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Retirement and college saving tip #1: Set expectations
You don’t want your teen to get their heart set on a school that’s way beyond your budget. Even before college brochures start showing up at your house, sit down as a family and discuss your values around money. Tell college-bound teens how much you can afford to contribute to their college education. Students can get scholarships for college, but there are no scholarships for retirement. Set a number that you’re comfortable with. Also discuss ways your teens might make up any shortfall, whether through student loans, scholarships, or a campus job.
Talking through these details can help everyone focus on schools that meet your kids’ needs—within a budget that keeps your retirement on track.
Retirement and college saving tip #2: See the big picture
Paying for college will impact your entire financial life. Review and prioritize the goals currently in your financial strategy. (If you don’t have a strategy yet, a financial professional can help you create one.) Keep in mind when you plan to retire, how many children you plan to help through college, and other financial commitments.
Retirement and college saving tip #3: Do your homework
Research schools to understand the economic value each offers—in addition to tuition, each has its own financial aid calculation that will impact your overall costs. Some colleges have a “net price” calculator on their website that can help you estimate how much financial aid they might offer based on data you enter.
Tip: “Reach” schools may not offer as much scholarship aid as “safety” schools. That said, some of the most prestigious universities are committed to meeting the financial needs of all accepted students, so they may offer generous aid depending on your situation.
Retirement and college saving tip #4: Make a move?
State schools offer some of the best values in education, especially for in-state residents. If your student is interested in attending an in-state school, that’s worth considering, although some state schools have highly competitive admissions processes. To take advantage of this lower tuition, some families decide to relocate. If you consider this, make sure you understand the cut-off date so that your student qualifies for in-state tuition.
Retirement and college saving tip #5: Borrow wisely
Before touching your retirement accounts, you may want to consider a federal government loan or a home equity loan instead. Parent PLUS loans can be used by parents of undergraduate students to pay for educational expenses not covered by over financial aid. Undergrads may also be able to borrow under their own name.
Retirement and college saving tip #6: Save early and often
Even if college is next month, keep saving—and resolve to increase those savings whenever possible. Include your kids in this decision to help them become lifelong savers. Many families use 529 plans to save for college or K-12 tuition at a private school. These are state-run investment accounts that can help fund eligible higher education expenses such as tuition and textbooks. You do not have to invest in a 529 state from your own state but some states offer tax incentives to residents who invest in their state plan.
The chart below shows how you can achieve different savings goals, month by month, depending on how many years your kids have until college.
How much to save each month if your goal is:
How much to save each month if your goal is:
| ||$50,000 ||$100,000 ||$150,000 |
|3 years until college ||$1,265 ||$2,530 ||$3,794 |
|6 years until college ||$576 ||$1,152 ||$1,727 |
|9 years until college ||$349 ||$697 ||$1,046 |
|12 years until college ||$237 ||$473 ||$710 |
|15 years until college ||$171 ||$342 ||$513 |
The investment example above is hypothetical and is provided for informational purposes only. It is not intended to represent the performance of any specific investment. The amounts shown do not take into consideration taxes, or investment fees or charges. Actual results and investment risks will vary. 6% return, beginning-of-month deposit, compounded monthly. Actual results and investment risks will vary.
Retirement and college saving tip #7: Spread the word
Family and friends may want to help with college costs. Individuals can give up to $16,000 per year, per child, without tax consequences, which can be very helpful in a 529 Plan account. They can also make a one-time accelerated gift equaling up to 5 years of giving (or $80,000 total) so money can get working all that much sooner.* They can even make unlimited tuition payments directly to a school on your child’s behalf.
What you can do next
The retirement/college savings gap can be a chasm, but you can bridge it by prioritizing, planning and putting smart strategies to work.
* IRS Form 709. If you were to die during that 5-year period, a prorate portion of this gift is brought back into your taxable estate for estate tax purposes. Consult your tax professional for more information about your personal circumstances.
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