Last Modified on March 5, 2020

Early retirement and saving for your child’s education are two things that are extremely time-bound. Sometimes they can also occur at the same moment in your life, which can make it difficult to save for them both without falling short on other aspects of financial planning. Preparing for retirement is in itself one of the most crucial and arduous activities for most individuals. But when you make up your mind for early retirement, you also find yourself racing against time and working doubly hard to achieve your goals in a much smaller duration. Here’s what you need to know to not let it come in the way of your child’s education:

The conflict

Some experts argue that retirement should be the first priority for parents regardless of whether you choose to retire early or in your 60s or 70s. This is because your child is likely to have more alternatives ahead of them than you would in your retirement. Children can find scholarships or other forms of financial aid. They can also choose community college or not decide to go to college at all, but retirement, on the other hand, does not come with many options. When you retire early, you choose to exhaust the possibility of working or earning beyond a certain age. This leaves you with only a limited pool of savings, investments, and later Social Security benefits to keep you secure for the rest of your life.

Ways to save for a child’s education with early retirement

Here are some methods you can adopt

529 Savings Account

The tools to save for a child’s education remain the same despite your decision to retire early. One of the best forms of savings is to invest in a 529 account. However, in order to maximize the benefits of a 529 account in a short period of limit, here is what you can do:

• Be quick: Open an account as soon as you can. Sometimes parents wait till kindergarten to start planning for their education expenses. However, with early retirement, everything on your agenda needs immediate attention. When you start saving right after your child is born, you can benefit more from the compound interest on your contributions.
• Learn to prioritize: Sometimes, parents contribute to a 529 account along with saving in the bank. It is true that your savings in the bank can be used for covering many other expenses and a 529 account is typically limited to education-related costs (you have to pay tax along with a 10% penalty if you use it for other expenses). However, bank savings accounts earn a very low rate of interest per annum, whereas 529 accounts grow over the years along with the market. They can bring you more returns in the same amount of time.
• Include family: It is common for grandparents, aunts, and uncles to bring gifts for your child on special occasions. So, a little help from them can help you in a great way if you wish to retire early. Talk to your family and ask them to make contributions to your child’s education expenses instead of bringing them presents. This may seem like a small contribution, but it can have a substantial impact over a period of many years. Grandparents can also open a separate 529 account for your child.

Roth IRA

Individual retirement accounts like a Roth IRA can also be used to cover the costs of education. If you do not want to open two separate accounts for retirement and higher education, you can stick to a Roth IRA. This is particularly helpful if your child decides to not attend college, in which case you can use the savings for your retirement expenses. However, on the other hand, if your child does decide to attend college, you can opt for early withdrawal. Roth IRAs can be used to cover qualified expenses without a penalty, but keep in mind that you will still have to pay income tax on your earnings.

Other Methods

There are also some other strategies that can help reduce the burden of college education expenses, along with saving for your early retirement.

• Speak to your child: Although you will have to wait a while for your child to be of an appropriate age to begin a conversation about college, it can still help you decide how much you need to save. Sometimes children decide to not attend college despite their parent’s savings. In such a case, you can concentrate on your early retirement without having to worry about other things.
• Look for financial aid: The Free Application for Federal Student Aid (FAFSA) has helped many students with their education expenses. You can see if your child qualifies for financial support by applying there.
• Pick community college: Some students initially study at community colleges and then transfer to a private or public university. This helps save a lot of money and also gives them time to earn a good GPA or possible scholarships.
• Aim for half: It is alright to not fund your child’s entire education. With early retirement, you may not have a lot of time on hand. You can aim to save half of it, and your child can pay the other half with a loan or scholarship.
• Seek scholarships: If your child is good in sports or academics, they can apply to colleges and look out for sports scholarships, etc.

Some states offer tax benefits for a 529 account. This can be of great help. You can also settle at a place closer to your child’s college and save boarding expenses.

To sum it up

Early retirement requires every ounce of your energy and commitment to work hard for a limited number of years so you can have a relaxed and comfortable retirement. But regardless of when you retire, your responsibilities and duties are likely to remain the same. It becomes necessary to prioritize in such situations. Providing for your children is important for all parents, but you must understand that your child is likely to have more ways than one to lead a successful life. However, after retirement, your income avenues and savings funds will only decrease with each passing day.

Are you planning to retire early and need help in saving for your child’s education? Get in touch with financial advisors to know how you can achieve both these goals.