Why Retirement Savings Should Trump College Savings

401k college

Parents, please repeat after me: Retirement comes first, college ranks second. Again: Retirement comes first, college ranks second.

What I mean is when it comes to deciding where to focus your savings efforts, it's usually best to make retirement a priority over accumulating tuition dollars.

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I say this assuming most readers are like me and must set financial priorities. Their incomes allow them to put aside only a certain number of dollars each week or each month.

If you find yourself in this category, then put more dollars in the 401(k) and less in the college savings fund. By no means am I saying you should save nothing for college. It's more a matter of emphasis.

The basic reason I say retirement deserves greater emphasis is that your sons and daughters have more options when it comes to financing higher education than you do when it comes to covering living expenses in your old age.

For 18-year-olds, there are scholarships, grants, loans, public universities, community colleges and more than 45 years of income-earning potential. For retirees with no savings, there's Social Security, Medicare and little time to make up for past mistakes.

Liane Warcup, a financial planner in Geneva, Ill., tells her clients with young children to make sure their retirement savings are on target before they think about saving for college.

"Many of these only have 15 to 20 years left to save for retirement, and they need every extra dollar to help strengthen their retirement plan," Warcup says. "In contrast, their children have a much longer time horizon to handle college expenses."

If you wait until your children are done with college to begin saving for retirement, then you will never be able to catch up. The reason is time, or the lack of it.

A person who begins saving $500 a month at age 30 can accumulate more than $900,000 by age 65 if you assume a 7-percent annual rate of return.

But if that person waits until age 50 to begin saving, it would require setting aside more than $2,800 a month to accumulate that same amount.

The most powerful advantage any retirement investor can have is time. Waste that time, and you will never get it back. That's why you can't wait to begin saving for retirement.

A second reason I tell parents to focus on retirement savings over college savings is that you get more bang for your buck with retirement savings. The bigger bang results from the upfront tax savings of contributing to a 401(k) or similar retirement savings plan plus any employer matching contribution.

Simply put, you can accumulate more money faster in a retirement plan than even in a 529 college savings plan. The 529 plan is the best college savings vehicle out there, but it's still no match for a 401(k).

Another reason to favor investing for retirement over college is that doing so will provide greater financial flexibility when the tuition bills start to roll around.

The bigger your retirement nest egg when a child graduates from high school, the more latitude you will have when it comes to finding ways to cover the education bills. If by your late 40s or early 50s you're off to a good start preparing for retirement, then you might be able to lay off the retirement contributions a bit and dedicate that money to tuition.

Aware of the debt burden many college graduates carry, parents often will say they want their children to graduate debt free. They should keep in mind, however, that if they have a healthy retirement portfolio, then they can help their children with monthly payments after graduation.

But a delay in retirement savings eliminates that option.

Finally, parents might be willing to take on a little bit of debt themselves if they know they have a sizeable 401(k) account that can help pay off that loan after they've reached 59½.

So don't put yourself in a position that requires you to work into your 70s because you wanted Junior to graduate free.

Instead, worry about yourself first. To do so does not make you a bad parent. In fact, decades from now, your children may thank you for making this decision if it means you support yourself in retirement rather than rely on them.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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