VOL. 131 | NO. 226 | Friday, November 11, 2016
Rays of Wisdom 
Dana and Ray Brandon
Splitting Your Savings – Retirement or College?
BY RAY AND DANA BRANDON
Ray’s Take After purchasing a home, the two biggest expenses most couples encounter are saving for retirement and saving for kids’ college expenses. In a perfect world, parents would estimate how much each goal would require, make a conservative estimate about returns, and then invest enough money each month to reach those goals on target.
But that’s tough to do. So which goal should come first? As a general rule, retirement savings need to outweigh college savings.
It may sound harsh putting yourself before your kids, but think of it this way: Kids have plenty of time to pay off student loans, while you have much less time to restore retirement savings raided or avoided for college expenses. Generally, a withdrawal before turning the age of 59 1/2 will trigger a 10 percent penalty on top of income tax, wounding the account so badly it might never recover, and undermining retirement plans. While the IRS does allow hardship withdrawals for college expenses, qualifying can be difficult and that only offers relief from the penalty.
It’s also possible to take out a home-equity loan to pay for college, but banks are funny – they expect to be repaid. Borrowing against the home, like raiding retirement savings, undermines retirement security by leaving you with less equity when you need to sell. Retirement plans generally don’t send monthly statements or foreclosure threats.
Although you may be willing to postpone retirement to pay for college, that’s not always an option. Kids can delay going to college and work in order to save money. They can also go to a less expensive school or get student loans.
The reality is, your kids can borrow for college, but you can’t borrow for retirement. And the best gift you will ever give your children is your own independence.
A financial planner can help you make a plan that will work for you and your goals.
Dana’s Take It’s really tough to build up your 401(k) account when you’re getting gigantic college bills.
It’s a real problem for the middle-income, middle-aged. Just about the time you hit your stride in your career and begin to make up lost ground in funding your retirement, your kids are graduating from high school and looking at colleges with everything that entails.
College financial aid calculation starts with a look at the discretionary income of the parents. Notably, anything for your retirement savings is absent from the allowable deductions. In other words, colleges think the money you would like to put into your retirement savings is discretionary.
“Pay yourself first” is the mantra here. If you have money left after assuring your retirement is secure, then it’s great to use it to help your kids pay for college. Remember, no one offers grants, scholarships or federally guaranteed loans to support you when you leave the workforce.
Ray Brandon, CEO of Brandon Financial Planning, and his wife, Dana, a licensed clinical social worker, can be reached at brandonplanning.com.