Retirement Savings Trump College Plans

It’s been a tough decade for families saving for college and retirement. The stock market has been virtually flat, leaving many investors short of where they expected to be.

Yet college costs continue to rise at 5% or 6% a year, more than double the overall inflation rate.

As a result, many parents who find their retirement plans in trouble face a nasty dilemma: should they cut back on contributions to their children’s college expenses in order to shore up their own retirement accounts?

It’s a tough decision, but many financial experts say retirement should come first, even if it means the children will finish college with a pile of student loans. A growing number of people agree, according to a Rasmussen Reports survey done for Country Financial, the insurance and investment firm.

Among those surveyed, 43% said saving for their own retirement is more important than saving for their children’s college educations, up from 41% a year ago. About 41% said college savings are more important, down from 47% the year before. About 17% were unsure which was more important, up from 13% a year earlier.

Although most parents want to do all they can for their children, experts cite a number of reasons the parents’ retirement savings should come first. Parents obviously are older, so they have less time to overcome a financial setback.

Also, young people can borrow to pay for college, often at low interest rates, while one generally cannot borrow to fund a retirement. Young people pressed for money can work a few years after high school to save up, start out at a low-cost community college, take a few extra years to finish college so they can work at the same time, or get tuition help by serving in the military.

Country Financial also points out that the parents’ retirement savings can actually help their children qualify for more financial aid. That’s because contributions to 401(k)s and similar accounts are deducted from taxable income. The less income the family has, the better its chances of getting financial aid.