After the initial investment, I started contributing smaller amounts, then gradually increased it, and finally in 2013, I am contributing about $600 per month. Just within the last 3 years, this fund has grown to about $20,000.
I recently came across a College Savings Planner from Vanguard. I plugged in my numbers, selected a college, and it generated a nice detailed report outlining costs and how much I will need to save. I hadn't paid a great deal of attention to calculations until now, but this report is an eye-opener for me. I highly recommend you to run your own numbers so you get an idea of how much you need to save.
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Vanguard College Savings Planner[/caption][caption id="attachment_628" align="aligncenter" width="623"]
College Savings Planner Chart[/caption]Assumptions
This calculator assumes that the child will start the college at the age of 18 and will attend a 4 year college. It also gives you the choice of selecting public, private, in-state, or out-of-state colleges. It lets you choose particular colleges if you select a state where you think your child will attend the college.
Additionally, it assumes the 6% rate of educational cost inflation. Historically, college cost inflation has remained higher than the general inflation rate. On average, college costs have increased between 5%-7% according to the calculator.
This calculator assumes the rate of return at 5%. You can of course change any of these numbers, but for the sake of being conservative, I kept their default. It is better to over save than under save.
Calculations
Our daughter will start college in 16 years. The College Savings Planner assumes that she will attend Georgia Institute of Technology, Atlanta, GA, where the estimated annual cost is $19,334 a year in today's dollars. The projected cost is $214,860 at an assumed 6% cost inflation rate.
Since I have already put aside $20,000 and am planning to save $600 per month, according to the calculator, it may not be necessary for me to save as much as $600 monthly. To fund 100% of the cost of college for this child would require only $448 per month, which is $152 less. The extra savings will come in handy for our second child we're planning to have in the future.
These costs will go down if we get financial assistance or scholarship. But, at this time, I'm not banking on those.
Conclusions
You may want to consider the benefits of beginning your college savings plan as soon as possible. An early start helps increase the benefits of compounding growth and the more you save, the less you may need to borrow, and the less you may need to take from current income.
Keep in mind that you do not have to save all of this money before college begins. In fact, this calculator bases its calculations on the fact that you will continue to devote the stated number of dollars per month to college through the end of college.
The important thing is to get started and to do the best you can to save as much as you can on a regular basis. Finally, loans, student employment, and financial aid can all play a part in paying for college.
So I'm planning to open a Roth IRA with Vanguard Target Retirement Date 2033. I have a few questions and would appreciate your responses
ReplyDelete1. Some people suggest starting a Traditional and then rollover to Roth. Do you see any advantages with that?
2. Using the calculator, I would need to invest $600/month or 7200/yr. But the contribution to Roth IRA is capped at $5500/yr. How can you invest more to cover the difference?
3. Can you open multiple Roth IRA to cover this difference? How about multiple accounts for multiple kids?
Thanks
Jameel,
ReplyDeleteThanks for your questions. Without knowing how much time you have until retirement and when your children enter the college, I'll provide some general pointers. It is great that you're thinking about opening an IRA account. It is also good that you're going to do it with Vanguard because it is a great company.
(1) I personally do not see many advantages of opening a Traditional IRA first and then rolling over to Roth at a later time. It benefits people who are in a really high tax bracket now and they anticipate going to a lower tax bracket once they near retirement. This way, it helps them save taxes now and pay lower taxes later. So, the answer depends on your age and your current income. If you are in your early career, then Roth is a better option. If you are in your prime income years like 40's or 50's, then Traditional IRA may make sense. Roth IRA has the benefit of paying taxes now because you do not know if the taxes will stay at the same rates as today. Many people believe that with all the borrowing government is making, income taxes are likely to go up in the future. So, from this perspective Roth makes most sense. Because of these uncertainties, I've both Roth IRA (for me) and Traditional IRA (for my wife).
(2) You cannot contribute beyond $5500. But, you can open two separate IRAs between you and your wife. This will allow you to contribute $11K in total. Your wife does not need to be working. We have two IRAs open between me and wife.
(3) Another piece of advice I will have for you would be that if possible, don't use IRA accounts as kids college education and prematurely withdraw the accounts. You should use those as your retirement accounts. The reason is that you would end up paying taxes (in case of Traditional IRA). Also, there may be penalties that you may want to research. For kids education, you can look into College 529 plan if your state offers a good plan. But, I also advise against that for most people. I've an article on my blog on that too. For kids education, I personally have a separate fund in my Vanguard's Individual Account. It is a taxable account, no tax benefits. But, it provides most flexibility.
Hope this helps.