It is a tough choice. Would you dip into your retirement funds to help pay for a college education for your child, or even your grandchild? Some parents and grandparents face that choice. College costs are continuing to rise, and if some children do not get scholarships or other financial assistance, they may not be able to attend the college of their choice — or even attend college at all — without absorbing massive student loan debt.
Parents understand the ramifications of a debt load from their own borrowing experiences, and many are willing to make retirement sacrifices to help their children avoid student debt. According to a new survey by the LIMRA Secure Retirement Institute, almost one-third of Americans are willing to defer a portion of their retirement savings toward assisting their children or grandchildren with college expenses, and 11% of respondents had already done so.
The author of the study, Michael Ericson, points out that college is now considered more of a necessity and that "with the average student loan approaching $30,000, people have been forced to shuffle around their financial priorities and obligations." Approximately 40% of respondents with children or grandchildren consider it an obligation to pay for college for their children/grandchildren, and given the rapidly rising costs, the money has to come from somewhere.
To meet their goals, 10% of respondents have already withdrawn money from their retirement savings to cover family college costs and another 20% are willing to do so if necessary. That is usually counterproductive from an overall financial standpoint. Rules on both traditional and Roth IRAs have been changed to allow withdrawals for college expenses, but even without penalties, the loss of tax advantages are significant — not to mention the diminished growth from having a lower base amount in your account.
An even larger number of respondents would simply delay retirement or work during their retirement years. 8% have already chosen one of those options and another 31% are willing to do so.
As retirement looms, the prospect of diverting retirement funds looks less inviting. The survey found that Millennials were most likely to sacrifice retirement funds for their children's college, but as retirement nears, the percentage of willing respondents decreases.
When facing this decision, it helps to have an overall mindset of saving. The study found that those who saved for retirement were also more likely to save for other reasons, just as previous research has indicated. With a savings mindset, you are more likely to find a compromise that meets the college needs and retirement savings goals to the extent possible.
If you are facing the decision of retirement funds versus college or family members, take a comprehensive look at the alternatives for college. Scholarships, grants, and work-study programs can defray some of the costs. When the question is saving for college in the future, dedicate as much money to your retirement as you realistically can and when saving for education consider using tax-deferred programs such as state-run 529 savings programs.
Your student may have debt to deal with, but they have many years to pay it back. In contrast, as you get close to retirement age, you do not have time to make up for the losses diverted toward college payments. You may still choose college over retirement, but be sure to scale back your retirement expectations appropriately — and it wouldn't hurt to remind Junior to take care of Mom and Dad in return when he is financially able to do so.
Another alternative growing in popularity is using an equity indexed life insurance policy as a savings vehicle which allows you to avoid committing money irrevocably in a 529 plan for education. If your kid needs the money, it’s available on a tax-free basis. If for some reason they don’t need the money, then it’s still invested and available for your own retirement needs.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.
Brad is a Registered Representative with, and Securities and Advisory Services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. CA Insurance License #: 0B22199.