Personal Finance

How Much Should I Save For Kids College

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

You can’t help but prioritize your kids when you’re a parent. This instinct protects our species when we’re in immediate danger, but it’s not helpful when you’re trying to save money for the future.

Actually, the reverse is true. Putting off your own retirement in order to pay for your children’s education is a bad idea. Consider the following as you plot out your financial future: the cost of retirement vs the cost of your children’s college education.

Should you save for your child’s education or for your own retirement?

Think about the following questions as you sort out your priorities for which kind of savings to focus on. If you can’t afford to put money into both, retirement should be your top priority.

What Are Your Retirement Objectives?

There are people I know who can’t wait to retire so they can hit the road in a camper van and find a quaint little house to call home. And I’ve got lots of friends who dream of seeing the world before settling down on a big, luxurious ranch.

If your retirement living expectations are low-key and reasonable, you can get by with a smaller nest egg. To achieve financial independence and early retirement as soon as possible, many advocates of the FIRE movement employ a method known as “lean FIRE,” in which they drastically reduce their living costs in order to more rapidly amass sufficient passive income. This paves the way for individuals to leave work at a very early age.

Save a lot more money throughout your working life if you want to retire in elegance. Saving more money during your working years allows you to retire in style. You may amass money rapidly if you live on a very low percentage of your income.

Are Your Retirement Savings on Track?

Your options are limited if you haven’t started saving for retirement yet. If you want to have financial security once you stop working, you need to make up for lost time with your retirement funds.

Your children can take a multi-pronged approach to paying for college by choosing from among a wide variety of possibilities. But for the vast majority of Americans, retirement funding can be found exclusively in their savings.

Obtaining a reverse mortgage is possible if you have a substantial amount of equity in your house. There is a good chance that Social Security will pay out to you as well, although the value of those payments has been steadily decreasing over the years.

Look at your retirement savings needs, no matter how unpleasant they may be. Before you start thinking about college funds for your kids, ask yourself if you’re on the right route.

How Much Financial Aid Could Your Child Receive?

There are many different motivations for awarding scholarships and grants by universities, governments, and NGOs. There are some that depend on merit. There should be plenty of merit and athletic scholarships available for your child if he or she succeeds in either academics or sports, or preferably both.

Need is at the center of the others. Numerous scholarships and grants are available to deserving students from low-income households or historically underrepresented areas.

In addition, there is an abundance of specific awards available. There are some that are just bizarre, like the Tall Clubs International scholarship.

Your child may be eligible for financial aid, but don’t count on it. However, talented children often find substantial assistance with tuition costs.

Will You Assist Your Child in Repaying Student Loans?

Try to tell the truth to yourself. Do you coddle your child if they get into trouble? There is a significant possibility that you and your spouse will give in and pay off your child’s college debts if you can’t help but save them. When lenders have amassed a substantial amount of money in interest and fees.

It is usually more practical to prepare ahead of time and spare yourself the cost of interest and penalties. Investing money to assist pay for your children’s college education is a great idea.

The only exception is that you shouldn’t do it if it means delaying your own retirement. Spending less on discretionary items is necessary when preparing for your children’s college tuition is a top priority. That is to say, you’ll have to give up certain things.

In Conclusion: Prioritize your own finances.

Recognize this when you choose whether or not to assist your children financially with their college education. Leaving your children to fend for themselves financially for college is far better than retiring broke and asking them to move in with you or continually hitting them up for money.

There are many more methods to assist kids out that don’t include paying for their education. Assist them in finding and applying for funding sources or deciding where to pursue higher education. These grants and scholarships help students maximize their educational investment and reduce the financial burden of college.

There are several ways for your children to pay for college, including grants, scholarships, part-time employment, and student loans. If you don’t plan ahead for your retirement, you can end up living with your kids or in a dreary retirement home.

In the event that you save more than you need for retirement and have money left over, consider giving it to your children when they’re adults. If you want to show your support, you might assist them out by paying off their college loans or giving them money toward a down payment on a property.

How to Save for Both College and Retirement at Once

Fortunately, it’s not always necessary to decide between retirement and college savings.
If you want to achieve both goals at once, use the following methods.

Think about a Roth IRA

Roth IRAs are fantastic. They are the most adaptable type of tax haven. To begin, withdrawals are always free of both taxes and penalties. Withdrawal of investment profits for qualified higher education expenses (such as tuition, fees, books, and supplies) is tax-free and penalty-free if the account has been open for at least five years.

Earnings can be withdrawn penalty-free for eligible school costs even if the account was started less than five years ago, although income taxes may still be owed. Even with regular IRAs.

In a nutshell, the best way to reap the tax benefits of a retirement account without being limited to a specific purpose is to contribute the maximum amount to a Roth IRA each year.
However, there are income restrictions for Roth IRAs. In 2022, the threshold at which one can make a contribution will drop from $130,000 to $140,000. The Roth IRA “backdoor” contribution option is still available to those with higher incomes.

Increase Employer 401(k) Matching

When it comes to retirement, some companies provide their employees with a 401(k) or similar plan. Additionally, many companies may even double your payments up to a particular wage threshold.

When an employer contributes as well, it’s like getting money for nothing. Make the most of it, there’s really no need to go into detail.

Open an HSA

Health savings accounts (HSAs) provide the highest tax advantages of any tax-favored savings vehicle. The original donation is tax deductible, the investment grows tax-free, and the withdrawal is also tax-free.

In addition, you should reconsider their usefulness for retirement or education savings if you think they are not relevant.

You should save now so that you can pay for future medical bills in retirement. Without a health savings account (HSA), you’d have to go into other funds, like your retirement or your kids’ education fund. According to research by Fidelity Investments, a retired couple can expect to spend almost $300,000 on medical care from the time they turn 65 until the end of their life.

As a result, it’s not a waste of money to put money aside for medical costs. It makes sense to avoid paying tax on money that must originate from someplace.

Open a 529 Savings Plan – For the Benefit of Others

Of course, you may start saving for school by opening a 529 plan. Similar to Roth IRAs, they allow you to save money tax-free. When it’s time to pay for school, you may take the money out without paying any taxes on it.

But 529 plans aren’t as adaptable as other types of savings vehicles for higher education. The Internal Revenue Service levies a 10% penalty on distributions used for purposes other than qualifying school costs.

The dilemma of a parent.

The answer is simple. Launch a 529 plan for your kid the moment he or she enters the world, and encourage all well-wishers to make contributions to the account whenever they ask what to get the new addition to the family. Even when compounded over 18 years, the value of several little presents quickly becomes substantial.

The program is an ideal opportunity for grandparents to contribute to their grandchildren’s education expenses. in addition to cousins twice removed, aunts, uncles, neighbors, etc.

Use a Brokerage Account That Charges Taxes

Saving money on taxes is something that everyone enjoys doing. However, there are situations in which being adaptable is more valuable than a financial gain. The truth is that in twenty years, your situation, requirements, resources, and aims will be very different. There is no guarantee that you can forecast any of them with any degree of accuracy.

Start investing immediately by signing up for a free brokerage account. Don’t feel comfortable making financial decisions on your own? Consider opening an account with a robo-advisor that can make smart investing decisions based on your specific objectives, risk tolerance, and age.

Without having to actively manage the account or choose a specific investment strategy, this account can help you develop money passively every month. In the long run, you’ll have the freedom to decide whether to help pay for your children’s college expenses or let your investment balance continue to grow toward your retirement.

Real Estate Investing

Let’s say that the year your child is born is also the year you decide to invest in a rental property. Your mortgage payment will decrease over the following 18 years, and it will remain the same each month despite the fact that rent will increase due to inflation.

Over the following two decades, your initial $20,000 down payment and $150 in monthly cash flow may grow to $200,000 in equity and $1,500, respectively. You may put the money in a 529 plan until then. The proceeds from the sale may be used to pay off any outstanding education bills, or you could hold on to the “golden goose” and use rental revenue to fund your retirement.

Alternatively, you may try something else. Your child just turned 15, and because they have no summer plans, you’ve decided to “partner” with them in a house flip. Together, you shop for a home, make an offer, and finalize a purchase. You and your partners start to work on the renovations, calling in professionals as needed.

The property is then marketed and sold for a profit. You put the unexpected sum into a 529 college savings plan for them. You can expect to pay short-term capital gains taxes on those profits, but your child’s lower tax rate may allow you to reduce those taxes through a partnership.

You may decide to maintain the home as a rental rather than sell it when the renovations are complete. In this situation, you may invest the money in your child’s 529 plan, use the funds for their education expenses, and then put the remainder toward your retirement when they reach adulthood.

More transactions are made between you and your kid over the course of the following few summers, and in the process, they learn vital skills like bargaining, house maintenance, and contractor management. You inculcate in them a can-do attitude toward investing, which is invaluable.

Finally, be aware that the maximum amount you may put into a 529 plan over the course of your lifetime varies from state to state. Your goal can be within reach if you and your kid flip enough properties.

Bottom Line

You should speak things out when you’re feeling confused, but not with just anyone. Talk to a qualified financial adviser about all your concerns regarding retirement planning.

A financial planner can help you create a strategy to achieve your specific financial objectives. They will assist you in saving and investing enough for retirement and a college fund for your child based on your income, retirement savings, and personal finances.

I’ve found that adopting a frugal mentality and way of life may put you in a position to assist your children pay for college. A high rate of savings, an aggressive investing plan, a variety of passive income streams, and a flexible active income all put you in a good position to replace your 9-to-5 and contribute to your education costs.

Think about using some of the same FIRE investment tactics to help pay for your children’s college expenses as you use for your own.

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