tips To Balance Retirement And Education Savings When You Have A Child

New parents often wonder how they are going to balance saving for their kids’ college education and their own retirement. There isn’t always enough money to fund all of their goals, and they are looking for a way to prioritize their savings.

I recently wrote a guest post on the 3 tips to help you strike a healthy balance between retirement and education savings when you have a child. The post first appeared on The Virtual Attorney‘s blog.

#1: Fully Fund Your Emergency Fund

I know what you’re thinking… what do cash reserves have to do with retirement OR education savings? The answer is EVERYTHING! If you save into a 401(k) or 529 plan but don’t have ample cash reserves, you run the risk of having to take money out of your savings to cover the cost of an emergency. Taking money out of these accounts will cause you to pay taxes and penalties, all of which are unnecessary with proper planning. Until you have 3-6 months of living expenses in an emergency fund, don’t worry too much about retirement or education savings.

#2: Pay Yourself First

I know you’ve heard the old cliché, “Your child can take out loans for college, but there aren’t any loans for retirement.” This statement is true, but one that is hard to accept. Most parents I know have a strong desire to send their kids to college, and many are willing to forgo their own retirement goals and dreams in order to do it. Think about this though… if you pay for your kid’s college education, but haven’t saved enough for retirement, what’s going to happen when you run out of money? Chances are, the burden will fall to your kids to take care of you financially. That will be right about the time they are having kids, and will force them to balance your expenses, their kids’ education expenses, and their own retirement savings. The greatest gift you can give you children is to remain financially independent… even if it means you can’t pay for their college education.

#3: Tax Advantaged Savings – But Not Too Much!

Once you have fully funded your cash reserves and are saving enough to meet your own financial goals, you can then begin to look at saving for your kids’ college. If you live in a state with a state income tax, your first stop should be the state sponsored 529 plan. TIAA-CREF administers EdVest, the Wisconsin State 529 plan, which provides a $3,000 state income deduction per year for parents (or other donors). If you don’t have state income taxes, or your plan isn’t all that great, you can either use another states’ 529 plan, or simply start saving into a brokerage account for your child. Don’t worry about using an UTMA or putting the money in your children’s name.

How much should you save? Well, I don’t know about you, but I’m not convinced college prices can continue to rise for the next 18 years the way they have over the last 18. I believe technology is going to drive down the cost of college (while driving some universities out of business) and make it much more accessible that is currently is. For Wisconsin clients, I usually don’t recommend putting in more than $3,000, but that depends on a lot of factors such as the age of their children, their own retirement savings, and more.

Many new parents first reaction is to open a 529 plan the moment their child is born. As hard as it is, I recommend first ensuring that you can weather a financial storm by fully funding your cash reserves. Then, be sure you are saving enough to never become a financial burden on your kids. Only then should you evaluate if a 529 plan makes sense for your situation.

About the author

Alan Moore, CFP®, MS

Alan is passionate about providing individualized financial advice to individuals and families, regardless of their net worth, income or investable assets. An educator at his core, he strives to serve as his clients’ guide, available to help with the sometimes stressful or exciting financial situations that life inevitably brings.

Alan is the founder of Serenity Financial Consulting, which he started after noticing the lack of hourly, as-needed financial planning advice available to consumers. With experience working in several nationally recognized firms including Kahler Financial Group and Financial Service Group, Alan combines his industry experience and technical knowledge with his entrepreneurial spirit and penchant for teaching others to create a refreshing style of truly personal financial planning.

Alan is a Certified Financial Planner™ professional and Certified Retirement Counselor™. He earned his bachelor’s degrees in Family Financial Planning and Consumer Economics and his Master’s Degree in Family Financial Planning from the University of Georgia. Driven by his desire to educate, Alan also taught undergraduate financial planning courses while in graduate school.

Alan prides himself on being active in his community and feels privileged to have served in the Georgia National Guard for four years before receiving an honorable discharge. Originally from Georgia, Alan now lives in Shorewood with his wife Melissa, and enjoys taking advantage of the abundance of activities that Milwaukee has to offer.


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