If you’re raising kids, you may feel squeezed as you save for both your own retirement and your children’s college expenses.
Understandably, many parents want to ease the financial burden on their kids. But you shouldn’t put your retirement savings on the back burner.
Mari Adam, a certified financial planner in Boca Raton, Florida, suggests that you aim to save six to eight times your salary for retirement. While that may seem daunting if you’re behind on saving, Adam insists that you can catch up. “The most powerful thing on your side is time,” she says. Even if you’re a Gen Xer, “you still have about 10 to 20 years to save,” she says.
She recommends fully funding your individual retirement accounts (IRAs), if you can. For 2024, the standard maximum IRA contribution is $7,000; while those 50 or older can salt away an extra $1,000 for a total of $8,000. If you have access to a 401(k) or other workplace retirement plan, make sure to save at least enough to capture any match that your employer offers on contributions.
If you’re looking for wiggle room in your budget to increase your retirement savings, track your cash flow to see where you may be able to trim expenses. Adam suggests that once you’re an empty nester, you could downsize your home and direct the money you save on housing expenses toward retirement.
Once your retirement plan is on track, you can focus more on saving for college. For many parents, the first stop is contributing to a 529 college-savings plan, an account that offers tax-free investment growth and no taxes on withdrawals if you use the proceeds for qualified higher-education expenses. Nearly all states offer a 529 plan, and depending on where you live, you may get a state tax deduction or credit on contributions if you use your own state’s plan. If your state doesn’t offer a tax break, or if it’s among the few that offer a deduction no matter which state’s plan you use, you may want to check whether plans from other states offer lower fees or better investment options. (Compare plans at www.savingforcollege.com.)
Savings in a taxable brokerage account can act as a source of funding for both retirement and college. These accounts don’t provide the same tax benefits as a 529 plan, but you can withdraw from them for any reason without penalty.
As your kids approach their college years, involve them in the planning process. If your student would need to take on substantial debt to attend his or her school of choice, it may be worth considering more-affordable schools.
Along with loans for students, the federal government offers Direct PLUS loans, which parents of dependent undergraduate students can use to help their kids pay for school. Interest is significantly higher than for student loans—8.05 percent for PLUS loans disbursed from July 2023 through June 2024, compared with 5.5 percent on direct subsidized and unsubsidized student loans. Generally, it’s not advisable for parents to take out loans for college.
