If you asked a lot of young couples about their savings priorities, many of them will say "saving for an education". Their child's 529 plan takes precedence over their own retirement, which is a perfectly understandable way to reason things.
But it's not always such a clear-cut decision, according to financial planners who work with families struggling with this decision. Like so many things in life, the right answer depends on individual circumstances.
It's a Common Dilemma
Parents can feel torn between saving for their own retirement and providing for their children's future education in a 529 plan. Both types of saving involve investing over the long term for a steady rate of return, so time plays an important role in either plan.
Some parents stock away too much in their child's 529 plan, leaving little or no money left for early investing in their own retirement funds. That can be a big mistake, since it leaves them with no means for living later on. Plus, it sort of defeats the purpose of providing for their kids, since they're potentially becoming a burden by not planning for retirement.
But it's hard for most parents to ignore their child's future, and everyone wants their kids to go to college. So how can parents decide what to do, and when?
Is There a Firm and Clear-Cut Rule?
While parents can feel pulled in both directions as far as where their investments should go, there are a few hard-cast rules to follow.
One of these rules involves your 401(k). If you have a 401(k) plan at work, nothing short of a federal emergency or the apocalypse should stop you from contributing the maximum amount that's matched by your employer.
Matching contributions are a rare a precious gift from employers - free money - that nobody should turn down. Even if it means delaying your 529 contributions, put your money into your 401(k).
Another accepted truth is that even just a little bit of investment in a college plan early on will make a difference over time. That means while you're agonizing over the decision about where to invest your money, it might be wise to just stop and put away $50 per month just to get one started.
Then, time can take over and you'll have a nice chunk saved by the time Junior is enrolling for freshman courses at his chosen institution of higher learning.
Chris Hardy - CFP®, EA, ChFC®, CLU®,