Just before any flight takes off, your friendly steward/stewardess demonstrates how to use the oxygen mask “in the unlikely event of cabin depressurization.” What's the first thing you're told? “Apply the mask to yourself before you give it to a child or anyone else.” Are they advocating a selfish act? No. They realize your child is more likely to survive if you're conscious and the child is unconscious, rather than the other way around.

The same methodology can be applied to the retirement savings versus paying for college scenario. At some point, most parents will face this dilemma. (It's not an either/or proposition, but I'll be treating it that way for the purposes of this article.) Many financial professionals insist parents take care of themselves first before they tend to the children. They want parents to save for retirement before they spend a penny on their kids' education.

Is this smart?

In more ways than you think.

The favorite justification for placing retirement savings before paying for college is the adage: “You can take out a loan for college, but you can't take out a loan for retirement.” Though true and insightful, the damage of paying for college in lieu of saving for retirement is costlier than parents may think.

According to the Sallie Mae report “How Americans Pay for College—2016,” the average parent pays $11,000 out-of-pocket for each year of college. That's $44,000 per child. (This number, by the way, does not include loans, which average $7,700 per year.) If $44,000 per child seems high, it gets worse. Much worse.

A 2013 New York Times article stated the average age of a parent with a 17 year old was 46½ (45 for women, 48 for men). Let's say they pay the average amount out-of-pocket to send little Johnny to college. Furthermore, let's say they pay this in lieu of contributing to their 401(k). That's $11,000 less per year into their retirement savings account.

If we growth that annual “missing” contribution of $11,000 per year for four years at 8 percent per year until the required minimum distribution age of 70½, we'll see a shocking revelation. Those parents might have thought they paid out only $44,000 for their child's education, but, in reality, the number was much higher. The retirement value at age 70½ would have been $270,000.

Here's where it gets much worse. If we assume a 4 percent withdrawal rate, our unfortunate parents are out $11,000 a year in retirement (assuming the portfolio's grows at 4 percent per year; thus, keeping the total post-retirement value of the “missing” contribution the same).

So, that $11,000 tuition payment isn't just a four year thing, it's a forever payment during the parents' retirement years. The parents would be better off having their child take out more in loan money.

Just make sure the child majors in engineering so the ensuing job pays enough to pay back the college loan.

Instant Insights /

A college degree or a comfortable retirement?

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