Saving money isn’t easy. If you’re trying to save money for retirement — and for your child’s college tuition — at the same time, you know just how difficult it can be. Fortunately, with proper financial planning, you should be able to comfortably accomplish both goals.
Funding Your Retirement
If you’re like many individuals, you know that it’s important to save money for retirement. Whether you’re looking to retire before 50 or prolong an enjoyable career, funding your retirement is one of the most important financial investments you can make.
Most Americans believe they need to save $1.7 million before retiring, according to one recent study. To accomplish this goal, financial experts suggest that you start saving for retirement as early as age 25. Even if you’re a student in your 20s paying back student loans while saving for retirement, putting a little money away each month for retirement eases the burden over time.
When saving for retirement, you’ll have the option to allocate your money into different types of financial accounts. These options include both a 401(k) and an IRA, each of which offers you unique benefits after you invest.
401(k)
Many companies offer a 401(k) savings account as an option for employees. This type of account allows you to save money toward your retirement — up to $19,500 in 2021 — with a reduced tax hit. If you’re over 50, you can contribute up to $26,000 into a 401(k) in 2021.
Employers often invest money into an employee’s 401(k) account. Some employers will even match or partially match your contributions toward your 401 (k) account, up to a certain percentage.
Depending on your tax preferences in saving for retirement, you’ll benefit from either a traditional or a Roth 401(k). Both account types are similarly structured, with differences in tax deductions. Tax breaks for a traditional 401 (k) are taken out upfront — before you receive a paycheck from your employer. On the other hand, tax breaks for Roth 401(k) accounts are not taken out until you withdraw your funds.
IRA
If your employer doesn’t offer a 401(k) savings option, you can still put money away for retirement through an individual retirement account (IRA). You can open an IRA through a bank or a broker, to invest in bonds, mutual funds, stocks, and other financial assets that accrue interest and value over time.
Unlike funding for a 401(k), you typically invest money into an IRA at your discretion. You can contribute as much as $6,000 into an IRA in a single year. And if you leave an employer who was contributing to a 401(k) plan, you can even roll those funds into an IRA.
Choose from different types of IRA accounts, depending on where you want to invest. If you want to retain more control over where your retirement savings are invested, a self-directed IRA is an ideal option. You’ll retain full manual control over your IRA contributions, which is ideal for alternative investments.
If you’d like to opt for an already proven investment option, a precious metals IRA may offer stability against the lowering of the U.S. dollar.
Funding Your Kid’s College Tuition
While saving for retirement, you’ll also want to keep an eye on your child’s educational future. With informed financial planning, you can find ways to fund your child’s college tuition while setting money aside for retirement.
It’s never too early to begin saving for your child’s college tuition. If you can begin saving money soon after your child is born, you will lessen the required financial commitment when college tuition comes due. Between college savings plans, university scholarships, and other financial opportunities, funding your child’s college tuition can become surprisingly affordable.
529 College Savings Plan
One way to save for your child’s college tuition is through a 529 college savings plan. A 529 college savings plan can be used to cover collegiate expenses — including tuition, books, and other necessary course materials — and offers a variety of tax benefits.
A 529 plan works similarly to a Roth 401(k) or a Roth IRA account. After taxes, your financial contributions are applied to mutual funds, stocks, or other investments. Your funds grow over time until you withdraw money tax-free and use it to fund your child’s higher education.
Contributions made to a 529 savings plan also have a minimal effect on a student’s ability to qualify for financial aid. This means that your child can utilize funds from a 529 plan you establish, and still qualify for private, state, or federal financial aid resources.
Financial Aid
You can also depend on financial aid to help lessen your child’s college costs. Different types of federal student aid — including grants, scholarships, and loans — can help reduce the financial burden of covering your child’s yearly tuition expenses.
To apply for, and receive, financial aid on your child’s behalf, you will typically need to complete and submit financial aid forms to recognized government organizations or private institutions. Financial aid is often granted to students on an as-needed basis, and application forms often require that you identify your yearly income, estimated expenses, and other figures that identify your need for the funding.
Financial aid is also available for both military families and international students. Some states also offer state-specific financial aid packages, through both independent donors and state-sponsored programs.
Academic and Athletic Scholarships
Students who are academically or athletically gifted may also receive scholarships based on their merits inside or outside of the classroom. Often, athletic and academic scholarships are awarded to individuals who plan to pursue a specific career path, either in a certain academic field or a certain sport.
If you believe your child might be eligible for an athletic scholarship, you should first check with potential schools to determine the extent of the scholarships they offer. Depending on a certain college’s athletic specialty, they might offer partial or full athletic scholarships for qualifying athletes.
College athletes who receive these athletic scholarships typically need to meet certain performance benchmarks, both during competition and in the classroom.
Similarly, academic scholarships reward academically-inclined students with tuition assistance. Some academic scholarships are contingent on that student teaching courses or performing research at their college or university. In addition, your child will need to maintain a high grade point average (GPA) to remain fully eligible for his or her scholarship.
Both academic and athletic scholarships can greatly lessen your financial burden in paying for your child’s college tuition.
Community College
A viable college option for many local students, community colleges allow students to complete general education courses — and four-year majors — often at reduced tuition rates.
Many students facing steep tuition payments will opt to begin their education at a community college. Your child can always transfer to a four-year university after obtaining the majority of their general education classes.
Even if your child only attends a community college for one or two years, the overall financial savings are massive. One recent study indicates that between housing, meals, courses, and class materials, students can save as much as $30,000 by attending a community college instead of a four-year university.
Why Prioritizing Retirement Savings May Be the Better Plan
It’s difficult to choose between saving for your retirement or saving for your child’s college tuition. However, it might be in your best interest to prioritize retirement when deciding how to allocate your savings.
With the right budget and financial planning, many individuals can set aside money for both retirement and a child’s education at the same time. When that’s not possible, your retirement is typically the savings option recommended by many financial planners.
learn more about how to navigate your first 401k or retirement plan.
When it comes to funding your child’s college tuition, there are simply more resources at your disposal than in retirement planning. Financial aid, scholarship funding, and community college can all make college a more affordable option for your child.
Some investment opportunities can allow you to save money before allocating your funds. Other opportunities, like swing portfolios, offer you the freedom to save money and designate it for a specific purpose at a later date. This option can help you save money at your own pace, while you decide on the most appropriate use for your savings.