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Shifting College Tuition Payments to Retirement Savings Isn’t Easy

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College graduation is obviously a cause for celebration. When the graduate is the youngest child, some parents have an extra reason to rejoice: no more tuition payments.

At the end of the college years, many parents who have chosen to fund their kids’ education find themselves behind on funding their own retirement. One popular solution is to plan on diverting the tuition payments to retirement plans as the kids leave college.

On paper, it’s a great solution. No change in lifestyle or cash flow is required. Whatever has gone out for college tuition, gas, housing, and books now is just diverted to a 401(k) or IRA. What could be simpler and less painful?

The problem is this rarely works. Over some 35 years of helping people plan for retirement, rarely have I seen parents actually shift tuition payments to retirement savings.

This is because saving is an emotional rather than cognitive activity.

We don’t think our way to saving, we feel our way to saving. This is confirmed by Nobel Prize winner Daniel Kahneman’s research, which found that 90% of all financial decisions are made emotionally.

Several emotional factors get in the way of couples’ intent to focus on their own retirement savings when they become empty nesters.

1. By the time the kids start college, if parents haven’t already built up college funds and made a good start on retirement funds there are likely to be deeper emotional reasons they are not saving. Many who retire comfortably began planning for their retirement as soon as they finished college themselves and started saving for college when their kids were babies. Those without that early habit of saving are less likely to start in middle age.

2. Parents who have focused on helping their kids through four years of college may find it extremely challenging to stop. The emotional habit of helping can easily find ongoing expenses to pay. Kids may want to go to graduate school, need help until they find permanent jobs, or want to buy homes. The list is endless.

3. Parents who can stop helping their kids often have a hard time not rewarding themselves when the tuition payments end. Even though they planned to divert the funds to their retirement account, there often is an unanticipated pent-up demand for unmet needs placed on hold during all the children’s college years. Sometimes the new spending isn’t unanticipated. How often have you heard someone say, “When the kids are gone, we’ll be able to afford . . .”? What would a vacation to the Bahamas or a new car hurt before going back to the austerity budget? In reality, once the dam of newfound discretionary income breaks, it’s rarely reconstructed.

The best time to break this spending pattern is before it’s created. Here are some ideas:

1. Remember, research has found it costs children much more to take care of a parent in retirement than fund their own college education. Taking care of your own retirement first may well be in your kids’ best interest as well as your own.

2. It doesn’t have to be either/or. Consider options like only funding part of the college bill. Your children won’t implode if they must work their way through. One Berkeley study actually found that kids who worked 20 hours a week had higher GPA’s than their counterparts who got a free ride.

3. Finally, be willing to look at your own emotional issues around money. Resolving your own emotional barriers to saving may be the best investment you can make, not only for your own future but for your children.

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