Retirement vs. college fund: Which comes first?

This post comes from Trent Hamm at partner blog The Simple Dollar.

One of the most common debates I hear about from people such as myself -- 20- and 30-somethings with young children -- is whether it makes more sense to save adequately for retirement or save adequately for their children’s college education. Young career folks often don’t have the means to do both, so it becomes a choice.

Retirement or college? Today, I’ll look at both sides of this coin, which is central in my own life.

When I envision my life 30 years from now, one key part of that vision is that I’m not financially dependent on my children. I’m able to live the life I want to lead without them worrying about me (at least financially) in the least, particularly in my final years.

The best way to ensure that kind of a future is to focus primarily on shoring up retirement savings, even if it comes at the expense of saving adequately for the college experience of one’s children.

What are the advantages of retirement savings when you’re young? The big advantage is that your savings have a huge number of years to grow. The power of compound interest has plenty of time to work in your favor.

The real numbers tell the story better than anything else. If you invest $10,000 when you’re 45 at an 8% rate of return, you’ll have $46,609 when you’re 65. Invest $10,000 when you’re 35 and you’ll have $100,626 when you’re 65. Invest $10,000 when you’re 25 and you’ll have $217,245 when you’re 65. The earlier you sock away money for retirement, the better the deal is.

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What about their education? Self-motivated students can always make college work if they choose to do so. Many financial aid options are available, plus most schools also accept transfer credits from low-cost institutions, enabling students to fulfill many of their general education requirements at a community college at a very low cost.

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Beyond that, having a student take a large deal of responsibility for their education forces them to learn some personal responsibility that they might not otherwise learn. It can also show them firsthand the cost of their education -- and the value of it. Those are lessons that aren’t taught by simply writing a check for them.

What if I change my mind? If you start saving for retirement, then change your mind about your choice, you’re not completely without options. Most common retirement savings plans allow you to use some -- if not all -- of your retirement savings to help with college education.

Most 401k plans allow you to borrow against them to pay for educational expenses. However, if you do this, you lose out on the returns during the years that you’ve got the money out on loan. If you’ve used a Roth IRA, you can withdraw the amount you’ve contributed at any time without penalty, but you can’t put that money back.

What if I feel guilty about saddling my children with lots of student loans? There’s no reason you can’t help them pay off those loans when you’re very secure in retirement. At Christmas, write a check to their student loan holder, knocking off a chunk of their loans for them. This way, you’ll be making the payments from a position of total security rather than from a position where the future is uncertain.

What if my decision causes my children to fail to get an education? From my perspective, that’s more of a commentary on the initiative of your children than anything else. If this roadblock somehow “prevents” them from going to college, they’re showing a lack of self-motivation that will hinder them in more ways than just not getting a degree. Without that kind of drive, they’ll be hard-pressed to succeed in any high-pressure field.

They might also simply not be interested in what college can provide and are intelligent enough to make that decision on their own. In that situation, a trade school might actually be a better alternative. Students who attend trade schools can often earn a very good income. 

I've made a strong case for saving for retirement instead of saving for your kid’s education. But what about the flip side of the coin? Read about that here.

Related reading at The Simple Dollar:

• The case for saving for college over saving for retirement
• Saving for college or retirement: What’s best for us?
• Retirement or education?