Specify Targets

The College Goal

If you are saving and investing for a child’s college education you should visit www.collegeispossible.org and www.collegeboard.com to learn the costs associated with the specific schools you would like your child to attend. If you find you are considering schools where the tuition, room, and board average $22,000 a year, you know you have to save $88,000 in today’s dollars. If your child is three years old, you have 15 years before the first payment is due to the college of choice and 19 years before the last payment is due.

For the 2001–2002 college year, the College Board estimated total expenses could range from $10,367 for an out-of-state student at a two-year public institution to $17,740 for an out-of-state student at a four-year public university, to $26,093 for a four-year private university. Remember, these are average costs across the nation. Actual costs may be higher or lower, depending on the region. Costs are highest in the New England area,

probably because of the Ivy League schools, and lowest in the Southwest.

The average total cost for private four-year colleges in New England was $32,326, and that was significantly below what Bill and Mary Sullivan, whom you met back in Chapter 4, faced when their daughter, Ruthie, was accepted at Stanford. Because of the bear market, Ruthie would not be attending Stanford unless she

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Worry-Free Investing

A Safe Approach to Achieving Your Lifetime Financial Goals

got aid. Even Penn State would be a stretch. Bob and Sandy Adams faced similar downsizing of their dreams for son Chuck’s education. Paul and Rita Clark, fortunately, realized their goal early enough to do something constructive, and part of that meant cutting down on some expenses and getting enough money invested in the right plan, one that could minimize the impact of inflation.

College expenses have been rising far faster than inflation. According to the Bureau of Labor Statistics, college cost inflation has exceeded the general rate of inflation in the Consumer Price Index (CPI) at an average of 4.33% per year since 1981. The share of family income required to pay total college expenses increased for many families during the 1980s and 1990s, but it went up most for those with low to moderate income.

These figures are troubling because they mean that even for your child to attend a local four-year public college or university, you must save at least enough to generate approximately $12,000 a year for four years—in today’s dollars—and you must invest that money in such a way that it will be safe and its invest-ment return will at least keep pace with the rate of increase of college costs. If you wish your child to attend a private four-year college, your savings will need to generate at least $26,000 a year, in today’s terms, more if you are looking at the Northeast. As most parents of college students discover, there are always expenses not figured into the official college expenses,

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Chapter 9 Putting It All Together

such as fraternity or sorority dues, the costs of bringing the student home during the holidays, and spending money.

To be conservative you should start saving for a child’s education soon after he or she is born, perhaps using gifts provided by grandparents. Take advantage of the special tax incentives designed to encourage college saving. Set up a Section 529 account, and select state plans that provide low-risk investment options like prepaid tuition and CollegeSure^® Certificates of Deposits (CDs). Visit www.529.com for a complete listing of the various state plans available. Consider buying I Bonds through payroll deduction as a means of automatically investing part of each paycheck for a child’s education. When I Bonds are

redeemed to pay for college expenses, they qualify for tax exemp-tion (subject to certain income limits).

Beware of college investment programs that provide age-based portfolios of stocks and bonds. Age-based investment strategies are based on the logically flawed notion that the risk of stocks diminishes over time. Unless they offer guarantees, these plans generally expose you to significant risk of falling short of your target.

You should revisit your target each year. If you were planning on sending your child to a public college or university, you may find your child is a talented enough student to get into a top private school. You would have to raise your saving target. Or, vice versa, you may have been aiming for a top private school and find your child is not a motivated student. You may want to lower your sights to a less-expensive public college.

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Worry-Free Investing

A Safe Approach to Achieving Your Lifetime Financial Goals

The Retirement Goal

If you are saving for retirement, we recommend starting by figuring out how much you would need to maintain your minimum acceptable lifestyle. We recommend that you aim at achieving the minimum acceptable target with certainty. You do not want to undershoot this target. If you feel that you can save more than this minimum, the additional savings can be invested in the stock market to take a chance at earning potentially higher returns.

Retirement experts calculate you will need at least 70% of your preretirement income to maintain your preretirement standard of living once you retire. John and Joan Parker had been aiming at just over 70% of John’s income of $135,000 a year. After the market plunge, they would have fallen far short of that if they had continued with their plans to retire at 62.

The experts estimate you will need less to live on in retirement than you need while you are working because many of your day-to-day expenses are connected with earning a living. For example, after you retire you will not have commuting costs, whether by car or by public transportation. Even if you continue to maintain two cars in the family, the number of miles put on them will most likely drop substantially, with resulting savings in fuel and mainte-nance costs unless you plan a heavy travel schedule.

In addition, the current amount you spend on work clothes will virtually disappear. Buying lunches at work is far more expensive than having lunch at home. In addition, you will not be saving for retirement. The savings component of income will be available for you to live on now.

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Chapter 9 Putting It All Together

For these and other reasons your living costs should drop once you retire. If you are earning $50,000 a year now, you will need to generate the equivalent of $35,000 a year in retirement ($50,000 x 0.7) to pay for your minimum acceptable living standard in retire-ment, assuming your salary keeps pace with inflation. If you are earning $100,000 a year, you will need to generate an inflation-adjusted $70,000 a year to maintain your current living standard.