College vs. retirement: Navigating the savings dilemma

Young mother prioritizing between saving for retirement and saving for college.

Many people struggle to set back money for education, while still contributing to retirement savings—and having enough left over for everything else. Principal can help you learn how to prioritize.

Holmes and Jennifer Osborne of Kansas City, MO, are eager to save for college for their baby daughter, Adelaide. Holmes, 35, filled out the paperwork for Adelaide's college savings account while she was still in the maternity ward. "A hundred dollars here, three hundred there, and we'll build this puppy up," says the proud dad.

The couple is less enthusiastic about their retirement savings. They're still paying off debt from Jennifer's graduate school, and while Jennifer contributes the maximum allowable amount to her 401(k) retirement plan, Holmes doesn't contribute as much to his plan.

How to decide where the money goes with so many competing priorities?

Put retirement first.

Like many couples, Holmes and Jennifer could benefit from revisiting their savings priorities. There are good reasons to make retirement your number-one financial objective.

  • Time can be a key to building retirement savings. You may be tempted to focus on retirement only after your kids finish school. But to accumulate the savings you may need, you’ll have to contribute early and consistently to your tax-advantaged retirement plan.
  • You can pay for college many ways, but only your savings can fund retirement. Government-subsidized loans, work-study programs, scholarships, and your children's own savings can make a significant dent in tuition bills. The same can’t be said for retirement income.
  • Your children may qualify for more financial aid if you save for retirement first. Retirement plan assets don't factor into federal financial aid calculations, but college savings accounts often do. With a nest egg set back in retirement savings, even families with relatively high incomes may  qualify for grants, loans, and other assistance.

Bear in mind that your long-term financial security is a gift to your children. Save aggressively for retirement now, and you may not need your kids to support you financially later on.

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