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Parents: Saving for retirement is more important than kids' college fund

Michael Santoli
Michael Santoli

Flight safety instructions tell parents to put on their own oxygen mask before assisting their children.

A similar rule should apply to money: Parents should make saving for their own retirement a priority over paying for their kids’ college education.

Yet according to a survey by T. Rowe Price Investment Services, most people seem willing to violate this principle by sacrificing their own financial security to cover children’s school bills.

Among the 2,000 parents polled, 59% said saving for their kids’ college was more important than building up their own retirement savings. Nearly as many said they would rather dip into their retirement savings than have the kids take on student loans.

This “really isn’t a good idea,” says Judith Ward, senior financial planner with T. Rowe Price, in the attached video. “I can understand, as a mother myself, wanting to put your kids before yourself.”

But given that most individuals today bear the primary responsibility for funding their own retirement cushion, hampering this effort by redirecting too much savings toward tuition is shortsighted, Ward says. There are various options for figuring out college financing, but it’s hard to begin a retirement-savings program after kids are mostly grown.

She recommends: “Make sure you’re on track for your own retirement first,” and then figure what more can be set aside for college savings. Perhaps it’s an ambitious target for most to hit, but Ward says people should try to save 15% of their salary – including any employer match in a 401(k) plan, which she calls “free money.”

If 15% isn’t practical, then 6% is a decent start. The key is to get a long-term savings plan underway.

Another worrisome finding of the 2015 Family Financial Trade-offs Survey: Nearly half of parents said they were using a standard savings account to accumulate money for future college costs. Yet this “all-encompassing savings account,” Ward says, is also being used for emergency funds, next year’s vacation kitty and whatever else comes up.

A dedicated account, such as in a 529 tax-deferred college savings plan, makes much more sense for this purpose.

Because college has become so expensive, too many people become daunted by the prospect of covering all costs and lose sight of the ways multiple funding sources can be accessed when the time comes.

Ward says T. Rowe has estimated that in order to save the entire cost of a four-year state college, parents would need to set aside $450 per month from the time a baby is born through his or her high school graduation.

Instead of becoming discouraged at this scary reality, Ward suggests that once a retirement-savings path is set, parents should strive to save up enough for a “down payment” on college expenses, equivalent to perhaps half of the four-year cost of school. Student loans, financial aid and student income can round out the total.

Perhaps not surprising, parents of millennials were twice as likely to tap retirement savings to cover college as parents of Generation Xers were. And those millennials appear headed to repeat their parents’ mistake, with 62% of them saying they’d draw from their own retirement savings rather than have their kids assume student debt.

If there’s a bright side, it’s that these millennials still have time to change course and reorient their priorities toward their own eventual retirement.