Retirement Readiness in the Age of High Tuition

Adults who think it’s their duty to put the kids through college may want to think a little further—that is, if they are also saving for retirement. A recent LIMRA Secure Retirement Institute study explored the incidence of parents and grandparents helping, or being willing to help, finance a four-year college education and their attitudes behind that. More than collecting numbers, the researchers wanted to give a warning, if needed, to self-sacrificing family who might later find they’ve given up more than they bargained for.

“It’s the first time we’ve done this kind of retirement debt study,” says Michael Ericson, a LIMRA analyst and the study’s author. “Student Loans and Retirement: Consumer Behaviors and Attitudes” is actually a carve-out of the association’s quarterly financial survey, which details a broad range of consumer sentiment.

“We wanted to get a snapshot to put some perspective around how college debt is impacting retirement security,” says Catherine Theroux, assistant vice president of public relations at LIMRA.

According to both Theroux and Ericson, that impact could be striking.

Thirty-nine percent of Americans would be willing to defer, or continue working in, their retirement to help their children or grandchildren pay for college, the survey found. In fact, almost one-third (30%) have already helped, tapping their retirement savings to do so. “Twenty-two percent of people said they currently provide significant financial support to children or grandchildren to help save for college, and 9% were actually paying for college,” Ericson says.

NEXT: Reality check needed

That family members feel compelled to pitch in should be of little surprise, considering the explosion in college costs. In fact, a full 40% of those with children or grandchildren, feel obliged to help.

“Student loans have spiked over the past two decades—a trend that will persist into the future,” Ericson says. He cites a 2014 LIMRA study, which noted the change: “The average education debt increased from $3,000 in 1989 to over $19,500 in 2013 for [those under age 35].”

“With the average student loan approaching $30,000, people have been forced to shuffle around their financial priorities and obligations,” he says.

The difficulty—the one these experts hope to allay—is that parents and grandparents have only so much savings to stretch, now even further than ever.

Take post-retirement mortgages. LIMRA recently found that a growing percentage of Americans are retiring with their home in the red, Theroux says, observing that her grandparents put off retirement until their house was paid in full. “That’s a big portion of most people’s working income, but if they’re retiring with a mortgage and depleting the rest of their savings for college, I’m not sure [where they can compensate].”

Many, as the survey found, plan to defer retiring. “That’s usually the easiest answer to a problem like this—just to say, ‘I’m going to keep working, and that will make up for the money later,’” Ericson says. “But that’s not always the case.”

Theroux agrees, pointing to further recent research. “Almost 50% of Americans retire earlier than they had planned, and oftentimes not by choice,” she says, ticking off illness, lay-off, or need to care for a parent or spouse as frequent causes. “So it’s important that people recognize the reality of ‘You may not be able to work longer’ and keep that in mind when they’re withdrawing from their retirement savings.”

NEXT: What the experts suggest

But the reality does not stop there. “There’s a misunderstanding that your expenses will diminish when you retire,” she says, “like suddenly, you’ll need only half of your income.” This typically means considerable downsizing, she says.

“I don’t think many people think long term, about the impact that can have,” she says. Removing money from savings also lessens how much the account can earn, she says. “Especially when you’re in your 40s or 50s—which often coincides with children’s college years—that time to grow your investment is critical. So it’s really important that people think through what they’re doing and how they can help their children or grandchildren.”

As is often the case, providing good education is key. “So many people don’t know how much money they need for retirement, and how much money school costs, and that they won’t always be able to work for as long as they think they will,” Ericson stresses.

In terms of specific suggestions, to proceed in a low-impact manner, both advised young parents to invest in 529 college plans, with their generous tax deferrals, “so they’re not raiding their retirement fund in their 50s."

Other than that, there are still college loans, Theroux says. “As I recently told my sister, ‘You can get a loan for college; you can’t get a loan for retirement. No one’s going to give you a loan for retirement.”

For the study, LIMRA surveyed 992 Americans, representing a cross-section of the U.S. population, in July.

The LIMRA LOMA Secure Retirement Institute provides research and education about the retirement industry. More information about the report can be found here.