Education Expenses in the Face of Retirement Planning

I am a parent of two college students and a sophomore in high school, which makes me uniquely positioned to write about planning for retirement while juggling over a decade of college expenses.

You do not want to fund education before retirement plans. The reason is simple: There are other ways to pay for college with loans, financial aid, scholarships, military service, community college and student employment. When it comes to your financial plan, retirement must be priority one.

The cost of attending college has risen above inflation for years. A postsecondary education normally pays off in the long run and is considered by many to be an investment and a core value. So how do you pay for it depending on your current life stage?

New parents:

Ensure you are fully funding your work-sponsored retirement plans because there may be a match. Retirement plans have a lot of unique tax advantages. Funding them is the cornerstone of most financial plans. Retirement accounts generally do not count against the child for federal financial aid. Additionally, Roth IRAs and traditional IRAs can be a secondary source of college funding (income taxes may apply, and distributions are counted in financial aid calculations).

Many parents follow the pay-as-you-go method with tuition, while others pay later with interest. Neither is as good as saving early and often in the form of an education plan. Ideally you already made the wise decision when your child was born to implement an education component into your financial plan, which is largely funding a 529 plan.

Beginning a 529 plan as soon as the child has a Social Security number gives you the greatest amount of time for the time value of money to work for you. When a 529 plan is specifically used for qualified educational expenses, distributions are tax-free. The combination of time and tax-free compounding of investment returns makes a college education more financially feasible.

If you have not yet set up a 529 plan for your children, do it as soon as possible. Your advisor can help determine the best strategy depending on how much you can invest and how many years you have.

Moreover, have you discussed your educational plan with your parents and in-laws?

Education is something that grandparents are willing to gift toward as it represents something that they believe in, and it suits the legacy they want to leave to the family. In many ways, a gift to a grandchild is a gift to the parents because it helps to relieve the full burden from the parents who are actively trying to fund retirement vehicles.

It is important for grandparents to work with the parents to ensure the education plan is coordinated. This helps to be sure that financial aid calculations, needs-based scholarships and tax ramifications are considered and that the plan is appropriately funded.

Parents of high schoolers:

At this point, unfortunately, time value of money is not on your side.

If college is looming and you have not yet funded a 529 plan, you still might want to do so as you can save/invest for freshman and sophomore year and utilize those savings for junior and senior year.

Then consider borrowing to cover the first two years if you have low or no debt.

If you have a substantial amount in taxable savings, you may consider selling some equities. However, be careful as that may increase your taxable income and impact the Free Application for Student Aid (FAFSA) expected family contribution if you intend on applying for financial aid (although most in this scenario wouldn’t be eligible for needs-based aid).

Another option is to consider a prepaid tuition plan. The cost of education inflation is higher than most fixed-income or cash returns.

Lastly, have you had the difficult yet important discussion about funding educational accounts through your parents’ estate plans? Depending on their health and age, this might not make sense to many, but here are the details.

A 529 plan is considered a completed gift for gross estate purposes, so it can be great for reducing potential estate taxes. Unique to 529 plans is that the owner of the account retains control of the money and can change the beneficiary. This can be handy when using the plan for multiple family members. With the federal annual exclusion of $15,000, a couple can give their grandchild $30,000 per year.

Another unique attribute of most 529 plans is that donors can gift forward five years of this amount into the plan for the grandchild (special rules prohibit additional gifts to the child).

In addition to estate tax advantages, this is a gift that they control (i.e. they can change beneficiary or take it back if need be, although certain penalties would apply), it is tax-free and it is a value-aligned goal across multiple generations of a family.

3-2-1 blast off (you to retirement and your kids to college)!

Both generations have big life events ahead — congratulations! As each of my children moved into their college years, my wife and I found comfort in knowing their education plans were well-funded. Thus, I can continue my focus on retirement planning. (Have no fear, it’s no time soon!)

If you are a parent or grandparent and you want to learn more about building an education plan that makes sense given all of the variables discussed above, please speak with your Parsec advisor.

Rick Manske, CFP®, BFA™
Chief Executive Officer


Share on facebook
Share on linkedin
Share on email
Share on print

Recent Posts:

5-Year Retirement Countdown Checklist

Are you within 5 years of retiring? If so, here is a quick checklist for you to reference on what you should be doing five, four, three, two and one year before retirement. Let the countdown begin!

Ready, Set, Retire! - Parsec Financial - Retirement Planning

Ready, Set, Retire!

Are you getting close to retirement age?  Have you started daydreaming about long, lazy days in the sun without a hectic schedule filling every minute?  Then perhaps it’s time to do something about that wishful thinking and take some concrete action to make a smooth transition to retired life.

Recent Quarterly Newsletters:

Retirement Readiness Edition

If you are getting close to retirement age, this newsletter is for you. Parsec CEO Rick Manske explains how to save for education expenses in the face of retirement planning. Michael Baughman provides a 5-year countdown checklist, and Travis Boyer explains how to adjust your portfolio allocation ahead of retirement alongisde a portfolio spending illustration. Nancy Blackman outlines eight steps to take ahead of retirement and Cristy Freeman suggests making a bucket list. Larry Harris writes about his experience turning 65 and Neal Nolan ponders what the day after retirement might feel like. We announce our 2021 Parsec Prize recipients and other company news. Enjoy!

Young Investors Edition

Read our Q2 2021 newsletter for young investors and financial topics that pertain to them, such as wedding finances, prenups, having children, student debt, and more.

Recent Whitepapers:

Get updates from parsec financial

Scroll to Top

Not a Client But want to receive updates?

Please sign up to join our mailing list and receive our latest news, thought leadership content and invitations to upcoming webinars.