How I Balance Retirement Savings with My Kids’ Education

We all want things from our money. For me, that includes a bright future for my kids, a comfortable retirement and the enjoyment of my life here and now.

My wife and I are building college funds for our three children (ages seven, twelve and fifteen) while also saving for retirement.

So how do we set priorities when looking at multiple financial goals? Here are the questions we ask ourselves (and the answers):

If we run behind schedule, what’s the backup plan?

The ramifications of falling short on retirement savings are pretty extreme: not being able to support yourself in your old age. But if you reserved the same margin for error for every financial goal, you might end up sacrificing your quality of life here and now. Not every goal is equal.

Think about goal-setting in the context of your likelihood of success. You can estimate on the high side for priority goals when the most important thing is reducing your chances of coming up short. However, being over-prepared comes with a cost of its own.

An analogy: Maybe you have an appointment. There’s potential for an unexpected delay, like heavy traffic. If it takes you 45 minutes to get there under normal circumstances, you might give yourself an hour, just in case. Now, if a certain meeting is super important, you could leave much earlier, say two hours beforehand. In the vast majority of cases, you’ll get there far earlier than you needed to, but you’ll almost never be late. The cost of this approach? The hour you could have spent doing something else. If it’s an especially high-priority meeting, leaving very early may be the right move, especially if the commute is unpredictable. But if it’s something routine, the time sitting around might not be worth the other things you could be doing (like an extra hour of sleep). 

My wife and I are currently on track for our retirement goals, but we have less margin for error when it comes to our kids’ education savings goal, especially to the extent they elect to pursue expensive graduate degrees. That’s a conscious choice, for two reasons. First, if push came to shove, we could look at other areas of our financial lives to compensate. Second, student loans are an option if necessary. And there are other ways to manage costs, such as our kids getting part-time jobs or asking them to factor expense into their choice of university or graduate program.

For retirement, the fallback options tend to be less robust. We could travel less and generally live a leaner lifestyle, but it’s difficult to predict exactly how decades of retirement will go. For example, there may be unavoidable expenses like health care or long-term care. Even simply living a long time can escalate our retirement costs. There’s no ideal way to borrow your way out of a retirement problem.

Because of this, my wife and I are currently prioritizing saving for retirement ahead of our kids’ education. Not because we aren’t deeply committed to their education and career choices, but because we have more options if we fall short.

Some goals have more flexible timelines. For example, you may have some discretion on when you need to buy a car or start a business, so you could conceivably take a little longer to save or let your money grow, if necessary.

By contrast, there isn’t much wiggle room on when my kids go to college—that’s a function of their age. Theoretically speaking they have more discretion about the timing of a graduate education, but realistically those decisions should depend more on career advancement than financing.

Similarly, retirement isn’t all that flexible. If my wife and I are running behind, we might have a little wiggle room on when we retire, but there’s a limit. At a certain point, we may no longer be able to work anymore, or our retirement may not be entirely optional.

When you’re flexible about when you need to meet a goal, you inherently have a higher margin for error. When it comes to more flexible goals, it’s better to save in a way that gets you there most often, without worrying about every conceivable what-if. 

I think of my three kids’ higher education funds as three distinct financial goals with the same priority but different time horizons. The nearest-term goal (meaning my oldest kid’s fund) is slightly less forgiving because the time horizons are shorter.

In the end, regardless of which account the money sits in, it can be used to cover any child’s expenses. So, if you’re underfunded when your first kid heads off to school, you can probably chip in from your other kids’ accounts, assuming you can increase your savings to plug the gap or reallocate from elsewhere. If you’re running behind because market performance has been weak, that may even out over time. Bringing the balances for the younger children back up would become a higher priority in that scenario, however, given that it’s generally wise to prioritize each child’s education equally.

At the end of the day, it helps to be nimble when it comes to managing your finances. Planning is about preparation, but it is also about managing tradeoffs based on your own values and aspirations and the income and savings you have at your disposal to make them a reality. The good news is that there are a lot of different ways to solve for goals, including options we covered like maintaining a prudent amount of risk in the portfolio, delaying spending, increasing savings or supplementing with things like student loans. The most important thing is to work out what matters most to you and to get on the path toward making it a reality. 

• How will I know if I’m behind on my retirement goals?
• How can I protect my retirement from market volatility?
• Can I prioritize my retirement and my child’s education needs at the same time?