Simple Rule for Calculating Where You Stand on College Savings
Saving for college is daunting, as the sticker price for even state schools edges ever higher.
To help families get a rough idea of whether they are on track to meet their college savings goals, Fidelity Investments is promoting a rule of thumb: Multiply your child’s age by $2,000 to get a back-of-the-napkin estimate of how much you should have saved at that point.
The number is based on a goal of saving half of the cost of four years at a public, in-state university, where the average cost in 2016 — including tuition, room and board, and fees — was more than $20,000 annually, according to the College Board. It assumes that savings start when a child is born and that he or she will start college at age 18.
The guideline assumes that the funds are invested in a tax-advantaged account, like a state-sponsored 529 savings plan (no surprise: Fidelity manages several such plans), or a Coverdell education savings account, which also has tax benefits, but much lower annual contribution limits.
According to the rule, if your child is 2, you should have $4,000 saved; if he or she is 10, you should have $20,000 set aside.
“It’s a reasonable number, when you look at public school costs,” said Keith Bernhardt, vice president for retirement and college products at Fidelity.
But why aim for saving just half the cost?
“Almost no one pays 100 percent of the cost right out of savings,” Mr. Bernhardt said. People generally pay for college with some combination of current income, grants and scholarships, and loans, in addition to savings.
Financial advisers say the rule’s simplicity may help families begin what often seems like an overwhelming task. Most parents should save even more, however, because investment returns are inherently uncertain.
“It’s catchy,” Robert Carroll, a financial planner with Carnegie Investment Counsel in Cincinnati, said of the so-called 2K rule. “But it’s a starting point.”
Lauren Zangardi Haynes, a fee-only financial planner with Evolution Advisers in Midlothian, Va., said the 50 percent target included an expectation that most students would get some sort of assistance, but that may be optimistic. “Most of my clients are paying full freight,” she said.
Mr. Bernhardt acknowledges that the rule’s simplicity comes with trade-offs. For one thing, the average cost of a four-year private college is currently more than double the amount of a public school. So, if your child is gunning for the Ivy League, multiply the initial number from the rule of thumb times two, and the totals become more eye-popping. (For a 14-year-old, the formula is $2,000 times 14 times 2, for a total of $56,000.) Read full article here.