The Kids' College Funds Can Wait. Save for Retirement First

In a perfect world, parents would earn enough and save enough to fully fund both their retirement and their kids' college educations. But for most families, one savings goal needs to take priority over another. In that case, financial planners say, you need to look at all the options.

"There are many ways to fund college -- scholarships, loans, work-study programs, part-time employment -- but when was the last time a 70-year-old unemployed person with no regular income obtained a loan for living expenses?" says Allison Alexander, financial adviser for Savant Capital Management in Rockford, Illinois, in an email.

Student loans aren't ideal, but at least they're a low-interest option for paying off debt over decades. If a retiree runs out of savings, there really are no options. They'll have to sell off their assets and try to live off Social Security benefits.

The choice between saving for college and saving for retirement doesn't need to be a zero sum game, but parents should do everything possible to avoid running out of money when working is no longer an option. Ideally, experts say, parents need to come up with a dollar figure that will allow them to be financially independent in retirement and save toward that goal.

"Once that number is known, it's very easy to see if there's anything left over to go to a 529 college savings plan if a child is young, or directly to paying tuition if they're already in school," says Richard Kahler, president of the Kahler Financial Group in Rapid City, South Dakota.

One reason why parents are so strongly motivated to save for college over retirement is that college may only be 10 or 15 years away, while retirement seems way beyond the horizon. Most parents in their 30s or 40s assume that they'll always be healthy and that their incomes will only grow with age.

"People have this illusion of control, that if they need to work longer, they can work longer," says Christian Mauser, a financial adviser with the Resource Planning Group in Atlanta. "They say, ''I'm going to spend this money now on my kid's college education and I'll just work until I'm 70. That won't be a problem.' What I've found is that people don't realise that a lot of that is out of their control."

Mauser has a client who went to great lengths to pay for her son's college education, pulling money from her retirement savings and drawing equity from her house. Then, at 60 years old, she was laid off and hasn't been able to find work. Now her savings have dried up, and the only option is to sell the house and collect Social Security. The kid is fine, but she's in bad shape.

"Guaranteeing your children's success can have an equal impact on your retirement," says Mauser.

Good parents pay for their kids' college tuition and don't saddle them with debt. That's what most parents believe. The problem with that mind-set, says financial adviser Kahler, is that if parents fail to plan for their own retirement, it's going to fall on the kids to take care of them.

Let's say a child decides to attend an out-of-state public school. That runs about $25,000 a year for a total of $100,000 over four years. That's a lot of money, and likely a lot of loans. But compare that to the cost of supporting an elderly parent who failed to save enough for retirement, which Kahler estimates as between $300,000 and $700,000.

"Even the low side of that is high," says Kahler. "It's substantially in the kid's best interest to pay for their own college and for the parents to fund their retirement. That's the loving thing to do."

Jamie Slaughter, a financial adviser with Strasbaugh Financial Advisory in Colorado Springs, Colorado, agrees, saying that it's not fair (or smart) to rely on your children's earnings as a retirement plan.

"It's to their detriment if you put all your money toward their college and then they have to help you later on. You're really doing them a disservice," says Slaughter. "They may get out of school and have a degree, but are they making enough to support you? Likely not."

Many young parents immediately start socking money away in a 529 college savings plan when their baby is born. And that's smart, because 529s offer a lot of benefits when saving for college. Not only are contributions tax deductible in many states, but the money grows tax-free, and all withdrawals are tax-free if they're used to pay tuition or other qualifying educational expenses.

But what if junior decides not to go to college? Or what if 10 years from now the traditional four-year college degree is upended by online learning and college costs a fraction of what it does today? (We can dream, can't we?) If you have most of your money saved in a 529, you'll pay a 10 percent penalty each time you withdraw cash for noneducational purposes.

That's why Robert Schmansky, a financial adviser at Clear Financial Advisors in Livonia, Michigan, is such a strong proponent of Roth IRAs. He says that most parents are only familiar with the retirement benefits of Roth IRAs, namely that you can withdraw money tax-free once you're older than 59½.

"But you can also use Roth IRAs to help pay for college," says Schmansky. "You're allowed to deduct your contributions for any reason whatsoever without a penalty, just not the growth."

What that means is that parents can take out any of the money they've put into a Roth IRA without incurring the 10 percent early-withdrawal penalty. They just can't touch the interest.

The result is flexibility. If a child needs help paying for tuition or covering student loans, mom and dad can pull some money from their Roth IRA. But if the kid doesn't need the money, mom and dad aren't stuck with an education-only savings account, and they can keep more for retirement.

Roth IRAs do have some limitations: You can't contribute more than $5,500 a year, or $6,500 a year if you're 50 or older. These amounts "phase out" or get reduced once you start making over $118,000 as a single person or $186,000 for married couples filing jointly. (More details here.)