A short college fund has backups like student loans, scholarships, and cheaper schools, while a short retirement fund leaves you working longer or living on less. Fund your own retirement first, starting with every dollar of your employer’s match, and put money toward college only after your retirement savings are on track.
It’s tempting to do it the other way around. A 529 college savings plan carries your child’s name, while a bigger 401(k) contribution feels like money you’re keeping for yourself.
Shortchanging your retirement doesn’t spare your kids anything. It can hand them the bill later, when a parent who ran short needs help with rent or medical care just as they’re raising families of their own.
Time favors retirement dollars saved early, too. At a 7% average annual return, $5,000 a year invested for 10 years starting at 35 grows to about $267,000 by 65. Starting at 55, you’d need roughly $19,350 a year to reach the same total, by our math.
The FAFSA, the application for federal student aid, also leaves retirement savings out. It doesn’t count the value of your 401(k), IRA, or pension as an asset, though a 529 plan for your student counts as a parent asset. Withdrawals from retirement accounts do count as income. That’s one more reason not to plan on tapping them for tuition.
Work through it in this order:
- Contribute enough to your workplace retirement plan to get the full employer match, which is part of your pay.
- Raise your retirement savings, counting the match, to 15% or more of your gross pay. That’s the yearly target Fidelity suggests.
- Once you reach that rate, open a 529 plan and send it whatever you can spare. More than 30 states, counting Washington, D.C., give a state income tax break for contributing, according to Saving for College, so check your home state’s plan first.
Revisit the split every time you get a raise. Once your retirement savings rate is at its target, part of every raise can go straight to the 529.
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