Balancing investing in your children vs retirement

As the cost of college continues to soar and life expectancy increases, parents are finding themselves caught in a delicate balancing act: How to save for their child’s education and their own retirement at the same time.

For some parents, the desire to provide their children with the best opportunities for success outweighs the need to save for their own retirement. However, neglecting retirement savings can lead to significant financial hardship later in life.

While it may seem like a daunting task, there are strategies that can help parents effectively allocate their resources and make progress toward both goals.

Key takeaways

Parents are making sacrifices to help their adult children financially

The rising cost of living, combined with the increasing burden of student loan debt, has made it more difficult for young adults to achieve financial independence. As a result, many are turning to their parents for financial support.

Many parents already provide financial assistance to their adult children. More than 3 in 5 (61 percent) parents/guardians of children age 18 or older are currently sacrificing, or have sacrificed, financially to provide assistance to their adult children, according to Bankrate’s Financial Independence Survey.

So, what have parents sacrificed? According to the survey, parents/guardians of children ages 18 or older most often sacrifice their emergency savings (43 percent) or paying down/off debt (41 percent). However, retirement savings weren’t far behind, at 37 percent. These financial sacrifices can place a significant strain on parents’ finances, especially those nearing retirement age.

Gen X parents (ages 44 to 59) of adult children are more likely than baby boomer parents (ages 60 to 78) of adult children to make, or have made, a financial sacrifice for their children (69 percent compared to 56 percent). When it comes to sacrificing their retirement savings, the pattern persists: 40 percent of Gen Xer parents with adult children say they are or have sacrificed their retirement savings versus 33 percent of baby boomers parents with adult children.

“Parents should prioritize their own retirement savings over saving for their child’s education,” says Greg McBride, Bankrate’s chief financial analyst. “There are a multitude of ways to pay for college … but increasingly we’re responsible for funding our own retirement.”

Parents feel like they need to earn more to be financially stable

Many parents feel like they need to earn significantly more income to meet their financial obligations, including saving for retirement and their children’s education.

According to a Bankrate Financial Freedom Survey, parents with children younger than 18 believe they need to earn at least $215,000 a year to live comfortably. That’s more than three times the median earnings of full-time, year-round workers (about $56,929, according to the Census Bureau).

Just 2 percent of parents with children younger than 18 say they’re already making the annual income they need to feel comfortable, the same survey found. Many parents don’t expect things to get better, either: Nearly 4 in 10 (39 percent) parents with children under the age of 18 don’t think they’ll ever achieve financial security.

The rising cost of living has made it increasingly difficult to maintain financial stability. Prices have soared almost 21 percent since the pandemic, requiring an extra $210 per every $1,000 someone used to spend on the typical consumer basket, according to Bureau of Labor Statistics data. This, coupled with long-term challenges like rising housing costs and college tuition, has put a strain on many people’s finances.

Nearly two-thirds (63 percent) of U.S. adults say inflation is causing them to save less for unexpected expenses, while 45 percent say the same of rising interest rates, as of December 2023, according to Bankrate.

3 tips to help balance retirement and saving for your child’s education

If saving for college is straining your finances, it’s time to reassess your budget and set limits. Helping your kids is admirable, but protecting your savings is equally important. This can help them become financially responsible adults and ensure a brighter future for both of you.

1. Don’t neglect retirement savings

While it’s important to invest in your child’s future, it’s equally important to secure your own financial well-being. Prioritize retirement savings as a foundational step in your financial planning so you have a reliable income stream in your later years, reducing the burden on your children. Explore retirement plans, such as 401(k)s and IRAs, to maximize your savings potential.

2. Start saving early for both goals

Start saving early for retirement and education to harness the power of compound interest. Even small amounts can grow significantly over time. Consider using a 529 plan for education savings and a 401(k) or a Roth IRA for retirement — and automate contributions to both to make saving effortless. This can help reduce financial stress later and maximize your investments.

“Putting aside even a modest amount in a 529 college savings plan on a monthly basis from birth until it is time to head off to college can make a huge dent in your child’s eventual higher education costs,” says McBride.

3. Engage in open dialogue with your children about college funding

Open communication with your children can alleviate financial stress and foster a sense of responsibility. Discuss your financial goals and limitations, emphasizing the importance of saving for both college and retirement.

Encourage your children to explore scholarships, grants and part-time jobs to help reduce the financial burden. By having open conversations, you can avoid surprises down the road, and create a shared understanding of the financial challenges you’re facing and potential solutions you’re considering.

Bottom line

Balancing retirement savings and your child’s education is a complex challenge. By creating a financial plan, saving early and being mindful of spending, you can increase your chances of achieving both financial goals. Remember, the idea isn’t to sacrifice one goal for the other, but to find a sustainable balance between the two.

• Methodology

  • Bankrate commissioned YouGov Plc to conduct the 2024 Financial Freedom Survey. All figures, unless otherwise stated, are from YouGov Plc. The total sample size was 2,407 U.S. adults. Fieldwork was undertaken between May 16-20, 2024. The survey was carried out online and meets rigorous quality standards. It employed a non-probability-based sample using both quotas upfront during collection and then a weighting scheme on the back end designed and proven to provide nationally representative results. The annual incomes Americans feel they need to earn to be both financially secure/comfortable and financially free/rich are rounded to the nearest thousandth.
  • The 2024 Bankrate Emergency Fund study (that was conducted May 2024) was conducted by SSRS on its Opinion Panel Omnibus platform. The SSRS Opinion Panel Omnibus is a national, twice-per-month, probability-based survey. Data collection was conducted from May 17 – May 20, 2024 among a sample of 1,032 respondents. The survey was conducted via web (n=1,000) and telephone (n=32) and administered in English (n=1006) and Spanish (n=26). The margin of error for total respondents is +/- 3.5 percentage points at the 95 percent confidence level. All SSRS Opinion Panel Omnibus data are weighted to represent the target population of U.S. adults ages 18 or older.
  • The study (that was conducted January 2024) was conducted by SSRS on its Opinion Panel Omnibus platform. The SSRS Opinion Panel Omnibus is a national, twice-per-month, probability-based survey. Data collection was conducted from January 19 – January 21, 2024 among a sample of 1031 respondents. The survey was conducted via web (n=1001) and telephone (n=30) and administered in English (n=1005) and Spanish (n=26). The margin of error for total respondents is +/- 3.6 percentage points at the 95% confidence level. All SSRS Opinion Panel Omnibus data are weighted to represent the target population of U.S. adults ages 18 or older.
  • The study on emergency savings (that was conducted December 2023) was conducted by SSRS on its Opinion Panel Omnibus platform. The SSRS Opinion Panel Omnibus is a national, twice-per-month, probability-based survey. Data collection was conducted from December 15 – December 17, 2023, among a sample of 1036 respondents. The survey was conducted via web (n=1006) and telephone (n=30) and administered in English (n=1010) and Spanish (n=26). The margin of error for total respondents is +/-3.6 percentage points at the 95% confidence level. All SSRS Opinion Panel Omnibus data are weighted to represent the target population of U.S. adults ages 18 or older.