Parents Deprioritizing Retirement to Save for College

Although saving for college is a top priority for many parents and many have a plan for it, more than one-third of parents (36%) do not have a financial plan to meet their overall goals, Fidelity revealed in its “2024 College Savings Indicator Study” released Thursday.

Fidelity’s data suggest parents are increasingly prioritizing their children’s education ahead of their retirement savings. For only the second time in the study’s 17-year history, saving for a child’s education was ranked higher than saving for retirement. When asked about their top savings priorities, 73% of parents indicated saving for their child’s education, 62% prioritized saving for retirement and 57% focused on saving for an emergency.

Moreover, 84% of parents plan to either maintain or increase their regular college savings contributions for the remainder of this year, potentially diverting funds that might have otherwise been allocated to their retirement savings, Fidelity reported.

“While saving for retirement has always been a top priority for parents, it’s not surprising to see them put more of an emphasis on college savings these past few years,” says Tony Durkan, a vice president and head of 529 relationship management at Fidelity Investments. “Our study revealed that parents continue to agree the value of college is worth the cost, and that cost continues to rise, so parents are increasing their expectations and changing how and where they save to meet this new reality.”

Among parents with children nearing college age, 68% said their child understood the total cost of their college education and the potential amount of student loan debt they may incur. However, 26% of these parents have not discussed the total cost of college with their child, and 35% have not talked about the amount of student debt their child may face after graduation.

Initiating the conversation about college costs can make a substantial impact, according to Fidelity. The study found that 80% of parents who discussed college expenses with their child have begun saving, compared with 61% who have not. Furthermore, 44% of these parents have opened a 529 account, compared with 29% who have not had the discussion. On average, parents who have talked to their child about college costs saved $20,000, while those who have not had a conversation about costs have saved $12,000.

Fidelity noted that financial professionals can offer valuable support and guidance to families. More than 80% of parents who work with a financial adviser say it gives them peace of mind regarding the college planning process.

Francesca Federico, co-founder and president of Twelve Points Wealth Management, says creating a plan and revisiting it often makes some parents more successful than others.

“We are born with habits from our own parents and families, and often they are not good ones,” she says. “The habit that can have the greatest impact on parents is simply saving early and often. This requires budgeting, a word everyone dreads.”

Setting long- and short-term goals helps parents achieve financial freedom, according to Federico. Long-term goals should guide short-term behavior, with savings and investing behavior informed by these goals. Parents should revise their plan along the way to adapt to any unexpected circumstances.

“Last but not least, use this as an exercise to educate the next generation,” she says. “Teach your children, nieces and nephews, or grandchildren how you think about money, how to save and how to be responsible in creating your future with money.”

Children’s Retirement

Recent changes legislated in the SECURE 2.0 Act of 2022 may also help address some of parents’ concerns about college savings by allowing 529 plan funds to be transferred to a Roth IRA, thereby giving children a head start on saving for retirement. The new rule can also help 529 account owners avoid taxes and penalties for withdrawals.

Although many parents anticipate their child will pursue higher education, 35% acknowledge that their child has considered not doing so. Fidelity stated that this uncertainty leaves many parents wondering about the future of their hard-earned 529 plan savings.

With the recent legislative changes, 529 plan assets can now be transferred to a Roth IRA for the beneficiary under certain conditions. The 529 account must be open for at least 15 years to qualify for the rollover, which is subject to annual Roth IRA contribution limits and an overall lifetime cap of $35,000. Additionally, the transfer must be made from contributions that have been in the 529 account for at least five years before the rollover to the Roth IRA.

Fidelity’s survey was conducted from April 15 through May 7, drawing response from 1,985 families nationwide with children high school age and younger who are expected to attend college or other further education. The survey respondents had household incomes of at least $30,000 per year and were the financial decisionmakers in their household.