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.
- Save an emergency fund that will get you through a missing paycheck or late reimbursement or small emergency.
- Put money into retirement up to any employer match.
- 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.)
- 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.
- 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?