For Too Many The Choice: 529 or Retirement Funding?

For Too Many The Choice: 529 or Retirement Funding?

Far too often, I meet with parents that have more money in 529 plans than in their own 401(k)s. The decision of how to split savings between retirement and education for kids is not an easy one. Incomes have not risen substantially over the last decade, making it harder to produce enough of a surplus to allocate for both purposes. The prevalent education option is the 529 plan. For retirement, there is an assortment of tax advantaged options. The question is: does it make sense to fund your child’s college fund or should you first focus on putting money away in retirement vehicles?

Study after study tells us people are not saving enough for retirement. Most people are going to need more than Social Security to sustain their pre-retirement lifestyles. The primary vehicle is the company retirement plan, which should be utilized early and often. As for education, the argument can be made that the current cost of education isn’t worth the investment. The amount of outstanding debt tied to school loans is now in the trillions. Those that spend close to six digits or more on education do have a better chance at continued employment, as evidenced by the recent unemployment numbers. But a rising default rate on student loan repayment tells us that many college graduates simply aren’t earning enough to pay back their student loans.

For parents, therefore, the key word is flexibility. I would suggest that after funding retirement plans, any surplus funds should be allocated to vehicles that can be used for both purposes. Roth IRA contributions can be used for education funding. Cash value life insurance policies can be borrowed against to pay for school. Home equity, assuming it’s available, provides a tax advantaged method of borrowing for educational expenses.

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This flexibility allows you to use a combination of these options while still leaving enough assets to meet retirement goals. If the tuition bill is so steep that retirement is endangered, it simply isn’t worth it.

We’re approaching a point where parents may have to overcome the moral obligation to spend as much as possible on their child’s education and start focusing solely on putting away enough money to retire. There are those that can do both and that’s great. As long as the budget doesn’t suffer, it makes sense to put money towards both retirement and education. But for those that have to make a choice, retirement must be the primary focus. With that in mind, a parent can use a variety of vehicles that also leave the door open for funding education at a reasonable cost.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]