Ask the grumpies: How much to save for different long-term priorities

Ali asks:

How much to save for college vs retirement vs other savings, etc.  Basically, tell me what to do.

The vast majority of our readers should max out their retirement savings prior to saving for kids’ college.  The reason for this is that you can get loans for college, but you can’t get loans for retirement AND US colleges don’t include retirement savings in their financial aid calculations.   That means every dollar that you hide in retirement is a dollar the universities don’t take into account for their financial aid calculations.  If worse comes to worse (ex. student loan rates are high), you can contribute less to retirement while the kids are in college (because you already have so much saved up) and cashflow some of those college expenses with what you would have contributed to retirement.

Disclaimer:  This is not what we did.  Originally I paid a lot of attention to the “recommended” savings percentages in various books and made sure we were putting away 20% of our income for retirement (recommended is 10-20%, we were on the “went to graduate school and need to save extra to make up for low savings years” track).  Then some extra money went into 529s (tax advantaged college saving) for our kids and then the stock market went crazy in a bad way (remember 2008?) and we started prepaying our mortgage as well.  It wasn’t until later that we started contributing to a 457 plan, even though that would have made more sense than contributing to the 529s.

The following assumes you have no debt other than a low interest mortgage.

  1. Save an emergency fund that will get you through a missing paycheck or late reimbursement or small emergency.
  2. Put money into retirement up to any employer match.
  3. Save an emergency fund that will get you through a reasonable job loss or other large expense.  (A Roth IRA is a good place to stash this when you’re just starting out since you can tap the principal without penalty and it can go to retirement if you don’t have a major emergency.)
  4. Save 10-20% of your gross income for retirement (or the max if are a high earner).  Play with retirement calculators to get more specific on the percent.
  5. Start putting money away in a 529 plan based on how much you’re planning to contribute and what schools your kid is considering.  We have more details here, and also more generally with other 529 posts.  The short is you’ll want to play with some college savings calculators AND the financial aid calculators at individual schools that you’re looking at.  (You might want to pay down your house at this step instead because colleges don’t use most housing wealth in their calculations for financial aid, but play with those different assumptions with the calculators.)

I DO think it is important to have a 529 for relatives to put monetary gifts in if you have relatives who are likely to think that’s a good idea, and don’t just have one for the oldest boy even though the money is fungible across kids.  That’s not how gifts work– people want to give to both kids, not just one.

So… I guess that’s the basic advice.  There are exceptions to the above– people who have access to a backdoor 401k at work but don’t have high incomes might never be able to max out their retirement, for example.

Grumpy Nation:  What advice would you give?  How do you decide how much to save where?

16 Responses to “Ask the grumpies: How much to save for different long-term priorities”

  1. bogart Says:

    I’d add that how old you will be when the not-so-LOs-anymore start college (or even finish college, or start graduate school, depending on your circumstances and objectives) can also matter. I’ll be (very) close to 59.5 before DS graduates HS, and DH was older than that before DS started kindergarten. We’re outliers, obviously, but once you reach that age, you can (but don’t have to) pull $$$ out of (at least the more usual) retirement savings accounts with no penalty, and I’m guessing lots of the readers of this blog are the same demographic that’s delaying having children, so…

    And — if you are eligible to contribute to one it’s very likely good to max your Roth IRA contributions before saving in a 529, as you can always pull those out without penalty. That can, I suppose, be some of where you put the money you are saving as item 4 in the list above. But I’d want to at least hit 20% (total, i.e. Roths + other) on that before contributing to any college accounts.

    I live in a state that offers no state tax advantage for 529 contributions/accounts. Other states are different, so that could also be something to find out about and factor in.

  2. Sara Says:

    CNBC posted an article today about retirement savings that claimed people need to save 40% of their income for retirement (https://www.cnbc.com/2019/10/23/millennials-need-to-save-an-huge-percent-of-paycheck-to-retire-at-65.html), but I couldn’t seem to find the actual basis for that claim. I always figured saving 25% for retirement was pretty good since I don’t plan to retire early, unless I have to.

    • nicoleandmaggie Says:

      Olivia Mitchell does good work. My guess is that millennials are no longer in their 20s and many of them haven’t started saving much for retirement for various reasons, so they’ve missed a lot of time early in their careers that they could be saving.

      It is also very likely that stock returns will be lower (we haven’t been investing in long-term growth) and it is definitely true that taxes will be higher for millennials. There are a bunch of train wrecks coming down the line in terms of taxes.

      The paper they link to is a 2014 paper by Jim Poterba. It seems to be focusing on how we’re going to have to cut Social Security in the future and on how private companies mostly no longer have defined benefit pensions.

    • bogart Says:

      … and the Poterba paper is available for free download. I haven’t read the whole thing, but another factor it mentions is longer lifespans, which also seem like a significant challenge in saving effectively for retirement.

      • nicoleandmaggie Says:

        Yeah, that’s one of the reasons economists are less down on annuities than other folks. We think of them as an insurance product. The delayed annuities that Olivia Mitchell is talking about in the article are really popular among academics right now (in terms of recommending them– I don’t know that people actually have them).

    • Leah Says:

      That is a high, high bar. I save a lot in retirement . . . the friends I’ve talked about with it are like “why do you stress about money and save so much? Just put less in retirement.” No, thanks. I’ll slow down when that pot is big enough. I think the idea of putting away 40% in purely retirement is simply unrealistic for pretty much everyone. I put away a third of my income for retirement, and I definitely dig a little to make that work. I find it important because I didn’t save very much in my 20s for retirement. I suppose I could hit 40%, but I have a lot of factors that work in my favor, and 40% would definitely give me a lifestyle hit.

  3. Revanche @ A Gai Shan Life Says:

    We put away a LOT in JB’s 529 for 4 years and it’s set up to accept monetary gifts from relatives. I stopped the 529 contributions because I have been way behind on retirement savings.

    A shame I didn’t think about that a few years ago when the market was doing its thing! I suppose it still is but you know that thing about hindsight. I haven’t had access to a decent 401K in almost a decade and I was distracted with the whole child thing. I’m not quite as good at multitasking financially as I thought I was! Now our money is going into maxing PiC’s 401k and then a separate brokerage. I mostly feel at peace with how we saved because we did set a solid foundation for JB’s college savings and we are aggressively saving our investments.

    There’s part of me that remains nervous about not having enough for retirement in time but realistically, if we shifted the money from that 529 to our brokerage, it still wouldn’t have taken us as far as I need to be at peace so I don’t have regrets. Just a touch of anxiety.

    We would really like to save 30-40% for retirement but that’s really the most we could save if we’re really careful to spend wisely. Some of that savings will definitely be diverted to our home maintenance and larger spending needs like car replacement whenever that happens.

    • nicoleandmaggie Says:

      You’re probably building a lot of home equity that you could tap into if you needed to on retirement, either by selling or by taking out home equity loans (or a reverse mortgage).

  4. SP Says:

    This is where we landed. We both have 457s, 403bs, mandatory pension savings, backdoor Roths, and T has one other account that I think I could use as a megabackdoor roth, though the after-tax limit combines with 403b I think. I haven’t quite figured it out. So, yeah, the 529 is just for gifts in hopes that someone will give her savings instead of a plastic toy.

    I was mistakenly/stupidly thinking you had to pay 10% to get any money back out of a 529, but it would only be on the earnings (right?), similar to a Roth. So, this made me much more comfortable with the idea of large sums 529. But it is still not a priority.

  5. First Gen American Says:

    Been listening to a lot of podcasts on the topic. Isn’t there also some rule about parents 529’s vs other relatives and how it affects perceived savings? Parents count but other relatives don’t until the kid starts cashing out. So, If a grandparent is giving money, then don’t do it til their after their junior year so that it isn’t counted towards income for the following year?

    I like your list. I think my latest strategy for college is contributing some after tax contributions to my 401K and then backdoor converting to Roth annually. I may suspend 529 Contributions altogether. That way there is no risk of over saving for college. If it doesn’t get used, I can use it for retirement. If all your other bases are covered, then why not?

    • nicoleandmaggie Says:

      Yes, kids’ 529s are counted a lot for financial aid, parents’ 529s in custody for the kid is counted as any kind of non-retirement/non-house investment, grandparent’s aren’t counted until the year after they’re tapped, IIRC. (Forbes has an article discussing this, I think.)

      I’ve been thinking hard about 529s these past couple of weeks, so there should be a really obnoxious post coming up on the topic soon.

  6. Should I put lump sums in the 529 instead of dollar cost averaging? | Grumpy Rumblings (of the formerly untenured) Says:

    […] college or vocational school such that the earnings are tax-free.  But, it’s a good idea to max out your retirement before setting money aside in 529 plans because retirement accounts aren’t included in college financial aid calculations and you can […]


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