3 Reasons You Should Never Pay for Your Kid’s College with Your Retirement Nest Egg
One of the most difficult decisions you’ll face as a parent is how you’ll pay for your child’s college education. It can be tough to figure out where that money will come from, particularly while you’re also saving for retirement.
In fact, many parents think about dipping into their retirement fund to pay for their kid’s college. According to CNBC, 12% of parents really do consider doing this. However, you should avoid this at all costs.
Why shouldn’t you use that money to help out your kid? Actually, there are several compelling reasons not to rob your retirement nest egg.
You’ll Run Out of Money If You Pay for Your Kid’s College
Perhaps the most important reason that you shouldn’t use your retirement money to pay for your kid’s college education is this: you’ll run out of money.
Saving for retirement requires careful planning and cost cutting, combined with savvy investment techniques. Even then, it’s possible that you’ll only have enough money to make ends meet after you retire.
Combine that with the fact that people are living longer and longer, and the need for as much money as possible during your golden years becomes apparent.
Now, consider that the average cost for a state-run school education is around $200,000 ($400,000 for a private school), and you can see just how much you’ll drain from your savings if you take on this financial burden yourself.
If you dip into your retirement nest egg now, you’ll feel the pinch down the road.
You’ll have less time to replenish those funds, according to the senior VP at BMO Private Bank, Stephen Williams. He says, “If you take out a signification portion of your 401(k) or IRA funds at an advanced age, you’ll have less time to replenish, and if you come up short of funds at retirement, you have fewer options.”
In addition, draining your account now means that you won’t be able to take advantage of compounding, which is an essential consideration for saving for retirement. Paying for four years of college now could actually cost you at least 10 years of retirement funding.
You’re Sending the Wrong Message
Another reason not to pay for your kid’s college with your retirement money is that you’re sending the wrong message to your child. You’re essentially telling him or her that you’re willing to sacrifice your financial future so they don’t have to work for their own education.
In fact, a poll conducted by Money magazine actually found that college students didn’t even realize that their parents were making significant financial cuts to their lives in order to pay for their education.
They simply assumed that they were getting “their due”.
You’re Teaching the Wrong Lesson
Ultimately, paying for your kid’s college education teaches them the wrong lesson. You want them to be independent and successful, right?
Well, how independent do you think they’ll be if they don’t have to work in order to achieve a goal? How successful will they actually become if their college education is just handed to them, without any effort on their part?
That’s definitely the wrong lesson, and not at all what you want to impart.
What Options Do You Have?
So, if you’re not supposed to dip into your retirement fund to pay for your kid’s college education, where does that leave you? In truth, there are lots of options available that don’t involve you sacrificing your financial future or teaching your child that they’re not responsible for their own success.
While they do saddle your child with debt, school loans are widely available. Fill out the FAFSA even if you think that your income is too high to qualify for student aid. It will also help when applying for scholarships and grants, both of which can help offset the cost of college.
Another option might be to encourage your child to take a year off of school. Many high school seniors aren’t emotionally ready for college, and taking some time off to experience the “real world” can actually be a good way to foster maturation and even build up some cash from working a job.
Speaking of working, encouraging your child to work a part-time job through high school is really a very good way to help him or her save for college. Every little bit helps, after all, and a part-time job held for three years could possibly result in several thousand dollars that could be put toward their college education.
There’s also the possibility of refinancing your mortgage to a lower rate. That can free up money for you to put toward your kid’s college education without dipping into an IRA or 401(k) account.
Finally, think about setting up a 529 college savings account. This allows you to save for college over time without dipping into your own retirement fund. You’ll also find that other family members can contribute to the account, so grandparents, aunts, and uncles can all give a little bit over time.
Of course, using a 529 account comes with some caveats. You’ll need to decide how much control you want over the investments the account makes, for instance. You should decide based on your own personal risk tolerance, the target date for your child’s college education, and whether you have the time to manage the account yourself, or if you’d be better off letting a professional do it for you.
In the end, paying for your kid’s college out of your retirement funds is not a smart move, and will ultimately come back to haunt you. It’s a better option to find other solutions to the problem, up to and including taking out an actual school loan.