Being a parent is costly! The USDA estimates that raising a child towards the age of seventeen will cost parents a total of $233,610. Not included in this sum are the cost of college or post-graduate study. Yikes! If you include the costs of sending a child to college, the figure could easily reach $300,000 or more. That’s two times as bad!
Approximately 6 weeks ago, Random Gal & I welcomed a new member of our family. We wanted to offer him the best opportunity possible of graduating from college debt-free, given the rapidly escalating costs of higher education . In order to accomplish this, we’ve already begun saving for his college costs. The kind of savings we selected, as well as our reasoning behind it, will be discussed in this piece, as well as our long-term financial goals.
Choosing an ESA is an important decision.
I have discussed many strategies for saving for a child’s future education. Despite the fact that each of the approaches I outlined has its own advantages and disadvantages, we ultimately decided on a savings plans for a variety of reasons.
Before you’ve had a child, you may open an account. Before they are even born, you can begin saving for your child’s education. After that, all you must do is change the beneficiary to your child once you’ve had a child and started saving. The sooner you start saving, the better off you will be. Start saving now, or better, go back through time a few years.
There have been no annual limits on contributions. Your annual contribution to a Coverdell ESA is capped at $2,000 per year. 529 plans do not have contribution caps, however gifts made to a beneficiary in excess of $14,000 per year are not subject to the yearly gift tax exclusion.
Gains are compounded tax-free. With a UGMA/UTMA account the parents’ marginal tax rate is applied to unearned income (interest, dividends, investment income) over $2,000. If you’re in one of the increased tax bands, this isn’t ideal (which we are).
On eligible educational costs, withdrawals are tax-free. Thus, Junior may put his money toward his studies rather than on fast vehicles and designer labels.
Choosing a 529 Savings Plan. There’s so many options to consider that making a decision is a daunting task in and of itself. When selecting on a health insurance plan, bear the following considerations in mind:
You are under no obligation to make use of the 529 savings plan offered by your home state.
It is not necessary for your child to attend school in same region as your plans. Any Section 529-eligible institution of higher learning can take advantage of the funds. You can see it here.
Tax breaks are provided by several states to its citizens. State income taxes in New York can be deducted up to $5,000 each year ($10,000 if filing as a married couple).
There will be differences in the types of investments available in different states. Consider all of a plan’s related costs and fees before making a decision.
Because Vanguard’s 529 plan doesn’t provide any tax breaks or deductions, we elected to use it instead of California’s. With similar fees & expense ratios, Vanguard also offers a few additional investment possibilities. Last but not least, my preference would be to have all of our investing accounts with Vanguard.
How to Calculate Our Savings Goals
Before we could devise a college savings strategy for LRG, we had to find exactly what we wanted to achieve. Is it possible that we’d cover all of his costs? Alternatively, would we simply save as much money as we could each month? We opted for a hybrid strategy. Our goal and monthly donations were calculated using an internet calculator based on the assumption that LRG will attend our alma institution.
Off-campus accommodation from our alma mater currently costs $27,870 per year in tuition. The default rise in college costs of 4% is what I settled on. A 7% yearly return was also used in this estimate. As a result, to pay all of our expected college expenses, we’d need to set aside $463 per month, or $500 total. Unpredictable factors can be seen in this situation. The first is an increase in the price of attending college. Between 2006-07 and 2016-17, in-state tuition costs at four-year public colleges and universities rose by an average of 3.5% over inflation, according to the Education Department. There is no way to predict how much college costs will rise in the years leading up to LRG’s first year. Furthermore, future investment returns are a mystery. Adjusted for inflation, the S&P 500’s historical return on dividends reinvested is around 7%. You’re as good a guess as I am when it comes to future returns.
As a result, we’ll adhere to our $500-a-month plan and whatever money is left in the pot once our son goes to college will be his. My household income makes it improbable that he’d be qualified for any demand financial assistance, thus I didn’t include it in my calculations at all.
Making Investment Decisions
Next, we decided how much money we were going to save and how much we were going to contribute each month. Individual and age-based portfolios are available in the Vanguard 529 plan. A target date retirement fund’s composition swings from aggressive to more moderate as your child ages, just like the age-based options. This is a “set it and forget it” method because the modifications are already made for you by the system.. Because I’m a do-it-yourself investor who like to monitor and manage my own investments, I went with individual portfolios. Since junior won’t need this money for another 18 years, I decided to begin with a large, aggressive allocation of 100 percent to stocks. I limited the list of possible portfolios down to the following:
Tracks with S&P 500 index: 500 Index Portfolio (ER 0.19 percent )
Adrenaline-Pumping Portfolio — Holds 60% of the Total Stock Index & 40% of Total International Stock (ER 0.17 percent ) .A portfolio that tracks its CRSP US Whole Market Index is known as a total market portfolio (ER 0.19 percent )
Global All Cap Ex-US Index FTSE Overall International Stock Indexes Portfolio (ER 0.35 percent )
The Aggressive Expansion Portfolio was the best option for me because I wanted some access to various stocks. 40% is a bit much for my tastes, however the Total International Indexes Portfolio was too pricey to utilise in a two-fund strategy for me to consider it. As LRG grows older, I plan to gradually reduce the percentage of riskier investments in the portfolio.
What We’ve seen thus far
When LRG was just six months old, I opened an account. I’ve seen a 7.9 percent return since launch. Neither remarkable nor terrible. In the future, it’ll be interesting to observe how well this account does. This account will most likely be included in future quarterly updates.