Should I put money into my retirement account or my children's 529 plan?
Nov 07, 2020 | 07:45 am
In this week's GME presentation to Hopkins residents a question was raised: If I have extra cash, should I: fund my children’s college plans, pay down my own debt, or invest in my own retirement plan?
The answer below is taken directly from e-Book 1: Personal Finance Essentials for Doctors. In addition, the e-Book also addresses the nuances associated with the question: If I have extra cash, should I pay off debt or invest?
The reflexive emotional response is to pay for our children’s college education. The response may be partly motivated by guilt; we feel that paying off our own debt or investing in our retirement are selfish choices.
But the mathematically correct answer is to invest in yourself first by building up assets and reducing debt.
To understand this assertion remember the power of compounding concept we learned in the time value of money section of this book. The most powerful compounding benefits accrue to investments over many decades. The contents of our children’s college savings plans won’t last for decades because they’ll typically be used up within 8 to 10 years. In contrast, our own retirement funds will have many decades to grow. Thus, there is much greater long-term upside to our household from paying down our debt and investing in our retirement.
Further boosting this argument is the possibility that our child(ren) will qualify for loan forgiveness, obtain a scholarship, or may not attend college at all, in which case our efforts to bend over backwards and invest everything in 529 plans will have been misplaced.
Another factor is that our children have their entire careers, spanning four to five decades, to pay down their own debts, while we have substantially less time: all the more reason to pay down our debts first.
Yet another strong argument in favor of building up our own assets is that if we prepare well for retirement we’ll be able to leave our children a substantial inheritance. That inheritance could be used to pay off their debts, should they still have any.
Furthermore, by steadily paying off our debts and saving for our retirement we’ll experience less stress (unless we succumb to the aforementioned guilt). Our children will be better off living in a home with less anxious parents. Lower anxiety may also help to safeguard our own marriage or partnership, which is also pivotal for our children’s emotional wellbeing.
Finally, consider that giving our children responsibility for their financial future, which includes learning to pay off debts, helps them mature and prepares them to be independent.