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Savings Strategies
Savings Strategies:
Get ready for some serious sticker shock… Run the numbers on finaid.org, and you’ll find that the projected cost for four years of college tuition, books, and room and board at an in-state public school for someone born this year is expected to jump from $68,000 today to more than $200,000. That’s allowing for 7% annual tuition inflation and not taking into account any rate hikes once your student starts. If you’re looking at a private education, you can double the cost.
We turned to Brett Moritz, CIMA, a Vice President of Investments with UBS Financial Services in Baltimore and a father of six, to get some suggested savings strategies for parents and grandparents at different points in the countdown to college. He has advised hundreds of families in his nearly 15 years of industry experience.
1. First time parents-to-be may be more focused on what crib and car seat to purchase than developing a college savings strategy. When is the right time to develop a savings plan? What is the best way to get started? Is there a rule of thumb about what percentage of your income should be earmarked for education?
The right time to plan is now … the sooner the better. As Yogi Berra said, "If you don't know where you're going, you might not get there." Planning starts with identifying your goals and agreeing on your destination.
I like to use the analogy of family vacations. My wife, Denise, is a great vacation planner. We have a list of places we want to visit and things we want our family to experience. She then starts months, sometimes years, in advance, deciding which places we can reasonably expect to visit and in what timeframe. Only then do we begin working on the logistics. Financial plans are the same; they start with a vision of your desires for your family. Then you prioritize them and work back to see what you can reasonably execute.
2. In a perfect world, we would all set aside funds for an emergency nest egg, retirement and our children’s educations. What should parents do if their ability to save is limited? What should take top priority?
I advise clients to establish an emergency fund of at least three months income, to maximize contributions to their retirement plans and other tax-preferred accounts, and then fund specific goals like education. Recognizing that is an “ideal world” solution, the priority for most families should be the need they will likely encounter soonest and most often — their emergency funds.
3. What are some common savings pitfalls that parents face and how can they be avoided?
The most common pitfall I see is that many families avoid this planning process altogether or they have unrealistic expectations about what they might accomplish. This can be avoided by making a commitment to seek advice, developing a financial plan that is specific to your situation and exercising the discipline to fund it.
4. For parents of tweens and teens, the countdown to college is coming up fast. Are there any strategies you would suggest for maximizing savings during this time?
Even though the miracle of compound interest offers a tremendous advantage to early savers, there are still ample opportunities for the parents of teenagers. The rising cost of college has also given rise to new investment vehicles like state sponsored 529 plans and Coverdell Savings Accounts. Both offer tax-deferred growth and tax free distributions if used for education.
There are two basic types of 529 plans: Prepaid Tuition Plans and Savings Plans. Almost anyone can establish a Savings Plan, and it offers the potential for substantial contributions. Most Prepaid Tuition Plans can be established for teenagers; while they have more restrictions, they offer the certainty of buying tuition at today’s prices. Parents of teens may want to take less risk by choosing the Prepaid Tuition Plans.
5. What advice do you have for grandparents who want to help their grandkids save for the future? What can be done to ensure that the least amount of money possible is taxed?
I advise grandparents to have their own financial plan so they can quantify their retirement income needs and then decide how they best want to help. Their participation can be as simple as matching a portion of family savings, or they can choose the five-year election, unique to 529 plans, and contribute as much as $120,000 (combined) to a 529 plan without giving rise to a taxable gift. Additionally, anyone so inclined can also arrange a gift directly to the college, for the benefit of the child, without being subject to gift tax limitations.
So, plan! Commit to seeing it through, and you will enjoy the fruits of your labors.
Contact information: brett.moritz@ubs.com, 410.576.3285
Note to Karen/Katy/Steph: *****Let’s create a pull-out box with this info*****
To calculate projected college costs, visit finaid.org and click on “calculators.”
