Few people would argue with the idea that a college education is one of the best investments you can make. But who should pay for that education? Mom and dad? The student? The government through our taxes? Some combination?
T. Rowe Price recently published a survey and several of the questions revolved around parents' priorities around saving for retirement and paying for their kid’s college education. One question revolved around savings priorities. Notice how 67% of respondents—across three generations—said saving for kids’ college education is a higher priority than saving for retirement. And even for the Boomer generation, 57% said saving for kids’ college education is a higher priority.
A second question sought to uncover survey respondents’ attitudes about college. Any of these raise your eyebrows? I thought the second attitude above was quite revealing—76% of respondents said they’d be willing to delay retirement to pay for their kids’ college education. Many parents are clearly willing to go to great lengths to give their kids a good start in life.
You could extend this survey and ask about whether you should pay for your kids’ weddings, rent, living expenses, cars, or fund their startup idea. (We'll discuss that in a future blog post.)
There are no easy answers to these questions and each situation is unique. In working with clients, I see three issues arise with how much financial support parents should give to their children.
1. Parents may not agree on how much support to provide.
One parent may want to be more generous in supporting the kids while the other may feel like the kids should be self-supporting in some of these areas. Obviously, this can cause conflict between the parents.
2. Parents may be in agreement to support their children in these areas—but to the detriment of their own retirement.
This is a fine line here. Both parents may agree in supporting their children financially but there may come a point where it’s hard to know when the support becomes so great that it completely jeopardizes the parent’s ability to retire with the lifestyle they originally desired.
3. Parents are wealthy and can financially support their children—but they provide too much support that their kids “fail to launch.”
If mom and dad become “The First National Bank of Kids,” it’s easy for the kids to rely too much on mom and dad and never make it on their own.
When it comes to paying for college, I advise my clients that in the worst case, you, or the kids, can pay for college as you go. But, and this is a big but, you can’t "pay for retirement as you go" because you don’t have the income and discretionary cash flow from work during your retirement years.
Consequently, I always recommend that my clients make retirement savings priority number one and that should be a non-negotiable. Plus, if you prioritize your retirement savings, it’s actually better for the kids because you are less likely to be a financial burden on them when you are retired.
I realize that student loan debt is a major issue for our young men and women coming out of college. And while it is a burden for students in their 20s to dig out of that debt, the good news is they have decades of career-earning power to pay off the debt and build up their savings. By contrast, if parents use their retirement savings to cover their kid’s college costs, there’s very little time left to recover those savings through working.
Ultimately, each family has to decide how to strike a balance between supporting their children and supporting their own retirement. Getting it wrong could be quite costly for both the kids and parents.
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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