Morgan Stanley
  • Wealth Management
  • Aug 13, 2020

How I Balance Retirement Savings with My Kids’ Education

When you have multiple financial goals, how do you prioritize? Here’s how one person strikes a balance between retirement and his kids’ education.

We all want things from our money. For me, that includes a bright future for my kids, a comfortable retirement and the enjoyment of my life here and now. 

My wife and I are building college funds for our three children (ages three, seven and ten) while also saving for retirement.

So how do we set priorities when looking at multiple financial goals? Here are the questions we ask ourselves (and the answers):

How much margin for error should we budget for our financial goals?

Think about goal-setting in the context of your likelihood of success. You can estimate on the high side for priority goals when the most important thing is reducing your chances of coming up short. However, being over-prepared comes with a cost of its own. 

An analogy: Maybe you have an appointment. There’s potential for an unexpected delay, like heavy traffic. If it takes you 45 minutes to get there under normal circumstances, you might give yourself an hour, just in case. Now, if a certain meeting is super important, you could leave much earlier, say two hours beforehand. In the vast majority of cases, you’ll get there far earlier than you needed to, but you’ll almost never be late. The cost of this approach? The hour you could have spent doing something else. If it’s an especially high-priority meeting, leaving very early may be the right move, especially if the commute is unpredictable. But if it’s something routine, the time sitting around might not be worth the other things you could be doing (like an extra hour of sleep). 

The ramifications of falling short on retirement are pretty extreme: not being able to support yourself in your old age. But if you reserved the same margin for error for every financial goal, you might end up sacrificing your quality of life here and now. Not every goal is equal. 

What are the best and worst case scenarios?

If we run behind schedule, what’s the backup plan? 

My wife and I are currently on track for our retirement goals, but we’re trending a bit below on our kids’ education goal. That’s a conscious choice, for two reasons. First, if push came to shove, we could look at other areas of our financial lives to compensate. Second, student loans are an option if necessary. And there are other ways to manage costs, such as our kids getting part-time jobs or choosing a less expensive university. 

For retirement, the fallback options tend to be less robust. We could travel less and generally live a leaner lifestyle, but it’s difficult to predict exactly how decades of retirement will go. For example, there may be unavoidable expenses like health care or long-term care. Even simply living a long time can escalate our retirement costs. There’s no ideal way to borrow your way out of a retirement problem.

Because of this, my wife and I are currently prioritizing retirement ahead of our kids’ education. Not that we don’t care about their education, but because we have more options if we fall short.

How flexible are our timelines?

Some goals have more flexible timelines. For example, you may have some discretion on when you need to buy a car or start a business, so you could conceivably take a little longer to save or let your money grow, if necessary.

By contrast, there isn’t much wiggle room on when my kids go to college—that’s a function of their age. Similarly, retirement isn’t all that flexible. If my wife and I are running behind, we might have a little wiggle room on when we retire, but there’s a limit. At a certain point, we may no longer be able to work anymore, or our retirement may not be entirely optional.

When you’re flexible about when you need to meet a goal, you inherently have a higher margin for error. When it comes to more flexible goals, it’s better to save in a way that gets you there most often, without worrying about every conceivable what-if. 

How will we balance saving for three different children?

I think of my three kids’ college funds as three distinct financial goals with the same priority but different time horizons. The nearest-term goal (meaning my oldest kid’s college fund) is slightly less forgiving because the time horizons are shorter. 

In the end, regardless of which account the money sits in, it can be used to cover any child’s expenses. So, if you’re underfunded when your first kid heads off to school, you can probably chip in from your other kids’ accounts, assuming you can increase your savings to plug the gap or reallocate from elsewhere. (If you’re running behind because market performance has been weak, that may even out over time.) If we didn’t take some corrective action to bring our younger children’s balances back up, we’d effectively be prioritizing each child’s education differently, which we wouldn’t want to do. 

At the end of the day, prioritizing your goals is a personal process, so you need to weigh your own values and aspirations against your income and savings. The most important thing is to know what matters to you and to get on the path toward making it a reality.

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