College vs. Retirement Savings: Which Is More Important?

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With the cost of college tuition rising and your golden years looming, you may be faced with a dilemma – should you save for your child’s college fund or your own retirement? Like many parents, you may think it’s better to put your child’s future ahead of your own and save for college. But saving for retirement should be your first priority. After all, even though you have a defined benefit pension, there are no loans or grants to pay for any shortfall between your pension and your retirement expenses.

Finding a Balance

When it comes to saving, you’d like to have enough money for all your future expenses. But with uncertainty in the state budget, you may not have as much money to save as you would like.

  • Participate in your 403(b) or 457 plan. Try to increase your contributions each year, or whenever you get a raise. Small increments in your contributions can make a big difference over time. For example, see how increasing your 403(b) or 457 plan contribution by just $25 a month could grow over the years, assuming an average annual return of 6%.
  $50/month $75/month $100/month $125/month
After 10 years $8,194 $12,291 $16,388 $20,485
After 20 years $23,102 $34,653 $46,204 $57,755
  • Do an annual checkup. Review your investments within the plan at least annually to make sure they're appropriate for your goals, time line and risk tolerance. Rebalance your investments as necessary.
  • Start a 529 college savings plan. Contributions made to this plan compound on a tax-deferred basis and are tax-exempt when the money is used for qualified higher education expenses. Family members can contribute to this fund as well, so encourage grandparents and other relatives to donate to this fund instead of giving presents for birthdays or holidays. 
  • Look for other ways to fund your child’s education. Financial aid, student loans, scholarships and grants are available to help fund higher education if your child qualifies. You can also just pay a portion of your children’s tuition or help them pay off their college debt after they graduate, when your nest egg has grown. For more information about student aid, visit www.fafsa.ed.gov.
  • Work longer. Working an extra year or two can help you be more prepared for retirement and college. It shortens the amount of time your nest egg must last in retirement. Plus, the working years at the end of your career are typically the ones with the highest earnings, so you may be able to contribute more to your nest egg. Retirement savers age 50-plus may be eligible to make "catch-up" contributions to a 403(b) or 457 plan of $5,500 beyond the contribution limit of $17,000 for younger savers. There are also special rules: For 403(b) participants, eligible employees with 15 or more years of full-time service may be able to contribute up to $3,000 more for five years, or a maximum of $15,000. 457 participants may be eligible to defer up to two times the contribution limit in effect for the final three years of service. Employees cannot participate in the 3-year catch-up and the 457 plan age 50+ catch-up during the same tax year.