Families face a variety of financial challenges, and those include planning for retirement and college. Although college and retirement might seem like a distant prospect to young families, it’s important to begin planning for each as early as possible.
Higher education costs have consistently outpaced standard inflation for decades. Average costs reported by the College Board in its “Trends in Higher Education” report show private non-profit four-year schools cost an average of $56,000 per year, while in-state schools may range from $24,000 to $42,000. That makes early, structured planning essential. Financial advisors generally recommend aiming to cover one-third to one-half of expected total college costs through savings. The remainder can be funded by current income, financial aid, loans, or student earnings.
For a newborn starting college 18 years from now, after factoring in a historical college inflation rate of 3 percent to 5 percent annually, a four-year degree at a public in-state university is projected to cost upwards of $180,000 to $220,000 total. To cover 50 percent of that estimate, parents would need a target of approximately $90,000 to $110,000 per child.
Financial planners utilize a recommended framework for saving that follows the Rule of 2K, which is a benchmark established by Fidelity Investments. This boils down to saving $2,000 per year for every year of a child’s age. Under this rule, the savings pattern looks like this:
Age 5: $10,000 in savings
Age 10: $20,000 in savings
Age 15: $30,000 in savings
Age 18: $36,000 in savings
While this can be a good start to college savings, tax-advantaged vehicles like the 529 College Savings plan offer compounding power to help parents realize greater savings goals. According to Sallie Mae’s “How America Pays for College” report, those who utilize dedicated 529 plans save significantly more on average than those relying on standard saving accounts. Saving $250 per month in a 529 plan from a child’s birth, for example, and assuming a 6 percent net annual return, will grow savings to $98,000 by the time the child reaches age 18.
Of course, these savings guidelines will vary by family and anticipated need. Many schools’ total costs exceed $70,000 per year, meaning tuition, room and board, and meal plans may run more than $280,000 over the course of four years. Students who aspire to earn a master’s or attend postgraduate schools like law school or medical school will need even more funds.
