How to Fund College Education When You Are Trying to Retire

College costs can feel overwhelming — especially if you are trying to retire sometime soon (or even just save for a future retirement). How to fund college education is a critical question and families need to explore all of their options. You are not alone if you are worried about paying for both big expenses — college and retirement. Learn below about average college costs, how other people are funding education and get strategies for paying for both school and your retirement.

What Are the Average College Costs?

The average cost of college — tuition and fees — in 2018-19 is:

• $35,830 at private schools
• $10,230 at four-year state schools

That is a lot. And, it does not include room and board or other living expenses. According to Sallie Mae, the actual overall average that families pay is $26,458.

How Do Families Fund College Education?

Sallie Mae’s recently published report, “How America Pays for College” outlines how people are actually funding college education. The results might surprise you. On average:

• 34% of the funding comes from parent income and savings
• 28% comes from grants and scholarships
• 14% is student borrowing
• 13% is student income and savings
• 10% is parent borrowing
• 2% from relatives and friends

Of course, this data might be a little misleading. The high percentage of funding from grants and scholarships might be due to the prevalence of this money comes from higher tuition private colleges.

For Better or Worse, Parents Prioritize College Over Retirement

Many parents prioritize their child’s education over saving for retirement. T. Rowe Price’s 2017 Parents Kids & Money survey revealed that more parents have money saved for their kids’ college education than their own retirement (53% versus 49%). And, 19% of parents owe $20,000 or more on student loans for their kids’ education.

What is the Right Financial Strategy? How to Pay for it All?

While the motivation to help your child graduate from college debt-free comes from a positive place, remember that college savings for your child should not be your top financial priority. Saving for retirement should come first. The fact is, there are options for paying for college that just aren’t available for retirement, like taking out low-interest loans, earning scholarships, attending community college before transferring to a university, and work-study programs. Plus, neglecting your own retirement saving can hurt your children financially in the long run. What happens when you need to leave the workforce early due to illness or injury and don’t have enough savings to fund your retirement? You could wind up needing financial support from your children just as they’re becoming financially independent. Here are 6 tips for how keep your retirement funds while also helping with tuition:

1. Use IRA instead of 401(k) to avoid early withdrawal penalty.

Under certain circumstances, some education costs like tuition can qualify for a 401(k) hardship withdrawal. However, if you are under 59 ½ years old, you will have to pay a 10% early withdrawal fee. In addition, you will be taxed at a higher rate for the funds you have withdrawn. To avoid these penalties, use an IRA distribution to pay for college expenses instead. Though early withdrawals from an IRA account are typically subject to a 10% penalty, withdrawals used to pay for higher education costs, such as tuition, fees, and books, are exempt from this penalty.

2. Consider a 529 Plan

If you have a bit of runway before you need to fund college education, consider a 529 plan. A 529 plan is a savings vehicle developed specifically to help parents and grandparents save for college expenses down the road. These plans, known as “qualified tuition plans,” are sponsored by states, state agencies or educational institutions that are authorized by Section 529 of the Internal Revenue Code. Contributions to a 529 plan are not deductible, but earnings in the plan grow free from federal taxes and no taxes are paid upon withdrawal as long as the money is used for qualified education expenses, such as tuition, fees, books and room and board, according to the IRS. Some states offer additional tax advantages like full or partial tax deduction or credits for your 529 plan contributions. Anyone can set up a 529 account and name anyone as a beneficiary — including a child, grandchild, friend or even yourself — and there is no limit to the number of plans you can set up.

3. Think about financial aid before withdrawing funds from your retirement account.

If your child is receiving need-based federal financial aid, take this into account before withdrawing funds. Withdrawals from a 401(k) or IRA count as income for the year. Therefore, these withdrawals will affect the amount of financial aid that your child is eligible for. If you can, try to delay withdrawals until your child enters his or her final year of college.

4. Talk with your kids about saving and budgeting.

It is vital that you talk with your kids about the importance of saving and effective money management before they head off to college. If you have not already, open a savings account for your children early on, and encourage them to save a portion of their allowance, birthday or holiday gift money, and income from part-time work during high school. Many college students begin their freshman year without any knowledge of how to manage their money wisely. Discussing budgeting and credit with your child will help set them up for success. This will also help lessen the chances of you having to spend more of your retirement income bailing them out financially.

5. Be aware of the choices you are making and their long-term impact

There are not really right answers for how you save and spend your money — just choices. College costs money. Retirement costs money. Somebody has to pay for it. As such, it is useful to consider both the short and long-term ramifications of your decisions. When considering the tradeoffs, it might be useful to think about what will happen if you spend on college now to the detriment of your retirement savings. Will your child need to help fund your retirement in the future? Are you willing to live at a lower standard of living? What will happen if you run out of money? Conversely, go ahead and explore what will happen if you don’t pay for college. Will your child be unable to attend? Will they need to get a job? Will they be in debt? Will they go to a different school that will give them a different kind of future? Try making a list of the pros and cons of your decisions. And, be honest. It is not always easy to think about what will happen in the future, but it is useful.

6. Take a Look at the Long-Term Impact of Your Decision

The Boldin retirement planner makes it easy for you to compare different scenarios. Log in and see what happens if you:

• Make withdrawals to fund college education (look for the “one-time expense” section)
• Raise your monthly expense levels for the college years
• Take out a loan (add a debt in the debt section)

The planner will immediately show you how any of these actions will impact your finances. If you pay for college:

• Will you run out of money in retirement?
• How is your cash flow impacted?
• How much lifetime debt will you accrue
• What is the result on your estate

If you don’t like what you see, but still want to fund college, you can start tweaking other aspects of your play: working longer, cutting expenses and tapping home equity are some of the best ways to improve your lifelong finances.