Saving for college can impact your clients’ retirement

Sending a child or other loved one to college and looking forward to a comfortable retirement are two keystones of the American dream. However, the cost burden on American families to realize these dreams is becoming more challenging. Despite this, a relatively small portion of Americans work with a financial professional.

Increasing burdens of retirement funding and college tuition

Historically, most Americans didn’t have to worry too much about saving for retirement. Until the 1980s, the option for a defined benefit pension was the norm for American workers. But these types of retirement plans are quickly becoming a thing of the past. As of March 2022, only 15% of private industry employees had access to a defined benefit plan, according to the U.S. Bureau of Labor Statistics. That percentage will shrink further as more companies transition to defined contribution plans, which place the obligation of saving for retirement on employees. 

While Americans take on the responsibility of saving for retirement, the cost of a college education is growing rapidly. From 2010 to 2020, annual college tuition in the U.S. increased at a rate of 12% per year, well above the average rate of inflation, according to the Education Data Initiative. Additionally, the U.S. Department of Education rolled out changes to the free application for federal student aid. While many families will benefit from the changes, some will see their aid decrease. Families with multiple college students, students with divorced parents, and those with small businesses or farms could qualify for less financial aid, according to Money. 

The resource gap

A Society of Actuaries Research Institute report, “Financial Perspectives on Aging and Retirement Across the Generations,” revealed that only about a third of millennials, Generation X and younger baby boomers worked with a financial planner in 2020. Additionally, focus group interviews conducted by the SOA in 2023 found that while financial advisors and retirement plan providers can be effective in educating 35-to-45-year-old clients about saving for retirement, most people in this age group do not work with these professionals.

The focus group also revealed that instead of financial planners, many Americans in this age group rely on friends, family, coworkers and social media. Younger savers, who are busy with jobs and families, often lack the time and energy to search for a trusted financial professional. However, competing financial goals demand prioritization, and building financial literacy with a professional can provide guidance.

Uncovering the challenges of competing goals

Savings goals don’t exist in a vacuum — many Americans are saving for more than one thing at a time, such as retirement and college tuition. Identifying potential challenges families face can help financial professionals pinpoint the kind of advice and support clients may need to achieve their goals. 

The SOA surveyed Americans who are actively saving for both their retirement and a loved one’s college education to find out the following: 

1. How families pay for college and retirement.

2. The impacts of having dual savings goals.

3. What trade-offs and sacrifices families make to save for both.

A snapshot of these dual savers shows that 93% of respondents are saving for their own children’s college education, and 66% of baby boomer respondents (aged 58-76) are saving for their grandchildren’s education. Many respondents are also saving for the education of other family members or friends. On average, they save about $3,000 a year for college and have less than $200,000 saved for retirement.

In addition to retirement and college tuition, 92% of respondents also reported saving for a general savings/emergency fund. Other popular savings goals include:

• Vacation/travel (87%).

• Purchasing a home/property (68%).

• Large appliances (63%).

Financial and lifestyle compromises

Forty percent of respondents said they will have to take out a loan to help pay for someone else’s college education due to saving for both college and retirement. Twenty-eight percent said they will have to take on other kinds of debt as a result, and 16% said they’ve had to borrow from family or friends. 

Respondents also reported that saving for both college and retirement had a significant impact on their lifestyles. About two-fifths (39%) reported having worked longer hours to achieve their dual savings goals, and 26% have taken on additional jobs. Other sacrifices include:

• Downsizing homes (14%).

• Selling belongings (11%).

• Going without medical care (9%).

Retirement and college trade-offs

A deeper dive into other findings of the survey reveals that the dual savings goals have significant effects on retirement plans, with more than half of all respondents (58%) who are of working age or retired saying they delayed retirement significantly or moderately. Furthermore, 41% of dual savers have used retirement funds to pay for the college education of a relative, risking a tax penalty for early withdrawals.

Having dual savings goals also impacts students’ college experience. Forty-nine percent of college fund beneficiaries report a medium to large impact on their college experience. Forty percent had to choose in-state or public colleges over out-of-state or private ones, and 35% say collegegoers will have to choose a two-year community college over a four-year institution. About 12% of dual savers report their college fund beneficiaries will have to postpone going to college due to their dual-savings goals.

This research indicates that saving for retirement and college impacts the plans for both. College plans become limited by the financial constraints of saving for multiple goals, and retirement plans are likely to be delayed and savings decreased. In addition, people’s daily lives are affected by the lifestyle or career changes made to accommodate these savings goals. 

Professional financial planners could provide support for many of these savers, helping them prioritize objectives and attain financial literacy. Enabling people to strike a balance between funding a college education and ensuring retirement security is key to realizing both.