How to Balance Retirement and Education Costs

Retirement and college are two of life’s big expenses – but can you fully fund both? PNC’s Rich Ramassini shares three steps for creating a plan that can help you achieve your future financial goals.

Managing competing financial goals is a challenge that many people face all too often. Specifically, balancing the need to invest for one’s retirement alongside other goals like saving for a child’s college education can lead to difficult questions like:

  • Should I prioritize one goal over another?
  • What should I do if I can only afford to focus on one goal at a given time?
  • How much should I be contributing toward each goal?

While the thought of balancing these competing goals might cause anxiety, don’t fret. Below are three steps you can take to work toward your goals. And remember, investing early, especially before having kids, can help maximize compound earnings and give you a solid head start.

graphic of a family with a life insurance policy

Step 1: Prioritize

Determining how to spend and invest your hard-earned money is a personal decision that depends on many factors, including personal beliefs, cultural norms and other financial obligations. A few key considerations can help you prioritize your spending and investing.

"When you listen to the safety instructions in an airplane, they always ask you to secure your own oxygen mask before helping others – I look at investing in your retirement the same way – invest toward your retirement first, then help others,” says Rich Ramassini, a Certified Financial Planner and senior vice president at PNC Investments. “Typically, people have more options for funding educational costs than for funding retirement. You can generally take out loans for college or your child may be eligible for scholarships, financial aid or work-study opportunities that you aren’t yet aware of. However, if you allocate excess funds into a college savings account, you may miss out on opportunities to adequately invest for your retirement.”

Step 2: Determine Costs

When it comes to retirement, carefully evaluate how much money you’re going to need to put away. Ask yourself questions like:

  • How much time do I have until I can reasonably expect to retire?
  • What is my personal vision of retirement?
  • How much income will I need in retirement?

Next, calculate the expected cost of your child’s or grandchild’s education.

  • How much time do you have until he or she will enroll in college?
  • What are the expected costs?

Once you know the costs of both your retirement and your child’s or grandchild’s college education, you can revisit your budget and determine how much you can reasonably afford to invest toward each goal.

For example, if a person earning $75,000 per year wanted to aggressively invest for retirement and for a child’s college education, that could exceed 40 percent of their total pay1. In reality, the average American only saves about 4 percent of their disposable income2. For many, the answer lies somewhere in between.

Step 3: Take Small Steps

If you’re contributing to an employer-sponsored retirement plan – like a 401(k) – that offers matching contributions, be sure to contribute enough to take advantage of the full match, otherwise you’re leaving free money on the table.

It also may be helpful to explore opening a Roth IRA, if you qualify, as a potential means to help achieve both retirement and education funding goals.

It’s also important not to let the numbers overwhelm you. Even if you can only contribute a small amount monthly to college costs after investing for retirement, every bit helps. For example, if you were to invest $50 a month for 18 years in an account earning 8% interest, you’d have an estimated $22,470 set aside by the time your child starts school3. It may not be enough to cover the full cost of a college education, but it certainly provides your child or grandchild with a solid place to start.

When it comes to saving for college, the most commonly used account is called a 529 plan. A 529 plan is a tax-advantaged investment vehicle with advantages that include:

  • Potential for tax-deferred growth
  • Qualified withdrawals are not subject to federal (and some state) income taxes
  • The option to change the plan’s beneficiary at any time4
  • The opportunity for substantial maximum contributions (over $300,000 per beneficiary in many state plans)

For many, funding a child’s college education is a major priority. However, it’s important not to do so at the expense of your own retirement assets. Everyone’s finances, priorities and goals are different, so talking to a financial advisor can help you develop a plan specific to your needs.

Learn how PNC can help you create a financial plan for your goals » 

1Maximum annual 401(k) contribution of $18,000 plus maximum annual IRA contribution of $5,500 if under age 50, plus saving $6,000 annually toward tuition costs results in 40 percent of a $75,000 salary.

2https://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

3Example is for illustrative purposes only and assumes an annual rate of return of 8%. Rate of return does not reflect the actual return of any specific investment and does not guarantee or imply actual results.

4 The account owner may change the beneficiary of the funds at any time, though this is limited to a first cousin or closer relative (to avoid tax consequences).

Rich Ramassini

Rich Ramassini is a Certified Financial Planner and senior vice president at PNC Investments
If you have to make a choice between funding your retirement or your child’s education – and most people do need to make this choice – consider investing in your retirement first, then seek other opportunities for college funding.

-Rich Ramassini