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Meeting the dual financial goals of higher education and retirement can be complex, but with careful planning and disciplined investing, families can achieve both.

Trying to balance funding children’s college expenses while saving for retirement can be complex and tricky. College tuition has risen by an annualized rate of 5.7% since 1983, and at many exclusive private colleges, costs currently exceed $90,000 per year.1 In addition to that funding challenge, saving for a desired retirement lifestyle requires consistent, disciplined investing over the course of several decades.

The question facing families isn’t whether to invest for college or retirement, it’s how to effectively invest for both—often at the same time—using the same pool of investible assets.

The key to success? Avoid overshooting one goal at the expense of another. It’s important to have a separate and discreet plan for each. But, when it comes to prioritizing goals, retirement funding should come first. While financial aid may help fill a college funding gap, there simply is no financial aid for retirement—so it must remain paramount when setting long-term planning targets.

Here, we take a closer look at how to balance these competing goals.

Lesson 1: Don’t cannibalize retirement savings to pay for college 

One common pitfall to avoid is the temptation to tap into retirement accounts to fund education. In fact, two in five Americans have used their retirement funds to pay for college, which comes with a huge opportunity cost. Every $25,000 withdrawn can reduce a retirement account by $80,000 over 20 years. That’s a savings amount that most families can’t afford to lose.2

For higher earning families, some financial professionals suggest setting aside 15% of gross income each year toward retirement. But even modest contributions can add up over time. A 25-year-old earning $50,000 per year, for example, who contributes 3% of their annual income (rising 1% per year) with a 5% employer match could end up with $2 million at age 65.

How much to save for college? The answer will depend on the type of educational institution children plan to attend (i.e., a public or private university), and what percentage of the costs their parents may choose to shoulder. According to our College Planning Essentials, investing approximately $325 per month for a newborn child, for example, could pay for up to 50% of the total cost to attend a public, in-state college. 

 

Lesson 2: Explore all available options to maximize dedicated college savings

How families choose to invest can also make all the difference. Investing in tax-advantaged 529 plans, for example, can allow parents to enjoy tax-deferred growth and make tax-free withdrawals (and access to other benefits) when paying for qualified education expenses. The upside can be significant: Investing $10,000 in a 529 plan and making $500 monthly contributions over 18 years could generate $40,000 more than a taxable account.

Other types of investment solutions, such as target-date funds (where the asset allocation changes based on a targeted retirement date) can also provide a smart and disciplined approach to accumulating assets for retirement. Some target-date funds even factor in investor behavior (i.e. timing and amount of withdrawals) into their investment allocations, which is an important consideration for those trying to balance multiple goals. We think it’s a good practice for savers to determine their retirement “checkpoint” as shown in the Guide to Retirement, to see if they are on track or not for retirement, then make any adjustments accordingly (Exhibit 1).

Like most things in life, achieving a balance is everything—and that truism applies to the simultaneous goals of funding college and retirement. Here’s the good news: With proper planning, disciplined investing and the guidance of a financial professional, savers can achieve both ambitions. 

1. BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represent cumulative percentage price change from 12/31/82 to 12/31/23.
2. Assumes that assets would have remained in a tax-advantaged retirement account instead of being withdrawn for college, earning 6% annual investment returns for 20 years, compounded monthly. This example does not represent the performance of any particular investment. Different assumptions will result in outcomes different from this example.
3. J.P. Morgan Asset Management, Long-Term Capital Market Assumptions. The above example is for illustrative purposes only and not indicative of any investment.
4. J.P. Morgan Asset Management. Illustration assumes an initial 1. $10,000 investment and monthly investments of $500 for 18 years. Chart also assumes an annual investment return of 6%, compounded monthly, and a federal tax rate of 32%. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses that would be paid by a 529 plan participant. Such costs would lower performance. This chart is shown for illustrative purposes only. Past performance is no guarantee of future result. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.
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