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Why Retirement Saving Comes Before College Costs

David Ning

When you have a child in college it is tempting to forgo saving for retirement to help fund more of the education expenses. However, there are plenty of good reasons to make sure your own retirement is secured before helping your children pay for college. Here's why preparing for retirement is more important than creating an education fund for your children:

Having financial security is the best gift for your children. When you have the ability to live comfortably and be financially independent, your children gain the freedom to make decisions that are most beneficial to them. Perhaps they will be able to take a higher paying job in another state because they don't need to worry about how Mom will pay her bills. Or maybe they can spend more time managing and improving their own finances instead of being worn out from trying to fix Dad's money situation. Once your retirement finances are secure, there are a variety of other ways you could assist your children, perhaps including helping to take care of grandkids or pitching in to plan or finance a family vacation.

No one will lend you money for your retirement needs, but your children have plenty of options to borrow for college. Children have a variety of student loan options that allow them to borrow money to pay for college. But you aren't likely to be able to get a loan at an advanced age in retirement because underwriters will want proof of your ability to pay off the loan and you are no longer working.

If your retirement savings plan goes well, you can always help your child pay off the loan later. While your child will likely need to pay interest on the loan before it is paid off, the budget flexibility the loan provides can be worth the price if it can significantly reduce the risk of a retirement savings shortfall. If your investments preform well, you can probably shoulder the extra interest. And if market returns don't turn out as rosy as you'd like, at least everyone can just deal with their own financial situation. Your child can develop a repayment plan to pay off the student loans. Plus, certain loans for college can be forgiven if your child decides to pursue a path in public service.

You can help your child find additional ways to pay for college. Your children might receive scholarships or grants that will cover some of their college bills. Parents can help their children to look for scholarship opportunities. They should also assist their children in filling out the application for federal student aid, which requires a significant amount of parent information.

You get a better deal for retirement accounts than college savings accounts. Many employers offer a match on the amount you contribute to a 401(k) plan, which is a better return that you will get on the money you contribute to a 529 plan. Money saved in a retirement account also typically has longer to grow and compound. It's a good idea to compare the fees associated with potential 529 plans with the fees on your 401(k) or individual retirement account. You can withdraw money from your IRA to pay for a child's college costs without incurring the 10 percent early withdrawal penalty, but you will have to pay income tax on the withdrawal and it could have implications for your child's federal financial aid.

Loan payments will teach your children an important financial lesson. Sending checks to pay off debt is a huge drain on your paychecks. Children who experience the pain of monthly debt payments may choose to be more responsible with their spending in the future. Ultimately, your child's ability to retire will be determined by how motivated he or she is to save money. So, teaching your children to prudently save and manage money could be one of the best lessons you could ever give them.

Paying for a child's college expenses is a goal practically all parents want to accomplish, but make sure your retirement finances are in place first. You need to be well on your way to financial independence before you can really help your children to achieve the same thing.

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