Financial choices: should you save for college, retirement or both?

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Deciding whether to save for your child/children’s college education, your own retirement, or both is often a financial dilemma for parents.

Should you save for retirement or college?
Over the past 20 years, college costs have grown roughly 4% to 6% each year — generally double the rate of inflation and typical salary increases. The cost for four years at an average private college is now $192,876 and public colleges now average $100,000 for four years.* Many parents have more than one child, adding to the strain. Yet, without a college degree, many jobs and career paths are off limits.

On the other side, the pressure to save for retirement is intense. Longer life expectancies, disappearing pensions, and the uncertainty of Social Security’s long-term fiscal health make it critical to build the biggest nest egg you can during your working years. In order to maintain your current standard of living in retirement, a general guideline is to accumulate enough savings to replace 60% to 90% of your current income in retirement — a sum that could equal hundreds of thousands of dollars or more.

With these two compelling financial needs and often limited funds, what’s a parent to do?

The prevailing wisdom
Retirement should win out. Saving for retirement should be something you do no matter what. It’s an investment in your future security, and it generally should take precedence over saving for your child/children’s college education.

And yet…
It’s unrealistic to expect parents to ignore college-funding altogether, and that approach isn’t advisable since regular contributions — even small ones — add up over time. One possible solution is to figure out what you can afford to save each month and split your savings, with a focus on retirement. You might decide to allocate 85% of your savings to retirement and 15% to college.

Although saving for retirement should take precedence, setting aside even a small amount for college can help. For example, parents of a preschooler who save $100 per month for 15 years would have $24,609 assuming an average 4% return. Saving $200 per month in the same scenario would net $49,218. These aren’t staggering numbers, but you might be able to add to your savings over time and if nothing else, think of it as a down payment — many parents don’t save the full amount before college.

*Source: College Board’s Trends in College Pricing 2013 and assumed 5% annual college inflation. 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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