Believe it or not, your nest egg should really come first.
A friend of mine in her late 40s hasn’t contributed money to a retirement savings plan in years. Neither has her spouse. And the reason isn’t that they’ve been blowing all of their money on things like vacations. Rather, it’s that they’re aggressively trying to fund their children’s college accounts to spare them the stress of graduating with piles of debt.
One of their children is only a couple of years away from going to college. The other is two years behind the first. All told, they don’t have a ton of time to ramp up their college savings. And because money was tight when their kids were younger, they got a late start.
I think what they’re doing is noble. But I also think it’s dangerous. And I’ve communicated this to them on multiple occasions.
The fact of the matter is that by not funding an IRA or 401(k) plan for so many years in a row, my friends are putting themselves at risk of not having enough money in retirement. And that could end up being problematic not just for them, but their kids as well.
When you retire without adequate savings
It’s unfortunate that many seniors reach retirement age without having saved enough. These people are often forced to live largely on Social Security, which is not an easy thing at all. But in my friends’ case, they’re looking at retiring with inadequate savings because of misplaced priorities.
My friends have some money set aside for retirement, but it isn’t a lot. And at this point, they don’t anticipate resuming retirement plan contributions until they’re in their mid- to late 50s. If they retire in their late 60s, that gives them only 10 years to pump money into an IRA or 401(k) to make up for lost time.
Of course, their hope is that they’ll have saved enough money for their kids to go college debt-free. But while they might manage to spare their children the hassle of having to borrow for college, in prioritizing educational savings over retirement savings, they also might end up having to burden their kids later in life by asking them for money when they don’t have enough.
My friends insist it will never come to this as far as their kids are concerned. But you never know.
And that’s why putting college savings ahead of retirement savings is a bad idea. Borrowing for college isn’t ideal, but a lot of people do it. And it’s possible to do it in a relatively affordable manner. It’s a lot harder to borrow money affordably as a retiree when your nest egg and Social Security benefits fall short.
Don’t set yourself up for a stressful retirement
I’m not sure that I’ll manage to get through to my friends and get them to reset their priorities. And ultimately, I have to respect the fact that it’s their decision to make.
But I do want to convey what a dangerous thing it can be to put college savings ahead of retirement savings. The ideal thing would be to set funds aside for both. But if you have to choose, it makes sense to prioritize your nest egg and do your best on the college savings front. If your kids wind up with loans, they’ll have their entire adult lives to pay them off, and they’ll certainly be in good company.
