Saving for college hurts retirement for nearly 60%, survey says

A new rule for 529-to-IRA rollovers could help those who have both retirement and college savings goals.

Planning for retirement and saving for college are increasingly becoming competing priorities — and many parents are staying in the workforce longer because of it.

Among people age 25 to 80 who are saving for both of those causes, 58% say they are delaying retirement “significantly or moderately due to these dual financial goals,” according to results of a survey published Wednesday by the Society of Actuaries.

And it’s not just that people are putting less into their 401(k)s and individual retirement accounts IRAs — 41% of the 1,000 respondents said they’ve taken early withdrawals from those accounts to help pay for college for relatives. Additionally, 40% of people are taking out loans or planning to in order to pay for a child’s education, with 16% doing so by borrowing from family or friends.

Those financial demands have led more than a quarter of people to work second jobs (26%) or put in longer hours at their primary jobs (39%).

Most of those surveyed are also funding emergency accounts (92%), putting money aside for travel (87%) or saving to buy homes (68%), according to the Society of Actuaries.

ADVISOR ANGLES

These competing demands can help show the value of good financial advice, according to several advisors. One of the common responses that financial professionals had to the survey results is that people should be careful about the decision to delay retiring in order to help pay for college. While students can borrow to help pay for school, the same isn’t true for retirement, advisors said.

In identifying a college savings strategy, it’s important to first assess clients’ core values, Eric Roberge, CEO of Beyond Your Hammock, said in an email.

“In having these conversations, we also often realize that paying 100% of a college education for a child is actually not the top priority for the family,” Roberge said. “In this case, clients get more clarity — and more confidence — around decisions to adjust that goal.”

Having realistic conversations about how fully funding a college education will affect clients’ financial futures is crucial, said Stephen Maggard, an advisor at Abacus Planning Group.

“Some clients are adamant about paying 100% of their children’s education because they see it as a critical investment into their children’s future and they themselves have seen the benefit of their education,” Maggard said in an email.

The average cost of college across public and private institutions, is now more than $36,000 per year, having doubled since 2000, rising annually by an average of 2%, according to figures from the Education Data Initiative.

“Selecting a college needs to be a business decision. However, so much emotion is involved it’s hard to make an objective decision,” Byrke Sestok, financial planner at Rightirement Wealth Partners, said in an email.

It’s also worth considering that students often change majors, so “prioritizing cost and schools with strong programs with multiple fields of interest is in your best interest,” Sestok said.

The total cost of big-name schools should be a consideration, unless clients are wealthy enough to not bat an eye at the price tag, he noted.

“It has been my experience as a planner that children comprehending the weight of debt when they have never worked for a living isn’t practical,” Sestok said. “I believe kids should have skin in the game but saddling them with more than the maximum Stafford loans is not in their best interests.”

Another advisor, Brandon Gibson of Gibson Wealth Management, said that planning for college costs as soon as possible is important.

“To estimate the actual cost of college, utilize net cost calculators on college websites. It’s essential to check these calculators well in advance to avoid getting emotionally attached to unaffordable colleges,” Gibson said in an email. “To maximize financial aid eligibility, make strategic financial decisions before the end of the sophomore year” of high school.

529 PLANS

A tool that parents and grandparents increasingly have turned to are 529 college savings plans – although the focus on those accounts appears to have gone down slightly in the wake of the pandemic.

Net contributions to 529 accounts during the first quarter of 2023 were $1.6 billion, which is half the level of $3.4 billion during the first quarter of 2022 and also down from $3.7 billion in the first quarter of 2021, data from ISS Market Intelligence show.

As of the end of March, total assets in 529 accounts were $408.5 billion, down from $431.7 billion a year prior.

“As of Q1 2023, 529 assets decreased over the past year primarily due to investment performance, while the net flows also decreased in part due to a material drop in the U.S. savings rate driven by inflation pressures and the reopening of the economy increasing demand to travel, among other spending categories,” Paul Curley, associate director of 529 and ABLE solutions at ISS Market Intelligence, said in an email. “Through Q2 2023, we have seen positive investment performance coupled with increasing savings rates, and so we expected 529 assets and net flows to increase.”

SECURE 2.0 BUMP

College savings accounts got significantly more consumer-friendly as a result of the Secure 2.0 Act that Congress passed last year.

Beginning next year, 529 owners or beneficiaries that have had accounts for 15 years may be able to roll assets penalty-free into Roth IRAs.

“There are nuances to this opportunity that should be understood prior to making this part of the plan, but nonetheless, this new rule opens the door for some additional planning considerations for college funding,” Crystal Cox, senior vice president at Wealthspire, said in an email.

“Clients have been very open to the idea, and it has given them more confidence with saving for college. Especially clients with younger children because we don’t know what’s going to happen with college tuition in 10-plus years,” Cox said. “The new rule brings an extra level of peace of mind that people aren’t going to get penalized if they over save for college expenses.”