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College Planning
Step 3: College Funding Savings Plan

Step 1: Planning for a College Education | Step 2: Goal for College Costs | Step 3: College Funding Savings Plan

College Planning

Once you've determined how much money you'll need to finance your child's education, you can look at how to accumulate it. The most popular methods are lump-sum investing and regular monthly or quarterly investing.

How Lump-Sum Investing Works

Lump-sum investing involves putting aside a large one-time investment that builds over time through the power of compounded interest. Interest earned on a large lump-sum will be greater than the interest earned on smaller investments made over time. And as the interest builds, the lump-sum increases to earn even more interest. Therefore, the larger your investment, the more benefits you'll realize with this method. For example, a lump-sum amount of $5,000 invested for 15 years at a compounded annual interest rate of 10% would grow to $20,886. A lump-sum amount of $10,000 invested for 12 years at a compound interest rate of 10% would amount to $31,384.

Calculating a Lump-Sum Investment

To estimate what your lump-sum may be worth when your child is ready to matriculate, use Table 4 below. Calculate the number of years until your child is ready for college and multiply your lump-sum investment by the appropriate return-rate factor.

TABLE 4 - Lump-Sum Investment

No. of Years Until College Lump Sum Return Rate Factor* No. of Years Until College Lump Sum Return Rate Factor*
1 1.10 10 2.59
2 1.21 11 2.85
3 1.33 12 3.13
4 1.46 13 3.45
5 1.61 14 3.79
6 1.77 15 4.17
7 1.94 16 4.59
8 2.14 17 5.05
9 2.35 18 5.55
*Assuming a 10% pretax rate of return compounded annually. These figures are meant as a guide only and do not represent the performance of any mutual fund.

The Power of Monthly or Quarterly Investing

If lump-sum investing is not for you, an alternative way to accumulate funds is through regular monthly or quarterly investing. This method of saving is most easily and consistently executed through payroll deduction or direct deposit plans. These plans enable you to direct a portion of your pay to your college funding plan. This disciplined approach to saving can help you reach your goals.

How Much Should I Invest?

College Funding can be based upon your forecasted tuition, you can calculate how much you need to invest monthly, assuming a 10% pretax rate of return compounded annually. For example, if you've calculated that in 12 years your investment goal is $63,000, you'll need to set aside $246 a month, or $737 every quarter, to meet your financial goals.

TABLE 5 - Monthly or Quarterly Investments

1. Future total cost of college funding (insert the figure from line 6 in Table 2 ). $63,000
2. Number of years until college: 18 minus your child's current age 12
3. Return Rate Factor: refer to Table 6 (below). 21.38
4. Annual target amount of investment: divide Line 1 by Line 3. $2,947
5. Amount to invest: divide Line 4 by 12 (for monthly payments) or divide Line 4 by 4 $246 Monthly or $737 Quarterly

TABLE 6 - Return Rate Factors

No. of Years Until College Lump Sum Return Rate Factor* No. of Years Until College Lump Sum Return Rate Factor*
1 1.00 10 15.94
2 2.10 11 18.53
3 3.31 12 21.38
4 4.64 13 24.52
5 6.11 14 27.98
6 7.72 15 31.77
7 9.49 16 35.95
8 11.44 17 40.55
9 13.58 18 45.60
* To put an assumed pretax return rate of 10% in perspective, the S&P 500 Stock Index had an 11.6% average annual return for the 20-year period ended 1992. The rate of return of the S&P 500, a widely recognized unmanaged index of common stock prices, reflects changes in price and reinvestment of dividends of the stocks that compromise the index. S&P 500 is a registered trademark of Standard & Poor's Corporation. The figures are meant to be used as a guide only and do not represent the performance of any mutual fund. Periodic investment plans do not protect against loss in declining markets and do not ensure profit. It is important to remember that past performance does not guarantee future results.

Choose the Appropriate Investments for your Plan

With a reasonable idea of what your child's education will cost and how much you plan to invest in to meet that cost, you're ready to consider which investments will help meet your college funding goals. When it comes to college funding, there are many choices which may be appropriate mutual funds, CDs, stocks and bonds are all possibilities.


financial-services/college-planning/Alliance529.pdf

financial-services/college-planning/Fidelity-Advisor-Scholarshare-Atlantic-Financial-838719.PDF


In addition to saving for college did you know that Creative IRA Roth planning can leave a significant tax free legacy for a young child?

 

 

529 college savings plans are not the only tool, learn more here



 








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