More parents are waiting to have children later in life, meaning their savings goals for retirement and their children’s college education are often on a crash course.
The average age of American women having their first child has increased over the past four decades, in part a reflection of an increase in women ages 35 and older becoming mothers for the first time, according to the Centers for Disease Control and Prevention. A parent who is around 40 when he or she has children will be close to 60 when that child is entering college – an age when, for many, retirement looms large on the horizon.
“Unfortunately, the people close to retirement are really in this emotional bind, where they want to be able to promise any school at any price, but they know that they really need to be sensitive to how much they pay,” says Tim Higgins, a certified financial planner and author of “Pay for College Without Sacrificing Your Retirement.” “Because it’s going to directly impact them soon, even while the student’s in college or soon after.”
Leslie Germond, 53, who lives in Holden, Massachusetts, says she and her husband hope to retire a few years after their 18-year-old son graduates from college. Her husband, a teacher, will work until he can take full advantage of his pension, she says.
But with what they’ve saved in their son’s college savings account and a Roth IRA – in addition to a generous tuition assistance program from her employer, Becker College – she thinks they can both retire from full-time work between the ages of 60 and 62, early enough to enjoy retirement and travel.
“I have seen too many people work well into their 60s and beyond, only then to become ill or pass away and never have the chance to fully enjoy the fruits of their labor,” she says.
The key is finding ways to save for college that don’t threaten parents’ retirement savings, experts say. While there are multiple options for paying for college, “no one is going to give parents a loan to retire,” says Brett Tushingham, a certified financial planner and founder of Tushingham Wealth Strategies in Wilmington, North Carolina.
“I understand we want the best for our kids, but families shouldn’t have to mortgage their future or their retirement to get it,” Tushingham says.
For those close to retirement, the following college savings strategies may be the solution.
1. Tap into Roth IRAs and other tax-advantaged vehicles: Roth IRAs offer tax advantages and unique flexibility for both college and retirement. Parents can tap into the principal without paying taxes and penalties any time and use the money for any purpose.
“With Roth IRAs, you get the best of both worlds,” says Tushingham. “You can save for retirement and college in the same vehicle.”
However, there are limits on eligibility based on income, and contribution limits for those over the age of 50.
Tushingham says he doesn’t recommend opening a Roth IRA with the singular intent of saving for college, but views it as a “fallback strategy” for college if contributions are needed.
He also suggests using an education-specific savings account, such as a 529 plan, which has tax advantages but doesn’t have income limitations.
Earnings in a 529 account grow without being subject to federal taxes, and distributions are not taxed as long as they’re used for qualified education expenses.
2. Look at other retirement accounts: Experts warn to be careful here, but one potential advantage of being an older parent is that by age 59-and-a-half, individuals can tap into their retirement accounts penalty-free to use for college.
Higgins says he tells clients to first take stock of their financial position and retirement goals. If they are on track to reach or exceed those goals, retirement accounts can be used as a safety net for college.
“It’s really looking at retirement first, because that’s going to dictate what’s on the table and what’s not,” he says.
He cautions that parents who pull out retirement funds should consider financial aid implications. While retirement accounts are not counted as assets on the Free Application for Federal Student Aid, any distributions taken out are factored in on the next year’s application. If a family thinks it will be eligible for need-based aid, he suggests using those funds in the final three semesters of college, after the final form has been filled out.
3. Be conservative as your child nears college: For parents with a child nearing college, Higgins recommends a more conservative investment mix, especially in college savings plans or accounts with college savings intentions, since they will need to be liquidated within a short time frame.
“Even though you can’t be promised high rates of return, I would rather preserve what you have rather than taking on more risk,” he says.
Higgins says age-based 529 plans, which move from an aggressive to a conservative mix of investments as a child nears college, can be useful for that reason.