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Sandwich Generation Choice: College Vs. Retirement

Pulling cash out of your retirement funds to pay for your kid's tuition could be a painful mistake

posted by Jeff Brown, August 29, 2012 More by this author

empty vs full piggy bank

Jeff Brown has nearly 20 years experience as a personal finance columnist for publications including The New York Times, The Nightly Business Report on PBS, The Philadelphia Inquirer and MSNBC.com.


empty vs full piggy bank
iStockphoto | Thinkstock
Jeff Brown writes a biweekly blog about the Sandwich Generation and the financial issues its members face as they try to help their parents and their adult children. The blog appears on Next Avenue and on the website of the public television show Nightly Business Report. A financial journalist, Brown brings personal expertise to the subject: He is himself part of the Sandwich Generation.
 
Your son or daughter has a fat acceptance envelope from a fine college. All the study, sports, after-school activities and SAT cramming finally paid off. Then reality sets in.
 
The mammoth bill for a top-notch school will chew deeply at your retirement savings and leave you especially short if grandma needs help paying for her pricey home care.
 
It’s the Sandwich Generation’s dilemma: How do you balance these financial tradeoffs?
 
The simple answer sounds glib: You need to prepare early for the warring expenses by saving as much as humanly possible. Live in a smaller home. Drive older cars. Take cheaper vacations. Et cetera.
 
(MORE: Asset Allocation Advice for the Sandwich Generation)
 
Yet in the real world, even the well prepared can get socked by ugly surprises that disrupt best-laid plans.
 
Who knew, for instance, that stock market returns would be flat for an entire decade? Or that college and medical costs would grow so much faster than wages? Then there are unexpected health problems, unemployment and even natural disasters.
 
Parents and Grandparents First
 
When it comes to balancing the needs of three age groups, financial advisers tend to favor prioritizing the middle-aged and the old. In other words, your future retirement and your parents’ needs take precedence over the cost of college.
 
The reason is simple: The young have time on their side; people in their middle and later years do not.
 
Parents in their 40s and 50s who take $50,000, $100,000 or, heaven forbid, even more out of their retirement savings to pay for their children’s tuition bills may never make that money back.
 
Since that sum, if left alone, could double or triple before being tapped in retirement, withdrawing the cash now can deprive parents of a huge sum in the future. Retirees whose finances fall short in their ‘70s or ‘80s don’t have many options. It would probably be impossible for them to return to work and, without an income, impossible to borrow.
 
The kids, however, would have decades to overcome the effects of high college costs.
 
The Case for Student Loans
 
As much as everyone hates to see fresh college graduates loaded with debt, taking out student loans may be a better option than plundering parents’ retirement accounts.
 
Government-backed student loans currently have low interest rates (between 3.4 percent and 7.9 percent) and relatively easy payment terms.
 
The young have other options, too: delaying college to work and save more; working part-time while in school; living at home during college; working full-time and attending college part-time; joining the military or ROTC; or spending the first two college years at a less-expensive school and then transferring to one that’s more prestigious and costlier.
 
A Personal Decision About Tuition
 
At our house, we’ve been pondering college-cost questions as my son, a high school senior, decides where to apply.
 
(MORE: How Taxes Affect Retirement Investments)
 
We’ve decided that if he can get into a top school like one of the Ivies, it will be worth spending the required $50,000 a year or more, since that pedigree would benefit him throughout his life.
 
But we also believe it’s not worth shelling out anything like that for a good  but lesser-known private college. At half the cost, Penn State would be just fine.
 
I think many families are weighing this issue of value much more carefully now that college costs are so crushing, and I don’t think this approach is short-changing the kids.
 
Advice for Balancing College and Retirement
 
So, for any family that must balance college and retirement needs, the first steps are clear: Spend less, save more.
 
Next, try to be as pragmatic as possible.
 
A good education, the experts tell us, is more the result of the student’s commitment than the school’s name. College should be about learning, not parents’ bragging rights.
 
While high school students agonize over which college is the perfect fit, it seems to me that most college graduates are very happy with their experiences, even if they didn’t get into their first choice or go to the most expensive school on their list.
 
Parents should also get realistic about their retirement plans.
 
As I’ve mentioned in earlier Sandwich Generation blog posts, I plan to work until 70. That will reduce the number of retirement years I’ll need to fund. It’ll also give my investments longer to grow and entitle me to a larger Social Security benefit than if I quit work in my mid-60s.
 
If something wonderful happens, like stocks double in the next five years, I may stop working sooner. But it’s best to err on the safe side.
 
(MORE: The Best Way to Pay for College)
 
Retirement doesn’t have to be a binge of conspicuous consumption, either.
 
When I first started freelancing and business was slow, I had an early taste of what retirement might be like. Simply being free of the whims of an employer was so wonderful I didn’t care that money was a little tight.
 
I was happy tending vegetables, riding my bike and reading free classics on my Kindle, all the while keeping retirement and college savings intact. A second home wasn’t in the cards, and that was fine.
 
Of course, our college expenses haven’t started yet, and retirement is years off, so I can’t prove this middle-ground approach will work. But it seems like the smartest way to take care of everyone in our Sandwich Generation family.
 
When it comes to finances, you have to place your bets and hope for the best.
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