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For parents, a growing problem is adequately saving for their children's education while balancing their own need to save for retirement. In fact, according to Yahoo! Finance, "A staggering 51% of parents now worry they’ll have to ‘put off retirement’ after cosigning their kids' college loans."

In-state tuition and fees at public national universities have grown by about 56% - U.S. News

The cost of education has been steadily increasing over the years, significantly impacting students and families. In-state tuition and fees at public National Universities have surged by about 56% over the past 20 years, with the average annual tuition fees for a public 4-year institution reaching $10,410 in 2023-24.  Unfortunately, tuition prices are projected to increase by an average of 8% per year, meaning college tuition could double in only 9 years.


Source: College Board - Trends in College Pricing

Of course, parents who are trying to save for their children's education are also likely saving for retirement and often have to decide between the two.

Compounding this, retirement costs are also rising significantly, reflecting the diverse lifestyles individuals aspire to in their retirement years. A recent study indicates that most Americans now believe they will need nearly $1.5 million saved to retire comfortably. This marks a 15% increase from the previous year, a growth rate that far surpasses the typical 3% to 5% inflation rate, and represents a 53% rise since 2020.

As education and retirement costs continue to climb, starting to save early for both is more important than ever. These financial pressures necessitate a well-thought-out savings strategy to secure future stability. But how can you efficiently allocate funds for both education and retirement without compromising on either goal?

Create a budget that includes education and retirement savings

Your first step should be to assess your income, expenses, and financial goals to determine how much you can afford to allocate to each. Once you have a clear understanding of your financial landscape, including how much you can invest in each area, start implementing strategies like automating your savings to ensure consistent contributions to both education and retirement funds.

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Strategies to Reduce College Expenses

Investing early is crucial, as it gives your investments more time to grow and benefit from compound interest. But there are ways to stretch education dollars even without an investment account:

  • Apply for financial aid and scholarships to reduce the burden of educational expenses
  • Consider reducing educational costs by attending an in-state school
  • If your child will attend an out-of-state school, encourage them to take some of their transferable classes online at an in-state university 
  • Encourage your child to put money away for college expenses while they are working during their high-school years 
  • High-school AP courses that earn college credit are free or relatively inexpensive as the same course taken in college may cost thousands. Additionally, earned AP credits may accelerate completion of college, potentially providing significant savings
  • Consider dual enrollment opportunities in high school. In some states, high school students can take college courses which count both toward their high school diploma and college credit hours

Exploring tax-advantaged accounts for education and retirement

Another smart strategy is to explore tax-advantaged accounts for education and retirement. These accounts offer various tax benefits that can help you save more effectively. For education savings, consider a 529 plan. These accounts offer tax-free growth and withdrawals when used for qualified education expenses. For retirement savings, take advantage of employer-sponsored retirement plans like 401(k)s or individual retirement accounts (IRAs). These accounts provide tax advantages such as tax-deferred growth or tax-free withdrawals in retirement. By utilizing these tax-advantaged accounts, you can maximize your savings potential while minimizing your tax liability.

Investing wisely for both education and retirement

Investing wisely is crucial when balancing education savings and retirement investments. Start by diversifying your investments with a mix of stocks, bonds, and other vehicles that match your risk tolerance and time horizon. For education savings, choose investments appropriate for your child's age, and as they get closer to college, gradually shift to more conservative options to protect the funds. Involve your child in education funding decisions by discussing costs and encouraging contributions through part-time work or scholarships. This builds their financial literacy and fosters a sense of responsibility for their future education. For retirement, focus on long-term growth with higher return investments and regularly review your portfolio to stay aligned with your goals.

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Communicate goals and limitations with your child

As important as savings are, make sure that you and your prospective college student understand the goals and any limitations on available funds. If you can only afford to pay for part of your child's education, then help them understand their responsibilities for the rest and together, develop options to secure funds beyond your contributions, such as co-signing student loans. 

Seeking professional advice when needed

When it comes to managing your finances and balancing education savings and retirement investments, it can be beneficial to seek professional advice.

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Post by Team Worthy
May 22, 2024