WWYD? Advice on Retirement contributions vs. Saving for college

AlbanyBride33 · May 2014

Hi ladies!

My husband and I are fans of Dave Ramsey as I know some of you are. I generally follow his guidelines but there have been some instances where I've differed in opinion with him. Right now, we're on Step 5, but I'm at another place where I feel like this might not be the smartest use of our money.

Here's some background info on us and my conundrum.

I'm a teacher (age 35) who resigned a few years ago to stay at home with my kids. I have a direct sales business that I run from home so I am still earning income and bring in on average about $2K-2,500 a month, however, it wasn't until late last fall that I finally got around to opening a Roth IRA and started re-contributing to my retirement (15% of what I earn each month). There were probably a good 3 years that I contributed nothing.

I also have a 403b that I contributed to when I was teaching. It has about 20K in it and my Roth IRA has about 3K in it so far. It's not as much as I'd like but I do plan on going back to teaching and should have a pension after I retire as well. My husband has both a Simple IRA and a Roth, he has probably close to 40K saved so far. He is contributing 15%, maxing out his Roth and meeting his employer's contribution so his is really starting to grow a lot more quickly at this point. We do also have a large emergency fund and are currently saving up more as we'd like to move to a larger home within a year and are looking to add to our down payment.

According to Dave Ramsey's plan we moved on to opening 529 plans for the kids and we've been contributing $150 per child (we have 2) monthly, however, I'm not sure this is the smartest thing for us right now. Recently I've been reading up on saving for college and I read that when it comes to financial aid, schools will take into consideration your 529 but NOT your retirement. I've also read that you can take out your Roth IRA for qualified expenses (college tuition would be considered a "qualified" expense) without penalty so in theory if we needed (or wanted) to tap into this we could.

Do you think I should be maxing out my Roth IRA before I move onto this step? I can't help but feeling we're not in as strong of a place as I'd like to be retirement-wise and I that really should be our top priority right now. Our kids are currently 5 and 2 (with a 3rd due this summer). So we do have time. We also strongly feel that they should be contributing something to their own education so it's not a goal for us to fully provide them with college tuition- just to be able to give them a gift and help them out with us much as we can.

Any thoughts or suggestions? Thanks in advance!

blondie42107 · May 2014

My personal opinion is that saving for my (and my husband's) retirement is more important than saving for my childrens college education.

brij2006 · May 2014

I'm also a fellow DR follower.

Step #4 is to contribute 15% toward retirement. You do not proceed to step #5 until you are at 15%. So make sure you are contributing a full 15% before saving for kid's college (step #5) or saving up for a newer house (step #6).

The point to that plan is that you do not want to rely on your children to pay for your retirement, but you paid for their college tuition. Focus on your retirement first before moving on to steps 5 and 6.

Also, I believe DR recommends putting their college savings into a Mutual Fund not a 529. That way it can be used for other things if they choose not to attend college.

Xstatic3333 · May 2014

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

brij2006 · May 2014

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

hoffse · May 2014

I'll be honest - I'm not familiar with which step is which in DR. So there's that.

However, conventional wisdom on this is that you should be contributing to your retirement in full before you save for kids' colleges. That's because kids can take out loans for college, but you can't take out a loan for retirement.

The FAFSA does take into account kids 529 accounts - but they also take into account any liquid savings the parents or kids have in general. The difference is that if it's saved in the parents' name, then their expected % contribution is significantly less than if the money is saved in the kid's name. That said: the tax perks on a 529 are still really really good, and the formulas for the FAFSA tend to cut out middle-class and upper-middle-class families regardless of savings.

Some perspective: my dad is a college professor at a public school. He earns less than school teachers with doctorates. My mom worked for a school system but doesn't have a teaching certificate, so she has always made less than public school teachers. 529s became a thing when I was in about the 8th grade - so my parents did open one for me, but they did not have time to fund it significantly before I went to college. Most of their asset base was tied up in retirement at that time. The FAFSA STILL said that I would receive a whopping $3,000/year in need-based aid at private schools like Vanderbilt and Notre Dame because my parents' income at the time was too high to make me qualified for more. Seriously.

So I would fund your retirement in full first. And then I would worry about college. Odds are your kid will not get much need-based aid regardless of how much or how little you save. Remember that 529s, etc. have absolutely 0 bearing on merit-based scholarships. And there's a lot to be said for sending your kid to a school that is willing to give an academic scholarship.

hoffse · May 2014

Oh and PLEASE do not pull money out of your Roths for college expenses. That's a terrible idea for so many reasons.

Kids can go to community college or inexpensive public colleges on the cheap if needed. Then they graduate with some debt, but a manageable amount for the degree they have. They get a job and pay it off.

Whereas if you borrow from your retirement, you have now gutted your own savings, and guess who will be responsible for dealing with that as you age? Yep - your kids. I can tell you that it's vastly preferable to spend 10 years making student loan payments than potentially 30 years helping your parents afford retirement. This is just my perspective, but I firmly believe that one of the best things you can do for your kids is to NOT be a burden on them in your old age.

maple2 · May 2014

I am also not a DR devotee, so I don't know exactly what his stance would be. Personally, I would contribute more toward retirement. Even though you are currently contributing 15% (which is great!), it sounds like you might want to do even more to compensate for times in the past when you were not contributing as much.

DH spent a long time in school, and, as a result, he didn't have a company retirement plan he could contribute to. We did fund Roth IRA's to the best of our ability and I contributed to my retirement plan, but our income was much lower than it currently is so even if we were contributing 15% of our income at that point, we are no where near where retirement calculators say we should be given our current ages and incomes. As a result, we have decided to focus on building up retirement even more before saving for college. We actually try to each contribute 15% to our company retirement plans and max out Roth IRA's to get us to where we would like to be. We probably won't contribute significantly to college savings until we stop spending so much on child care at which point we will be able to save aggressively for retirement and do some college savings.

hoffse · May 2014

One other thing because I read some other comments - I would not use mutual funds for college savings. The tax perks of 529s are significantly better.

I recognize that not everybody goes to college. However, the expectation of college attendance is something you can control at a very very young age. Hell, I was telling people where I would be attending grad school when I was 5. Truly, the idea of NOT going to college was a completely foreign one to me at age 18 - there was never any question in my family that I would be going.

So if your family is one where there is an expectation that all of your kids will get college degrees, 529s are the best savings vehicle. The contributions grow tax free, and you can get that money refunded without paying the 10% penalty if your kid gets a scholarship. Or, because you have three kids, you can transfer the account from child to child until your last one is done. If there is still money left over, you can help kids fund graduate school, or you can even transfer it to yourself for continuing education.

Mutual funds will require you to pay a 15% capital gains tax on all gains. That's a lot of money you are losing, given the tax-free alternative.

And actually - 529's are a fantastic estate planning tool for high-net-worth individuals who are likely to die with an estate over the exemption amount. But I won't go into that right now.

AlbanyBride33 · May 2014

Thanks for all the advice ladies! I really appreciate it. I think I just needed to hear a little validation that it's ok to NOT save for college (or at least as much) at this point in our life. It's been hard to be objective because I do feel a little guilty about pulling back on their college savings.

DH and I graduated with about 70K in student loan debt and then I paid for grad. school within my first 5 years of teaching. I definitely want my kids to be better off than I was, but I agree that I would never trade that for being unprepared for retirement.

We do aim to be completely debt free (mortgage included) before they graduate HS and we're on track for that happen. Hopefully that will free us up in the future to contribute more to their college later on.

vlagrl29 · May 2014

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

That's scary. Only 5k? OP, I would fund retirement first before kids college savings. We do have a savings for DD, but it's more of like the extra money we get we put in her bank. We don't plan on doing a 529 for her.

brij2006 · May 2014

vlagrl29 said:

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

That's scary. Only 5k? OP, I would fund retirement first before kids college savings. We do have a savings for DD, but it's more of like the extra money we get we put in her bank. We don't plan on doing a 529 for her.

Yes. It's very scary. But he brags to people that he paid cash for H's college education. No you didn't. You paid for 1/3rd of it. H still has student loans, and now we are planning our future around supporting your ass for 30 years in retirement.

He also just took out a $3k 401k loan to roof his house. So who knows how much is truly in it.

H and I have made the agreement that we will help support him, but we will only pay for a roof over his head and food on the table. No luxuries.

vlagrl29 · May 2014

brij2006 said:

vlagrl29 said:

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

That's scary. Only 5k? OP, I would fund retirement first before kids college savings. We do have a savings for DD, but it's more of like the extra money we get we put in her bank. We don't plan on doing a 529 for her.

Yes. It's very scary. But he brags to people that he paid cash for H's college education. No you didn't. You paid for 1/3rd of it. H still has student loans, and now we are planning our future around supporting your ass for 30 years in retirement.

He also just took out a $3k 401k loan to roof his house. So who knows how much is truly in it.

H and I have made the agreement that we will help support him, but we will only pay for a roof over his head and food on the table. No luxuries.

you are very nice. I would tell him to go to a retirement home and get on medicare. Sounds like he could qualify with very little assets.

IAmSherlocked · May 2014

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

You've gotten some good advice, but I just want to chime in that I completely agree with the above statement and am pretty much in the same boat. I was lucky enough to have my entire college education paid for, and since I knew that they had sacrificed for that, I made sure to get good grades, graduate early (went into college as a sophomore and took extra classes each semester) and go to a cheaper state but what I didn't know at the time was that my parent's have almost nothing saved for retirement because they chose to put money into a college fund for me instead.

Of course, I'm very grateful that I didn't have to take out student loans like just about everyone else I know, but I wish they would have put at least something aside from themselves--it's left me feeling guilty and wondering what the future will look like. DH and I have already come to terms with the fact that at some point my parents will probably move in with us. Granted it's pretty typical in the culture where my parents were raised that the parents fully support their kids the entire time they are in school (even college--I wasn't even allowed to have a job while going to school. Not even a part time gig) and the kids then take care of the parents as they get older. Is it nice in theory? Sure, and I love the idea of being so close to family and helping each other out. But it's also riduclously stressful to try and figure out the logistics of how to afford having kids and providing for my parents at the same time. That's exactly why I'm in my early 20's and am contributing as much as possible to my Roth and DH is maxing out his 401k.

KatieCutie05 · May 2014

since your DR followers, i would figure out how much you want to have saved for each child when they are 18. then meet with one of Daves ELP's for investing and figure out how much you should be investing in each of their college funds (or one lump fund) for you to reach that goal for each child. obviously the 5 year old would need more then then your unborn child because theyll be going 5 years sooner.

Personally my husband and I only plan to pay for half of their college tuition (not room and board) at an in state school and they'll have to save, work, and get scholarships to pay for the rest. (this could change depending on our finances) But if they don't work, they'll get nothing. I don't want my kids to be one of those spoiled kids where mommy and daddy pay for school but i also want them to be able to get a 4 year degree without student loans. (which won't be an option). So for us i know that we'll likely be using separate investments in our name that aren't specifically for college or in our childs name. Because i want to be sure that if they don't earn our assistance then its mine to keep for whatever i want. Hey you don't want to work thats fine - dad and i are gonna go on vacation. i want them to know that the money is ours and they earn it - its not automatically theirs.

brij2006 · May 2014

vlagrl29 said:

brij2006 said:

vlagrl29 said:

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

That's scary. Only 5k? OP, I would fund retirement first before kids college savings. We do have a savings for DD, but it's more of like the extra money we get we put in her bank. We don't plan on doing a 529 for her.

Yes. It's very scary. But he brags to people that he paid cash for H's college education. No you didn't. You paid for 1/3rd of it. H still has student loans, and now we are planning our future around supporting your ass for 30 years in retirement.

He also just took out a $3k 401k loan to roof his house. So who knows how much is truly in it.

H and I have made the agreement that we will help support him, but we will only pay for a roof over his head and food on the table. No luxuries.

you are very nice. I would tell him to go to a retirement home and get on medicare. Sounds like he could qualify with very little assets.

He also has a Harley and lives in a house 3 times the mortgage of ours (but not the value). We will pay for him to live in a crappy apartment with his wife (who lives off disability now but works jobs under the table to not affect her disability check), but they won't have a nice car or Harley. We also don't plan to help them until they show an honest effort to make things different. This is where we're 100% about Dave Ramsey. He says to not help or enable people by giving them money. It's the same as giving a drunk a drink.

In the meantime he preaches to us on what to do with our money. While he's filed for bankruptcy 3 times in his life (once with his first marriage, once when he was single, and again with his wife now), and he blew through $100k in inheritance within 2 weeks of receiving it. Please FIL, tell us how to be financially responsible.

Obviously this has been a sore subject for us, and OP this is exactly why I'm such a Dave Ramsey advocate. It's more than what to do with your money. It's behavior that he teaches.

smerka · May 2014

OP, I'm in a similar situation in that I stay at home. I work a little, but not much. My DH is a teacher! but we are in IL so who knows what his pension will look like when the time comes. My advice is to fully fund both of your IRAs. When the time comes, you might be able to cash flow college if you are both working and/or use what you pay for your mortgage now. Don't stress about college until you get retirement settled.

Mom987 · May 2014

I agree to pay retirement before college savings, but we also pay $300/month to ourselves automatically, aside from 401(k), which goes towards our 6+ month living expenses and Roth IRA. I know I'm not maxing out my Roth IRA but I need to get on that. People may not agree with this plan, but we will have the house paid off by the time they start college and a lot in savings (non-retirement), so we will have that extra money for college tuition. They will definitely go in-state and nothing private.

Wulfgar · May 2014

Since I will be almost retirement age by the time my son goes to college, he is on his own. I will also do what my parents did and put him through Catholic School which are a lot better than the local public schools. The High School that I will try to get him in has a very good track record of graduates getting really good scholarships. This way we will also have budgeted some helping money for school. I will also do like my parents did, if we are paying for even part of college you have to keep your grades up and get a degree that has potential.

vlagrl29 · May 2014

brij2006 said:

vlagrl29 said:

brij2006 said:

vlagrl29 said:

brij2006 said:

Xstatic3333 said:

It's a judgement call, but I would max out your Roth IRA first. Someone (I forget who!) said on this board once that saving well for retirement is the best gift you can give your kids. Honestly, and I don't say this to be mean because I am too, I think you're a little behind where you would ideally be. I might still make some small 529 contributions to give them time to grow, but the Roth would be my priority.

I will agree with this statement. H's dad paid for 1/3rd of his college tuition, but has $5k in his 401k. He is 50 and not contributing anything to it. He says that his kids will take care of him the same way he took care of their college. H would've much rather graduated with larger student loans than this burden he's placed on us know we're going to have to support him in retirement while we have kids at home and are trying to save for ours and their future.

That's scary. Only 5k? OP, I would fund retirement first before kids college savings. We do have a savings for DD, but it's more of like the extra money we get we put in her bank. We don't plan on doing a 529 for her.

Yes. It's very scary. But he brags to people that he paid cash for H's college education. No you didn't. You paid for 1/3rd of it. H still has student loans, and now we are planning our future around supporting your ass for 30 years in retirement.

He also just took out a $3k 401k loan to roof his house. So who knows how much is truly in it.

H and I have made the agreement that we will help support him, but we will only pay for a roof over his head and food on the table. No luxuries.

you are very nice. I would tell him to go to a retirement home and get on medicare. Sounds like he could qualify with very little assets.

He also has a Harley and lives in a house 3 times the mortgage of ours (but not the value). We will pay for him to live in a crappy apartment with his wife (who lives off disability now but works jobs under the table to not affect her disability check), but they won't have a nice car or Harley. We also don't plan to help them until they show an honest effort to make things different. This is where we're 100% about Dave Ramsey. He says to not help or enable people by giving them money. It's the same as giving a drunk a drink.

In the meantime he preaches to us on what to do with our money. While he's filed for bankruptcy 3 times in his life (once with his first marriage, once when he was single, and again with his wife now), and he blew through $100k in inheritance within 2 weeks of receiving it. Please FIL, tell us how to be financially responsible.

Obviously this has been a sore subject for us, and OP this is exactly why I'm such a Dave Ramsey advocate. It's more than what to do with your money. It's behavior that he teaches.

I need to read DR's books. After I read the 3 parenting books I have on hold at the library. That's too bad about your FIL, he doesn't seem very financially smart. To blow thru the kind of inheritance is really ignorant.

strickland8052 · May 2014

We are not parents....yet. But, our plan is to 1. Contribute to both 401ks up to our employer's match. 2. Contribute to both our Roths up to the max (not able to do that yet). 3. Contribute to a 529 if and only if we have extra after contributing to the Roths. (Right now, it doesn't look like we can do that, but incomes change so maybe later.)

My parents saved for my college through a state program similar to a 529, and the program completely tanked the year after I started college. The class behind me didn't get their money back out of it! Fortunately, I did, but I didn't really need it. They moved to another state that offers free in state tuition for students who maintain a 3.0. I lived at home and went to a school near by, worked, and used the extra money from the 529-type program to save and have fun with. I then joined AmeriCorps and received money for graduate school. I worked full time through graduate school, taking only one class at a time, and paid for all my grad school tuition through a combination of AmeriCorps money and cash. I feel really proud that I paid for graduate school without any help from my parents or student loans.

H joined the National Guard and used military scholarships and GI bill to pay for college. He also got the free in state tuition for maintaining a 3.0, and extra money from two deployments. I am also very proud of him for graduating school without any help from his parents or student loans.

After both of our experiences, we aren't even sure if our kids will need money for college. We live near plenty of universities, as of now our state offers free tuition for good grades, and there are always scholarships and the military/AmeriCorps. There are plenty of ways that a kid can go to college, if they absolutely want it bad enough. There are not as many options for retirement. As a result, we will do our best for retirement, and if we are on track by the time our hypothetical kids graduate high school, we may help them out some.

hoffse · May 2014

CHICK1250 said:

@strickland8052 , do you mind me asking which state had the 3.0 GPA free tuition program? I've never heard of that before! A quick google search suggested Oklahoma...?

I haven't thought far enough ahead about kids college (thinking about kids itself is far enough away for me), so this is a really interesting discussion to read about!

GA and TN both have this - you have to be an in-state resident attending an in-state school, but GA Tech, UGA, UT, etc. all qualify for it. It's called the "HOPE Scholarship" down here.

It's funded by the lottery.

strickland8052 · May 2014

Yup! I was referring to the HOPE scholarship in Georgia. It is AWESOME!

HOPE has been cut recently, so I do question whether or not it will still be around by the time we have children in college. When I went, you only had to have a 3.0. Now, I think you have to have like a 3.5 or maybe higher to get the full scholarship, but you can get a partial scholarship with a 3.0.

AlbanyBride33 · May 2014

That's awesome! My cousins live in FL, and I know there's something similar available there. In NY state colleges are discounted but still fairly expensive.

Strickland, thanks also for the info about the National guard and Americorp. I had looked into that myself after college but at the time it seemed really difficult to find programs near me that paid enough for me to live on and then I ended up getting a teaching job so I lucked out at the last minute. Were you involved with that before or after you graduated?

My brother was a little less tied down and had a lot of success with their programs. I guess I should start putting all these options on the list for later on down the road.

strickland8052 · May 2014

I did AmeriCorps immediately after graduating undergrad, and then started graduate school towards the end of my AmeriCorps year. I got really lucky with my AmeriCorps experience, because a local college allowed me to live in their dorms RENT FREE since they had a good relationship with my service organization! It was a little weird to live in a freshman dorm when I was a 22 year old college graduate, and all my friends were getting "real" jobs and apartments. However, now I am so glad I did it!

AlbanyBride33 · May 2014

Wow!! Yeah, that was a great deal though and definitely worth the potential awkwardness.

Mom987 · May 2014

I used the HOPE Scholarship and got 120 hours paid for here in GA. It is funded by the lottery. It was awesome...

Mom987 · May 2014

It was also just 3.0 minimum for me and it is more strict now (which makes sense).

hoffse · May 2014

Mom987 said:

It was also just 3.0 minimum for me and it is more strict now (which makes sense).

Yeah it really needs to be more strict. What started happening is high school teachers would inflate grades so more students qualified in their first year. It's a great program, but given that it's supposed to be merit-based money, there should be stricter merit qualifications for it.

sillygoosegirl · May 2014

By age 35, you should have at least 1x your annual salary in retirement. If you aren't there yet, I would absolutely save for retirement rather than for college, for many reasons, as have been articulated above.

WWYD? Advice on Retirement contributions vs. Saving for college

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