Retirement vs. College: The Savings Debate

Parents are feeling more stretched about where to allot their savings, according to research from Putnam Investments.

More parents are feeling a pinch of late as they try to achieve two of the biggest financial goals: saving for retirement and saving for college. A research paper from Putnam Investments, College or retirement? How to balance two of life’s biggest savings goals?, says saving for both is more challenging today than a generation ago for a variety of reasons.

First, people are more responsible for funding their own retirement, leaving less available income for parents to put toward college savings. In 1985, 60% of retirement assets were represented by defined benefit plans, while today nearly two-thirds of retirement assets are self-directed, according to a release from Putnam.

In addition to the switch in retirement responsibility in the last decade, Putnam cites demographic trends. Because women are having children later in life—well into their 30s or 40s—parents find themselves faced with saving for retirement and college simultaneously.

“There are many benefits to being an older parent, including maturity, focus, and financial security,’ said Elaine Sullivan, Putnam’s head of retail marketing, in the release. “However, an important financial drawback to having children later in life is that the timing of saving for college often overlaps with the peak years of saving for retirement.’

Tuition Troubles

While the overlap of saving for retirement and college is a challenge, saving for college is quite the test on its own. Student loan availability has decreased and home values are depleting, giving parents less options to cover climbing tuition costs. Putnam says 50 private and nonprofit lenders have withdrawn from the student loan business in the last 10 months, possibly creating the bleakest loan environment to date.

Not to be too depressing—there is a light at the end of tunnel to which people might need an adviser to direct them. Putnam’s Sullivan encourages using a balanced savings approach combining a 529 savings plan and savings bonds for college costs, and using tax-advantaged plans such as 401(k)s and IRAs to save for retirement.