How Much Do You Have To Save For A Child's College EducationSubmitted by S. F. Ehrlich Associates, Inc. on February 19th, 2019
February 15, 2019
By: John Zeltmann
While it might be logical to assume that most parents (and grandparents) would like to pay for their children’s (or grandchildren’s) college education by funding 529 plans, it’s probably even more likely that most haven’t calculated how much money they’ll need to save each year in order to do so. (The exercise is frightening, so avert your eyes if you’re an individual who scares easily.)
According to Consumer Price Index data3 from the U.S. Bureau of Labor Statistics, between 1978 and 2018, college tuition experienced average annual inflation of 6.82%, compared to an overall yearly inflation rate of 3.47% during the same period.
Using John’s three children as an example, here’s how much would have to be saved annually to cover their future college expenses:
*Calculations available upon request.
Unless you’re a Kardashian, saving for the full amount of a child’s future college obligation is probably unrealistic. So what’s an anxious parent (or grandparent) to do?
- Save for yourself first: Saving for retirement should always be the top priority. Never forget the adage: “You can borrow to pay for college, but you can’t borrow to pay for retirement.” Are you (and your spouse?) contributing to your employer-provided retirement plan? You should at least contribute enough to capture whatever employer match is available. Once you’ve fully captured the employer match, consider maximizing contributions to your retirement plan if cash flow allows.
- Save for college second: Each savings goal should be looked at as a separate bucket to fill. If the retirement buckets are being filled, the next bucket is education. Funding a 529 plan (or multiple plans for multiple children) would allow those investments to benefit from tax-deferred growth for both goals.
- Gifts: Grandparents may be a source of funds to help to fill 529 plans. Whether they provide monetary gifts that can be deposited into an existing plan or open their own 529 plans, these types of cash gifts can help to fill the education bucket.
If you have older children or grandchildren, there are strategies that can be used to better coordinate financial aid and how to time withdrawals from 529 plans. With a lot of money on the line, call us long before it’s time to make tuition payments.