Parents have a tough financial dilemma: Should they fund their kids’ tuition or their own retirement?
Aaron Ulrich, a financial adviser at Family Wealth Strategies, says parents should put themselves first.
“We want to take care of our kids, and we want to take care of ourselves. The conversation usually starts with the idea that there is not a loan for retirement, OK? There are grants, there are scholarships for college. There’s no scholarship for retirement,” Ulrich told Yahoo Finance Live ( video above). “So we’ve got to be really aware of what the risks are when you’re dividing up your family’s finances.”
He advised parents to avoid taking out loans to cover immediate expenses once they’ve retired because that debt could jeopardize their long-term retirement goals.
“I don’t want my clients looking for loans and trying to finance retirement. They don’t want to be trying to take the equity out of their homes. So, those decisions that you make early in life are what can set you up for a quality retirement,” Ulrich said. “If you’re investing for college, saving for college at the expense of saving for retirement, you could be doing yourself a very big disservice.”
However, Ulrich said that that parents who save for retirement over their kids’ tuition are making a better decision in the long run.
“If you’re choosing to divert some of your family finances into college funding, you could possibly be doing that at the risk of not saving for retirement during some pretty key working years. You’re saving for retirement— you’re in your 20s, 30s, 40s— that’s a 30, 40-year— that’s long-term investing,” said Ulrich.
Ulrich also noted that while 529s can be beneficial, the return on investment is not the best during a short time frame.
“Saving for a 10-year-old, well, for college, that’s an eight-, to 10-, to 12-year time frame. That’s naturally a shorter time frame, which limits the amount of growth that you’re going to be able to get from any investment. Additionally, with a 529, it gives you a tax break on the growth, right?” said Ulrich. “So if you don’t get a lot of growth, that 529 may not be the best vehicle for short-term savings.”