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PERSONAL FINANCE
Retirement

For many parents, paying tuition tops retirement

Charisse Jones
USA TODAY

Too many parents are sacrificing financial security in their golden years to help pay the tuition tab for their children, according to a new T. Rowe Price survey.

Rather than have their children take out loans, 53% of the parents polled said they'd prefer to tap their retirement savings to pay college expenses. Meanwhile, 49% said they'd be willing to retire later so they could pay their children's tuition.

Experts say it's a bad idea to rob from your retirement to pay college tuition for your kids.

That inclination is not unexpected, says Judith Ward, a senior financial planner and vice president of T. Rowe Price Investment services. But it ultimately may be foolhardy.

"The key takeaway is that parents are willing to sacrifice their own retirement to help their kids pay for college,'' Ward says. It's "not surprising, because as parents we always want to do what's best for our kids. But in this day and age where we're probably going to be more responsible for our own retirement ... they really need to be taking care of themselves.''

It's a different stance than the one taken by older generations, possibly because college wasn't as expensive, and pensions were more prevalent, so aging parents didn't have to rely so much on 401(k) plans and their own thrift to get through their senior years.

But nowadays, with pensions disappearing and people living longer, saving for retirement is critical.

"A lot of folks might underestimate how long they're going to live in retirement,'' Ward says, adding that it's possible "your portfolio is going to have to last for 20 or maybe 30 years. You might be shortchanging yourself going into retirement if you haven't saved as much as you should have, or taken from retirement savings to fund other things, like college costs for your children.''

The T. Rowe Price survey, which questioned 2,000 parents and took place in December, shows that parents are willing to work extra hard, and add to their own debt burden, to pick up the college tab. Among those polled, 51% said they'd be willing to get a second job or work part time to cover tuition. And 52% said they'd be willing to assume $25,000 or more in debt to cover tuition. The number who said they "would borrow whatever it takes'' totaled 9% of respondents.

In part, parents might be motivated to help their children because of their own challenges repaying college-related debt. Among parents who relied on student loans to fund their own educations, 44% said that paying those loans off had affected their ability to put aside money for retirement.

But "our counter to that is ... you should be saving for college, if you can, up front,'' Ward says. "Start as early as possible and therefore the likelihood of debt is much less."

A 529 account is a good way to save. Contributions may qualify for a state tax deduction, and when money is withdrawn for college expenses, including room and board, it is considered tax-free income.

And don't worry that 529 savings will make it more difficult to get financial aid. "It will count as part of your assets, but it barely factors into the financial aid formula,'' Ward says. "It's really your income that drives the calculation.''

While the 529 account is — hopefully — growing, parents need to make sure their retirement savings are on track, Ward says.

"We like to see folks saving about 15% of their (gross) salary, and that includes anything you might get from your employer,'' Ward says, adding that T. Rowe Price also recommends age-based benchmarks, such as saving two times your salary by the time you're 40, six times your salary by age 50, and 10 times your pay by age 60.

Many people focus more on college expenses than retirement because it seems more immediate, says Christopher Zand, a principal with the financial advisory and wealth management firm of Brouwer & Janachowski in Tiburon, Calif.

"I've found once you pass that 45 or 50 age mark, the retirement piece comes more and more front and center,'' he says. "Once we walk them through the value of not having to be a burden on their children from a financial perspective, they quickly come around to seeing how valuable that is, and securing their future really becomes first priority.''

Still, Ward acknowledged, saving can be tough. And if push comes to shove, focus on preparing for retirement.

"It takes discipline and a willingness to really examine their budget,'' she says of parents being able to set aside adequate funds for both tuition and the years when they are no longer working. "We suggest you need to learn to live on less, on 70% to 80% of your salary, so you have room there to save for these other goals, such as college and retirement. Ideally, it would be nice to do both, but that's difficult, and that's why we say your retirement needs to come first.''

And if push comes to shove, focus on preparing for retirement.

"The number of years you can work are ultimately going to be limited,'' says Zand, "so maximizing the opportunities you have to put away for your long-term financial independence and security should always come first. There's no other way to replace those funds.''

Families should also take heart that there are ways to cut college costs. For instance, parents could consider offering their children a tuition "down payment,'' as opposed to trying to foot the whole bill. And young people don't have to go to the most expensive institutions to get a quality education.

"It used to be taboo to talk about your kids going to community college,'' Ward said. "I don't think it is anymore. I think a lot of parents think it's smart to go to a less expensive school to get basic requirements out of the way. Or go to a state school."

Comparison shop, she recommends. "It doesn't have to be whatever school at whatever cost,'' Ward says. "There's a lot parents can do when they're looking into colleges.''

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