Along with delaying saving for a college education, another mistake is to
not properly invest the funds. Good returns make accumulating the needed
funds easier. Historically, the best place to earn high returns has been the
stock market. But, along with the high returns come higher risks. The ideal
situation would be to earn the high returns in the stock market, while making
sure the money will be there when needed for tuition bills.
Here are the annual savings needed to accumulate $120,000 for today's five
year old to attend an out of state college.
Rate of return |
Annual savings
needed |
4% |
$7,200 |
6% |
$6,400 |
8% |
$5,600 |
Having the funds in the child's name with a "Uniform Transfer to
Minors Act" account can make qualifying for financial aid more
difficult, but can also provide some income tax relief once the child reaches
age 14. The issue of control becomes important since the child will control
the account at age 18 or 21 depending on state laws.
A sensible investment strategy is to use different types of investments as
the child ages. Since funds need to be available when the child starts
college each year, your time horizon is from now until that time. When the
child is younger, you can take more risk to try to earn higher returns with
equities.
As the child gets close to college, say at age 14, start slowly converting
the equity investments into lower risk investments such as savings
certificates. Consider certificates that mature annually as college
begins.
Investment Mix
Start with equities and then shift to cash
Age |
Equities |
Bonds |
Cash |
14 |
85% |
15% |
|
15 |
85% |
15% |
|
16 |
80% |
20% |
|
17 |
70% |
30% |
|
18 |
40% |
50% |
10% |
19 |
40% |
35% |
25% |
20 |
|
50% |
50% |
21 |
|
|
100% |
An investments strategy that positions you to earn the high returns of
stocks, and yet provides a means to move the funds to lower risk investments
as the need for the funds approaches, can provide peace of mind that your
children will be able to afford the college of choice.
