Managing competing financial goals is a challenge that many individuals 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:
- How much should I be contributing toward each goal?
- 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?
While the thought of balancing these competing goals might cause anxiety, don’t fret. Below are four steps you can take to help remain on track as you work toward both goals.
And remember, investing early towards your retirement, especially before having kids, can help maximize compound earnings and give you a good jumpstart towards achieving your goals.
Step 1: What’s it going to cost?
When it comes to retirement, start by carefully evaluating 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 does my personal vision of retirement look like?
- How much income will I need in retirement? As a general rule of thumb, you’ll likely need to replace about 70% of income earned in your last year working.
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? The annual average cost of attending a four-year public college is over $21,000 and the average cost of attending a four-year private college is over $51,000 ($51,690).
Step 2: Prioritize
Once you know the costs of both your vision for 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.
A word of advice, though:
If you’re considering scaling back your retirement contributions in favor of saving more for college, don’t. You can always take out loans for college, but you can’t do the same for retirement.
In addition, if you’re contributing to an employer-sponsored retirement plan — like a 401(k) — that offers matching, be sure to continue contributing enough to take advantage of the full match, otherwise you’re leaving free money on the table.
It may also be helpful to explore opening a Roth IRA, if you qualify, as a potential means to help achieve both goals.
Step 3: Small steps
It’s also important not to let the numbers overwhelm you. Even if you can only contribute a small amount monthly, every bit helps. For example, if you were to invest $50 a month for 18 years in an account with a 7% return rate, you’d have an estimated $22,015 set aside by the time your child starts school. 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 foundation from which to start.
Step 4: Take advantage of education savings vehicles
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
- Can be used to cover qualified education expenses (with no annual cap) at most accredited colleges and universities
- Can also be used to cover tuition costs at both public and private elementary and secondary schools (K-12)
- There is an annual cap of $10,000 when using a 529 plan to pay for K-12 tuition expenses
- Qualified withdrawals are not subject to federal (and some state) income taxes
- The option to change the plan’s beneficiary at any time
- The opportunity for substantial maximum contributions (over $300,000 per beneficiary in many state plans)
When in doubt, seek professional help
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. PNC can help you manage and prioritize your various financial goals.