Most parents would agree that when it comes to raising children, the old adage “the days are long, but the years are short” rings true. It also applies when we look at education funding. You can’t start saving too soon when it comes to college, since age 18 may be here before you know it.
Sending a child to college has become extremely expensive. For the 2017-18 school year, the College Board found the median annual public four-year college tuition (out of state) was $36,420, while a private four-year college tuition was $46,950. The U.S. Department of Education has consistently shown that a college degree is a key factor in financial success and stability in life. On average, college graduates earn 66 percent more than those with only a high school diploma. For parents, the question isn’t should my child attend college, but rather where.
When is the right time to start saving for college? This is a question that should be addressed when you are expecting. While parents-to-be are setting up baby registries and comparing costs of daycare providers, 529 planning must also be considered as you need to be ready to start saving for college the moment the baby arrives.
Strategy as Simple as Your ABCs
529 plans cannot be opened until the baby is born and has a Social Security number. Expectant parents still have the luxury of discussion time that they won’t once the baby arrives. What are your goals for education funding? They may range from trying to fund enough for public school tuition to ensuring there is enough in the plan for graduate school. The vision is yours and will be unique to your goals.
Once you agree on funding goals, it’s time to implement and the best approach is to focus on the ABCs of 529 planning: age-based, budgeted and consistent.
A is for Age-Based
College funding is an investment you must do correctly because you only have 18 years to achieve your objectives. There are numerous 529 plans to consider and deciding how to proceed can be overwhelming.
Start by focusing on age-based plans, in which asset allocation is managed on your behalf. The asset mix starts out fairly aggressive and becomes more conservative as the child gets closer to using the plan. These plans are similar to target retirement funds found in 401(k) and 403(b) plans. They tend to be cost-effective and allow parents to “set it and forget it.” The plan takes care of the necessary reallocation, adjusting it based on your child’s age.
B is for Budget
Once you have selected your plan, you can focus on developing your overall budget post-baby’s birth, including expenses such as daycare, diapers, clothing, etc. While any amount you fund towards the 529 helps, parents should strive to fund the plan with $500 a month ($6,000 per year.) At this level, assuming a moderate annualized growth rate of 6%, parents will likely have an approximate $157,000 saved by the time the child turns 18.
Keep in mind that expenses tend to increase as children get older. By planning a significant monthly 529 plan investment right from the start, you’ll be able to benefit from the maximum time horizon for asset growth.
C is for Consistent
Being consistent out of the gate with the monthly amount you automatically fund is important to setting good 529 planning habits. In the recent College Savings IQ Study, Fidelity found that on average, most parents underestimate the cost of college and the amount that needs to be saved. But the study also found that parents who use 529 plans have approximately 50 percent more in their college savings than those without 529 plans.
The best way to ensure consistency in 529 funding is to have the money go into the plan automatically. You may even be able to have the amount transferred from your paycheck directly into the plan. Consistent and regular funding will enable you to accrue a significant amount without overthinking it.
Follow the ABCs to College
Expectant parents should feel confident that a 529 plan strategy developed during pregnancy has the depth and structure to help them fund their child’s education. Of course, any strategy should be reviewed on a regular basis, but by sticking to these key ABC fundamentals, expectant parents can feel confident that they will be establishing a foundation for their child’s financial success.