How Much Should I Save for College vs. Retirement?

Most advisers tell parents to prioritize retirement savings because you and your child can borrow for college, while nobody lends for retirement.

But taken to the extreme, that would mean most parents would only put money in their retirement accounts and save nothing for college. And that would be a mistake.

For one thing, parents who don’t save for college in a 529 plan and live one of the 34 states that offer tax benefits for college savings are basically turning away free money, notes independent investment adviser William Bernstein, author of The Intelligent Asset Allocator. A Morningstar analysis found that the average college savings state tax benefit adds up to $87 for every $1,000 invested – or an extra 8.7 percentage points in return in the year you make the contribution.

Check out the new Money College Planner

Check out the map below, based on data from AKF Consulting, to see if your state offers a tax break. Dark blue indicates states that either have no state taxes or offer no tax break for college savings. Medium blue indicates states that offer tax breaks for investing only in that state's 529 college savings plan. Light blue are states that offer a tax break for investing in any 529 college savings plan, no matter where it is based. And white is for New Jersey, which does not offer a tax break, but makes students who are the beneficiary of a NJ 529 eligible for a one-time scholarship of up to $1,500.

Additionally, every dollar saved for college ahead of time generally saves at least $2 in debt payments after graduation. Plus, a growing number of colleges are giving admissions preferences to students who can pay more.

Calculator: How much should I be saving for college?

As a general rule, Bernstein and Ric Ferri, co-author of The Bogleheads’ Guide to Retirement Planning, suggests that parents save in this order.

If you live in one of the states—or the District of Columbia—that offers a tax break: (see chart)

1. Save in your 401(k) up to your employer match.
2. Pay off high-interest debt.
3. Build up six-month emergency reserve.
4. Save in a 529 college savings plan up to at least one-third of your expected college costs.
5. Put money in a Roth IRA (if you qualify), since this money can be used penalty free for college besides retirement

If your state doesn’t offer any tax benefit:

1. Save in your 401(k) up to your employer match.
2. Pay off high-interest debt.
3. Build up six-month emergency reserve.
4. Put money in a Roth IRA (if you qualify)
5. Save in a 529 college savings plan.

Rules of thumb shouldn’t simply be followed without consideration for your unique situation, of course. Families with several children need to save more for college than those with few. Parents with little retirement savings and a limited number of working years left need to squirrel away more for their golden years than those who plan to work for another 30 years. And a child who is 100% certain on becoming a dermatologist might need less financial help from a parent since he or she would be likely to be able to pay off massive student loans with that career, Bernstein points out.