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It isn't easy to choose tough love when dealing with your own kids.

That's my daughter. Though I'd like to believe otherwise, she has my wife and I wrapped around her little finger. Like many parents, we'd do just about anything for her to have a happy and healthy future.

I want to start with that because I understand that what I'm about to suggest goes against many of our protective parental tendencies. Yet when it comes to one of the most gut-wrenching decisions parents have to make, practicing a little tough love may end up being best for you, your spouse, and your child.

Funding retirement versus your child's college
In the ideal world, you would be able to put away enough money each month for both your retirement and your children's college fund. Sadly, for many, that isn't possible. And that leaves parents in the difficult situation of having to choose between funding their own retirement or footing their children's tuition bill.

T. Rowe Price just completed a Family Financial Trade-offs Survey that delves into this predicament. The survey's results took up an exhausting 72 slides, but three simple data points are especially worth mentioning.

  • 49% of respondents said, "I'd be willing to delay my retirement to pay for my kids' college education." 
  • 57% said that saving for their kids' education was a higher priority than saving for retirement. 
  • 62% agreed that "Investing in my kids' college education is actually an investment in my own retirement."

It's heartening to know that so many parents are willing to sacrifice so much for their children.

The cruel irony of the situation, however, is that such an approach can often boomerang, coming back years later to cause financial embarrassment for parents -- and financial hardship for their kids.

A fable to remember
Consider the 45-year-old husband and wife who are behind on their retirement savings. We'll call them Mr. & Mrs. Spender. They have an 18-year-old and a 14-year-old. They choose to pay for all they can afford of their children's college for eight straight years. Let's assume that comes out to $10,000 (inflation-adjusted) per year.

At the same time, there's a different couple -- Mr. & Mrs. Tough Love -- who are under the exact same circumstances. The Tough Loves, however, choose to continue investing the $10,000 in their retirement and tell their kids to consider working and going to community college for two years first.

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Which family would you be -- the Spenders or the Tough Loves? 

One might assume that the Tough Loves have $80,000 more in their retirement coffers (eight years times $10,000 per year) thanks to their decision. But that assumption exposes an enormous blind spot we have when it comes to opportunity costs and the effects of compound interest.

Let's say the Spenders and the Tough Loves all retire at age 68. Assuming an inflation-adjusted return of 6.9% (the historical average for the stock market since 1871) on investments, look at how much money each couple puts away from age 45 to age 68.

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The truth is that every $10,000 tuition check the couple wrote was actually worth far more than $10,000. That's because it automatically missed out on the power of compounding over about 20 years. Given enough time, each check was -- on average -- costing the couple four times that amount.

From fable to real life
You could poke holes in some of my assumptions, but I think the same lesson is learned no matter how you look at it. And there's a body of data being collected that supports this.

Last week, I wrote about the differences in how baby boomers and millennials support their kin. According to a TD Ameritrade study, 19% of boomers support their adult children, while the exact same percentage of millennials support their aging parents. The big difference was that while boomers were providing an average of $9,700 in support per year, millennials were coughing up much more for their parents -- $18,250 per year.

Crucially, since the boomers are near or in retirement, they aren't giving away much more than $10,000 per year. But because millennials still have as much as 35 years before they retire, they are giving away far more than the numbers indicate. For instance, the 30-year-old millennial who gives her parents $18,250 this year is actually giving away about $165,000 (assuming 6.9% investment returns) per year in opportunity costs from her nest egg at age 68!

I believe this points out a fundamental truth that's too often forgotten: College can be expensive, but funding one's retirement can be far, far more expensive. Because the interest rate on student loans is lower than the average stock-market return, it makes more financial sense to fund your retirement. And if you must help your child out, consider helping to pay a portion of the loans when they come due and you've had a chance to give your nest egg more time to grow.

When we don't do that math correctly, we end up putting our children in a much tougher spot financially than we would if they had to pay for college. By asking them to fund the gap in our retirements, the bills will have to cover far more than just four years of expenses.

 

Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends and owns shares of TD Ameritrade. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.