Saving for College Vs. Retirement

Which is more important? And how much should you save for each?

We parents are always being told we should save for our retirement and our kids' college. Which comes first, and how much should we save for each?

In general, saving for retirement should be your top priority. As the standard advice goes, you can always borrow for college, but there are no loans to pay for retirement.

But that raises your second question: How much should you put into each pot? That's such a puzzle that apparently many parents just punt. In a study by Futuretrust, a college-savings program, only 44% of parents interviewed said they had put aside money for their children's education. And nearly half of those surveyed didn't know what a state-sponsored 529 college-savings plan was.

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Here's my take: Look at your savings as a whole and divvy it up in a way that makes sense to you. The best case would be to fund your retirement account to capture the entire employer match, and then put as much as you can into college savings.

If that's not possible, you might contribute, say, 80% to retirement and 20% to college. Gary Carpenter, a CPA and executive director of the National College Advocacy Group, suggests that a 529 account could make up 10% to 15% of your savings.

T. Rowe Price has done a fascinating analysis of different strategies for saving for college and retirement. One approach is to split your annual investments between the two until college starts, and then invest only in retirement accounts.

A couple who start with an income of $100,000, invest 6% per year and earn an annual pretax return of 8% could end up with $126,000 for college and $1.65 million at retirement (including a 50% employer match).

If that sounds like more than you can manage, aim for one of these real-world benchmarks:

  • Save what everyone else does. A survey by Sallie Mae found that, on average, families tapped college-savings accounts such as 529 plans for about $8,000 in college expenses. The amount currently in 529 accounts per beneficiary is a tad over $9,000.
  • Save enough to cover a portion of your child's education -- say, expenses for his first year. In 2007-08, the average cost of tuition and fees for in-state students at a public institution was $6,158; at private schools, the average cost was $23,712 (figure on an annual increase of 5%).

Think you can't afford to save? You may end up borrowing, which is even more expensive. Barbara Tornow, a higher-education consultant, estimates that it will cost you $58 per month to save $10,000 over ten years if you earn 7% interest. On the other hand, borrowing $10,000 at 7% interest and repaying it over ten years will cost you $116 per month.

NEXT: A rundown on college-savings options.

Janet Bodnar

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.