College or Retirement? How Single Parents Can Successfully Save for Both
Should you prioritize saving money for your kids' future—or your own future? It's a difficult question, but we have answers.
As plenty of single parents can attest, balancing the competing priorities of saving for your retirement and providing for your children's college education is no small challenge.
It's a predicament that's fraught with economic realities as well as emotions—should you prioritize setting aside money for your children's future or for your own? Or should you try (somehow) to accomplish both? It's a tightrope act that can be stressful, confusing, and discouraging when pursuing both goals concurrently on a single income. What's more, according to research from Merrill, this struggle might be even greater for women, who face a significant wealth gap throughout their adult lives compared to men. And when those underpaid women are single moms footing the bills for their families, is that kind of long-term saving even possible?
Yes. Single parents can navigate this very real financial planning dilemma successfully. To help you do so, we asked money experts to shed some light on how single parents should approach these seemingly competing challenges. Here are 10 concrete steps that can help provide your children with money for education, while also protecting your own financial future.
Advance planning is your friend when funding college
Parents, single or otherwise, have probably heard this admonition more often than we care to admit, but that's because time really can work in your favor when it comes to accomplishing big money goals like saving for a child's college education.
"Saving early can avoid the need to borrow against your retirement down the road," says Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America.
One of the first steps to take when your child arrives (yes, before they're even out of diapers) is opening a 529 college savings plan, which offers tax advantages, diverse investment options, and significant contribution potential so that you can set aside a big chunk of money toward college tuition.
"The more you contribute prior to children enrolling in college, the less money will be owed down the line, ultimately protecting the family from loans that can follow children into adulthood," says Sabbia.
UTMAs are another important option
When Lakisha Simmons, PhD and author of The Unlikely AchieveHer: 11 Steps to a Happy and Prosperous Life ($17, Amazon) became a divorced single parent, she immediately opened UTMA accounts for each of her children.
"For birthdays and holidays, 25 percent of any monetary gifts they receive is sent to their UTMA accounts," says Simmons. "When they start working, they will send money to their own UTMA to invest for their future."
UTMAs (Uniform Transfer to Minors Act) are custodial accounts usually held by a parent or grandparent for the benefit of a child. The assets (which can include money or property) are passed to the child when they reach the age of maturity, which is usually 18. And here's the beauty of UTMA accounts (as opposed to perhaps a 529): usage of the money or assets in these types of accounts is not limited strictly to education expenses.
"The UTMA allows me to invest money for their use outside of just college," explains Simmons.
Additional facts to bear in mind about UTMAs: There are no contribution limits on these accounts (good). However, the growth is not tax deferred (not so great). The account will be subject to taxes as the income, whether it's in the form of interest or dividends, accrues each year. In addition, withdrawals are not tax-free.
Maximize the value of your 401(k)
Taking full advantage of 401(k) and 403(b) plans can be critical to building your retirement nest egg as a single income household thanks to the matching contributions provided by many employers (which, let's all say it together: is essentially free money.) The tax benefits associated with these accounts, meanwhile, can help you fund your child's college savings.
"Single mothers face a particular challenge of a single income and that income is a lower wage than the white male," says Simmons. "The wage gap makes it harder to make ends meet. That's why it's important to maximize workplace tax-deferred accounts because these contributions reduce [the account holder's income] tax burden and ultimately allow for saving a little bit more."
Contributions to workplace accounts like a 401(k), or a 403(b) are taken from your salary before income taxes are calculated, thus reducing your overall tax burden. That income tax savings shows up in your paycheck, money that can be directed into a child's college savings account, whether it's an UTMA, 529 or something else.
"Maximizing my workplace retirement accounts allowed me to become financially independent and contribute to my children's future college expenses because of the tax savings," says Simmons.
Roth IRAs can also be a valuable tool
Ideally, you also have a Roth IRA where you're putting aside some money for retirement. And if you don't have enough free cash to max out your annual Roth contributions (the annual limit is $6,000 for those earning less than $125,000) you probably should not be putting any money into a fund for a child's education just yet, says Scott Butler, financial planner with Maryland-based Klauenberg Retirement Solutions.
However, if you really want to save for your child's future and your retirement simultaneously, it's worth noting that a Roth can be a solid tool to help accomplish both goals more effectively.
"You can use the money contributed to your Roth for qualified education expenses tax-free. So if you contributed $30,000 into a Roth over five years, you could use up to $30,000 for education expenses and leave the growth in the account to help with retirement," explains Butler. "Also, if your student does not end up needing your Roth funds, the funds are already where you're going to want them to be for your retirement."
Save your raises
It's human nature to want to splurge or live a little larger after earning a raise or receiving an unexpected lump sum of money. Brian Walsh, a CFP with SoFi, advises single parents to do their best to ignore such impulses when there are more important goals on the horizon.
"Save your raises and extra money, such as tax refunds, instead of increasing your spending," says Walsh. "This will keep your spending fairly constant while your income increases."
Another important point with regard to raises: single parents need to make it a habit to regularly look for ways to increase their income, whether through a bigger salary, a side hustle, or some other proactive move.
"The best way for a single parent to save for retirement and save for college is to simply make more money. There usually is nowhere else in our budgets to make cuts to reallocate the savings," says Amanda McDonald, founder and president of Unbound Disability Claims and single mom to two children. "Start small. Think about what you spend your time doing when you have free time. That's likely your passion. Now figure out a way to make money doing that."
Leverage credit card cash rewards
Another creative way to balance retirement and college savings goals is to earmark credit card cash rewards for one of these two needs. It may be a small step, but every dollar counts on this journey.
"Maybe you focus your monthly savings efforts on your retirement fund, but you get a credit card that allows you to get cash back that money can then be put into a 529 plan," says Walsh. "That way you're taking care of retirement but using the credit card rewards to help save for college rather than travel or other perks."
Avoid debt like the plague
Micah Wotton, CTO of money management app Douugh, also happens to be the single dad to two children, ages 12 and 16. So he speaks from experience when counseling single parents to avoid debt as they're trying to accumulate money for retirement and college.
"Go without, get less, select cheaper," says Wotton. "When you're already struggling from paycheck to paycheck, short-term cash through a credit card or loan is really attractive. But it's a very short-term solution to a long-term problem and will make that problem even worse in the mid-term."
Establish family bank limits
While we're on the subject of avoiding debt, being clear with children about the limits on parental spending throughout their lives and when it comes to the amount of college funding you're willing to kick in can also be a critical step to reaching your goals. Doing this will help children understand they play a role in those financial goals and that they bear some responsibility for their future.
"Clearly define the type and level of support you're able to provide your children, without compromising your financial future," says Sabbia, of Bank of America. "For instance, rather than instantly unleashing the wallet strings, work with your child on budgeting and savings strategies."
Have candid and transparent conversations about financial concerns, boundaries, and needs. Without any significant financial experience of their own, children may be unaware of the burden they're placing on a parent. Be honest and open about your retirement goals and make clear how, by establishing financial independence and forming positive money habits, children aren't just protecting their own financial wellness, but yours, too, says Sabbia.
While you're having this frank discussion with kids, you may also want to encourage them (at the appropriate age) to get a job and start setting aside earnings for college, as single mom Sheri Atwood did during her teen years. Raised by a single mother herself, Atwood worked during high school and college to pay the education bills.
"While this may go against what most parents assume or are willing to admit, you're not required to pay for all your child's college expenses by yourself," says Atwood, founder and CEO of her own company, SupportPay. "In addition to a full course load, I worked a minimum of 30 hours a week while in college. Through my job, loans, and scholarships, I paid all of my college expenses."
Atwood has instilled that same work ethic in her own daughter, who at 16 also got a job to help fund her education.
It's important to reward yourself once in a while for all the hard work you do as a single parent, and for meeting goals, but try to find rewards that are either free or cost-effective.
"Identify what you buy to make yourself feel happy, and work on reprogramming yourself," says Wotton. "For me, it used to be computer games. When I needed a pick-up or to feel better, I would buy a new game and lose myself in it whenever the opportunity presented itself. Instead, I now put that money into paying a bill early, putting aside cash, or a micro-investment through an app. Instead of getting the dopamine release from purchasing and playing a game, I get an ongoing dopamine release from not stressing about a bill, or seeing my balance going up, or seeing my investment grow."
While Wotton still occasionally buys those video games, he only does so when they're heavily discounted.
Parting wisdom: don't be guided by guilt
We started this discussion by acknowledging that emotions can often play an outsized role in financial choices as parents. For single parents, in particular, guilt can be a significant factor clouding better judgment. It's natural to want do everything we can to help our children, laying the groundwork for them to succeed in life. But as you plan for your family's future, guilt is not your friend. Focused resolve is.
"All too frequently, I see single parents, women especially, mired in guilt or shame, due to divorce or other circumstances. They feel they have to 'make up' and either try to pay for their kids' college instead of paying off their own debt, or take out Parent Plus loans," says Kristine Stevenson Seale of Texas-based Advocate Financial Coaching. "Don't do it. It is a noble sacrifice from a loving place in the heart, but fast forward 35 or 40 years and ask yourself this: Do I want to be a financial burden on my child when I'm older because I did not adequately save for my own retirement?"
There's no better time than the present to ponder that question. (And hopefully your kids are still in diapers as you're contemplating the answer).