Asked by trish  |  Submitted September 22, 2015

We have two children, 5 and 8. We want to start a 529 for them, how do we figure out how much money we need to invest to pay for college?

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  Answers  |  1

September 29, 2015

There are a lot of variables at play here, so please bear with me since there is no simple answer.

First -- how much do you expect college to cost? Are you looking at public colleges or private schools? In-state or out-of-state? The range in costs all-in (including room and board and extras) is enormous. The averages right now (2014-2015 school year) are about $23-24,000 for public in-state, over $37,000 public out-of-state, and over $46,000 private. And if you start looking at the "elite" schools, it's even higher -- Stanford, for example, right now runs over $61,000/year all-in.

Those, of course, are "sticker" prices -- many folks don't actually pay anywhere near those amounts. And don't ignore outrageously expensive private schools -- they often come with enough aid to more than offset their higher costs (if you can get into them). Another example -- fully half of undergrad students in the University of California system pay zero in tuition. They still have expenses like room-and-board, books, etc.

Second -- don't forget that when the kids are in school, you'll probably still be working and can at least partially pay for school out of then-current income. You don't need to have pre-saved all the money you'll need.

Third -- prioritize -- are you maxing out all your retirement savings options? Unless you're already doing that, you may want to consider focusing on retirement savings first. There are a variety of reasons, not the least of which is that in the worst case, you can borrow money for college but not for retirement. Additionally, retirement savings may save you on taxes right now, money in retirement accounts is generally not considered when applying for financial aid, etc. Also, bear in mind that the time-horizon for retirement savings is vastly longer than that for college savings -- so you may be able to take more risk-- and get more return over the very long run -- in retirement savings. Definitely consider reviewing this with an advisor who can help you balance these things out.

Fourth -- inflation -- college costs have been going up faster than the general rate of inflation (i.e. the CPI) -- but have generally not gone up faster than the long-term return on a moderate balanced portfolio (i.e. a 50/50 stock/bond portfolio) -- so you still may get a big advantage from early savings, which should grow faster than college costs -- if you have the time and risk tolerance to let the markets work for you.

That all said, the bottom line is that there is no right answer, and any model which takes all those variable into consideration would need more input from you.

However, using some very simple assumptions such as the following: full-cost of in-state public school, college cost inflation at 2% faster than CPI and investment returns at 4% faster than CPI, starting saving today with a goal of saving 75% of the future costs ahead of time -- saving around $9,000/year, starting today with a balance of zero, should approximately get you there for the combination of both kids (note that if you put "too much" into a 529 for one of them, the balance may be eventually transferred to the other, so there's not all that much need to save separately).

I cannot stress enough that the number indicated above is purely an approximation and there are no guarantees of any sort regarding (a) future college costs; (b) investment growth; etc. It's just intended to give you a ball-park estimate. The bottom line, though, is that there are a lot of variables -- and other priorities -- to consider. It may be worth spending a couple of hours with an hourly fee-only financial planner to walk through the specific numbers that apply to your own personal situation (the spreadsheet I used to come up with the number above is one that I use for working with my own clients in exactly this manner).

I hope that helps! Best of luck and congratulations for thinking ahead and starting to prepare. It's never the wrong time to do the right thing and the right time to start planning for your (and your kids') futures is now.

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