Can You Save for Retirement and for Kid’s College Tuition Simultaneously?

Takes a villageIt is possible for parents to fund for both college tuition and their retirement but only if they begin saving 15% of their income early – how unlikely is that?

The cost of education is going to be highest for parents with younger children. For a couple today with a newborn, it’ll cost $455,585 to send him or her to a four-year private institution with the cost of a public institution around $202,768.

Let’s take a look at a hypothetical (and unrealistic) married couple. They’re 28 years old with a newborn, and they want to have a second child in a couple of years. The couple has been working since age 22 and earns a total income of $60,000. Their salaries are growing, and they’ve also been adding to their 401(k)s since they've started working and earning an average annual rate of return of 6.5%.

In addition, the couple’s been saving for college since the birth of their first child and they’re earning an annual return of 6%. They can accumulate $6.5 million by age 65 if they start saving 15% of their salaries in their 401(k)s at age 22. That deferral rate includes the couple’s 12% contribution and a 3% company match. When the first child is born, the couple (at age 28) can reduce their retirement plan savings rate to 12.2% and start to invest the difference or about 2.8% of salary into a 529 college savings plan.

After the second child arrives when they’re 30, they will continue saving to their 401(k), but at 9.4%. The difference (5.6% of salary) continues to go toward the college savings plan. When the first child begins her freshman year of college and the couple turns 46, they can up their retirement plan savings to 12.2% and continue to fund the college plan. After the youngest kid starts college, the parents can go back to their original 15% deferral rate into their retirement plans. They’ll need to keep that level of savings until they retire at age 65. Maybe I'm being too hard on the average American family or maybe it's my own life experience - all I can say is that this is such an ambitious plan that it might be impossible to achieve.

Of all the possible scenarios I've provided, here is something that is achievable: grandparents are allow to gift directly to the institution to pay the grandkids’ tuition without having to file a gift tax return or they can have a trust make these payments at their death in their estate plan thus helping their children achieve what might otherwise be impossible.  Are you interesting is learning more about your own estate plan?  Call us or better yet, request a complimentary consultation by clinking on the link provided.  We'd be happy to help.

Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”


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We've been putting together as many resources as possible so that we can continue to help:

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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.