Dear Retirement Adviser,
I am 42 years old with children ages 3 and 4, and I have an eye toward retirement someday. My friend recently began monthly payments for a prepaid college tuition plan. I am debating whether it makes sense to follow his lead or invest the $350 a month in my 457 plan, which is a deferred-compensation retirement plan. I know the answer depends a lot on how much tuition costs when it time for my kids to go to college, but I want your input.
-- Jason Juniata
Ideally you're working toward both life goals -- saving for educating your children and also for your retirement. If you're choosing between contributing toward your retirement and the kids' education, retirement should almost always win.
Prepaid tuition plans have the potential advantage of keeping up with tuition inflation. College cost inflation has been outpacing most price increases as measured by the consumer price index. That's expected to continue. As a college professor, I'll tell you that faculty salaries are not outpacing inflation.
You will want to research your state's prepaid tuition plan to learn what happens if your children don't attend an in-state school. The plan's returns may suffer a reduction in benefits if your child attends an out-of-state or private school. You'll also want to know what kind of guarantee that returns will cover increased tuition expenses.
You should also check with your 457 retirement plan sponsor whether you can withdraw money to pay for college while still employed by the sponsor. It's unlikely that you can. You might be able to take out a plan loan against the balance, but not an early distribution.
In general, you are eligible to withdraw funds from a 457 plan when you retire, when you leave your job and during an unforeseeable emergency circumstance. Unfortunately, Junior's college tuition bill isn't an unforeseeable emergency circumstance. The good news here is a plan loan can be a smart way to cover college costs.
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