mujitra (´･�･)

A recent U.S. News & World Report article recommended the obvious - fund your retirement accounts before you fund your child’s college education.  I agree.  While there are many vehicles to pay for education expenses, you are probably the only source of your retirement savings.

I say probably, because unless you’re a civil servant, or your company is still offering a good old-fashioned pension, your 401(k), IRA, or Roth IRA may be your primary retirement savings.  It’s a pipe dream to think that you can live on your Social Security benefits.  If you put off contributing to your 401(k), you’ll also be missing out on your company’s matching contributions.  This is free money that you do not want to pass up.

Let’s look at an example of a 22 year-old with a $30,000/year salary, contributing 10% to his 401(k), with a company match of 50% of his contribution, or 5%.  We’ll assume he gets a 3% raise each year, and a growth rate of 8% on principal.  We’ll assume he has an epiphany at age 30, and decides to invest in his child’s education for 4 years rather than his own retirement: click here for the Excel file

As you can see in the attached file, the contributions that he didn’t make, plus the company match that he missed out on during the 4 years, total under $25K.  However, when you take compounding into account, he’ll have $238K less in his account at age 62.

That’s almost a quarter of a million bucks that he’s passing up by not funding his 401(k) for just 4 years.  Quite an opportunity cost!  I hope Junior can land a decent job when he graduates.Maybe he’ll become a lawyer.

But, there are other ways to pay for school, without sacrificing your retirement savings:

• First, tell kids what college costs.  The college they have in mind may be WAY out of your price range.  Plot out a strategy before they have dreams of a 4 year vacation to Sunshine U.
• See what financial aid you can get from the school.  Another plus: retirement savings is not part of the calculation when determining financial aid needs, so sock it away in your 401(k).  Even with the financial aid, remember to add 10-20% on to college costs if your student is planning to live at the school.
• There are student loans, scholarships, and grants available for education.  Apply early so that you get first crack at them.

Finally, look in your own backyard.  Students can also live at home and go to state schools to keep costs down.  And don’t dismiss community colleges; if you’re willing to learn, you can learn anywhere.

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