Should I Save for Retirement or my Kids College Education?

Retirement Versus College
Retirement Versus College

Saving for retirement or for a college education for my child is a hard choice. A lot of articles will give you advise on which one to do. Since this is a concern of mine, I want/need to do both as my best option.

Let’s start with looking at 18 years out because 18 is the age we will start college.  We would like to be rich and have half a million dollars for a nice fancy private school education in cash just sitting around.  But let’s work with some more realistic numbers for me.  We do not need to have all of the money for college on day one.  What if instead, we could provide $24,000 a year, that would be a great start to wherever college we choice.

Saving for the 1st half of College

Saving for college and retirement is 2 big goals.  We want to keep our original savings without spending it during college. However, we could spend the dividends. We will assume that our dividend yield will be 5% on year 18 in our account(s). We would like to have half of the college expense come from dividends.  So some quick calculations, it shows that $12,000 a year / 5% = $240,000 will need to be saved. So if we save $240,000, we will earn $12,000 a year in dividends. Using a calculator on our cell phone, if we save $550 per month at a 7% growth rate, we will have $240,000 in 18 years. Not a bad amount to have saved up.

Second Half

When our child goes to college, we could take a break from saving for retirement.  By reducing our savings for retirement to $0 a month from $550, this will bring in $550 × 12 months = $6,600 a year to put towards college.  Now we have $18,600 towards our yearly goal of $24,000.


Now we need to come up with another $5,400 a year for college.  Another one of our goals is to become debt free.  $5,400 a year is $450 per month.  If we can pay off our car and student loans, this will provide the $450 a month in free cash flow.

Paying for College

So now we are getting $12,000 dividends, $6,600 for not saving for retirement, and $5,400 for not paying for loans.  This adds up to having $24,000 a year in dividends and free cash flow to pay for college.  Assuming 8 years of college, this comes to having $192,000 saved for a college education. While it would be better to have $500,000 just sitting around to be spent, this is a great start.

Finish Saving for Retirement

Assuming we have our first kid at 30, they will go to college when we become 48.  So, at 48, we will have $240,000 saved for retirement.  Now we have 8 years of college to pay for and we will become 56. We will assume our account will grow in value by 2% per year, with 5% of the 7% being spent on college from dividends.  So 8 years of 2% growth will turn $240,000 into $280,000.  Let assume that the latest we want to retire is 65.  That will give us 9 more years to save.

Before, we were saving $550 a month for savings account.  Then with our debts paid off, the $450 that was going towards debt can now go towards retirement. In addition, we are 26 years towards saving for retirement.  Hopefully, by this point, we will have our house paid off.  This should give us another $300 a month towards retirement.  This will total up to $1,300 a month to save.  Over 9 more years of saving and growing at 7%, we will turn $280,000 into $720,000.  Add in a $180,000 for the value of our house, and we will have $900,000 for retirement savings.

Money in Retirement

With $720,000 in savings, a 5% dividend will give us $36,000 a year in dividends.  With no debt, if we do not have to pay $750 a month in bills, that will be like having another $9,000 a we do not have to spend money on.  This will bring us up to $45,000 a year.  Hopefully with some social security, that will get us up to $60,000 a year.

Conclusion

With these numbers above, it shows us that it is possible to pay for college and save for retirement.  While we ignore some issues like inflation, taxes, and made some assumptions, it does give us a road map to start.  Of course the future may change these numbers on us, but using that as an excuse to have no plans is not a good option for me.  Hopefully, we can do better than the above strategy, which will lead to better results.

What do you think of this thought process?  Leave your thoughts below.

Post navigation

Leave a Reply