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.
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.
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 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.
PNC Point of View
Real People. Real Perspective. Real Insights.
Read more POV Stories »
Important Legal Disclosures & Information
Important Investor Information: Brokerage and insurance products are:
Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
Not Insured By Any Federal Government Agency • May Lose Value
Securities products, brokerage services and managed account advisory services are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and member FINRA, and SIPC. Annuities and other insurance products are offered through PNC Insurance Services, LLC, a licensed insurance agency.
The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should seek the advice of an investment professional to tailor a financial plan to your particular needs. For more information, please contact PNC at 1-888-762-6226.
The PNC Financial Services Group, Inc. (“PNC”) uses the marketing names PNC Wealth Management® and Hawthorn, PNC Family Wealth® to provide investment, wealth management, and fiduciary services through its subsidiary, PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and to provide specific fiduciary and agency services through its subsidiary, PNC Delaware Trust Company or PNC Ohio Trust Company. PNC also uses the marketing names PNC Institutional Asset Management®, PNC Retirement Solutions®, Vested Interest®, and PNC Institutional Advisory Solutions® for the various discretionary and non-discretionary institutional investment activities conducted through PNC Bank and through PNC’s subsidiary PNC Capital Advisors, LLC, a registered investment adviser (“PNC Capital Advisors”). Standalone custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds are also provided through PNC Bank. Securities products, brokerage services, and managed account advisory services are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and member of FINRA and SIPC. Insurance products may be provided through PNC Insurance Services, LLC, a licensed insurance agency affiliate of PNC, or through licensed insurance agencies that are not affiliated with PNC; in either case a licensed insurance affiliate may receive compensation if you choose to purchase insurance through these programs. A decision to purchase insurance will not affect the cost or availability of other products or services from PNC or its affiliates. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”). Investment management and related products and services provided to a “municipal entity” or “obligated person” regarding “proceeds of municipal securities” (as such terms are defined in the Act) will be provided by PNC Capital Advisors.
“PNC Wealth Management,” “Hawthorn, PNC Family Wealth,” “Vested Interest,” “PNC Institutional Asset Management,” “PNC Retirement Solutions,” and “PNC Institutional Advisory Solutions” are registered service marks of The PNC Financial Services Group, Inc.
Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value.
Insurance: Not FDIC Insured. No Bank or Federal Government Guarantee. Not a Deposit. May Lose Value.
These articles are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. PNC urges its customers to do independent research and to consult with financial and legal professionals before making any financial decisions.
This site may provide reference to Internet sites as a convenience to our readers. While PNC endeavors to provide resources that are reputable and safe, we cannot be held responsible for the information, products or services obtained on such sites and will not be liable for any damages arising from your access to such sites. The content, accuracy, opinions expressed and links provided by these resources are not investigated, verified, monitored or endorsed by PNC.