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Parents should prioritize funding their own retirement accounts before opening 529 college savings plans, experts say.
With U.S. personal savings rates at only 4% and consumer sentiment at all-time lows, families with shrinking budgets must choose between retirement and college savings, making the sequencing of financial priorities more critical than ever.
If you’ve maxed out your retirement contributions, a 529 is the next logical bucket, especially in states with deductions.
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The standard airline safety instruction “secure your own mask before helping others” applies to personal finance too.
On a recent episode of the How to Money podcast, hosts Joel and Matt issued a warning that cuts against the grain of millennial parenting culture. “Some folks are just too keen to invest for their kids,” they said. “They open up a 529. They start stuffing money in before they’ve optimized their own investing. Millennial parenting is very different than the way our parents parented. We put more pressure on ourselves to provide for our kids in a way that might not be best for our overall family financial situation.”
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The stakes are concrete. A parent who diverts $300 a month into a 529 instead of a 401(k) for 20 years walks away with a great college fund but a potential retirement gap, especially if an employer match is lost. Remember, your kid has access to student loans for college. Your retirement has to be funded out of pocket.
Consider a 35-year-old earning $110,000 with a 5% employer 401(k) match and $400 a month to allocate. Path A puts the full $400 into a 529 and skips the match. Path B captures the match first, then routes the remainder to a Roth IRA. Over 30 years at a 7% return, Path A produces a college fund near $490,000 and a retirement shortfall in the same neighborhood, because the forfeited match alone (roughly $5,500 a year of free money) compounds into more than $500,000 by age 65. Path B funds college through a mix of cash flow, scholarships, and modest 529 contributions later, while preserving retirement.
Read More: The 529 Mistake Parents Are Making
