MONEY 529 plans

Why the Best College Savings Plans Are Getting Better

stack of money under 5-2-9 number blocks
Jan Cobb Photography Ltd—Getty Images

Low-cost 529 college savings plans continue to rise to the top in Morningstar's latest ratings.

Competition is creating ever-better investment options for parents who want to save for their kids’ college costs through tax-preferred 529 college savings plans, according to Morningstar’s annual ratings of the 64 largest college savings plans.

In a report released today, the firm gave gold stars to 529 plans featuring funds managed by T. Rowe Price and Vanguard. The Nevada 529 plan, for example, which offers Vanguard’s low-cost index funds, has long been one of Morningstar’s top-rated college savings options. The plan became even more attractive this year when it cut the fees it charges investors from 0.21% of assets to 0.19%, says Morningstar senior analyst Kathryn Spica.

“In general, the industry is improving” its offerings to investors, Spica adds.

You can invest in any state’s 529. In many states, however, you qualify for special tax breaks by investing in your home-state 529 plan. If you don’t, you should shop nationally, paying attention to fees and investment choices.

Morningstar raised Virginia’s inVEST plan, which offers investment options from Vanguard, American Funds and Aberdeen, from bronze to silver ratings, in part because Virginia cut its fees from 0.20% to 0.15% early this year.

Virginia’s CollegeAmerica plan continued as Morningstar’s top-rated option for those who pay a commission to buy a 529 plan through an adviser. American Funds, which manages the plan, announced in June it would waive some fees, such as set-up charges.

But there are exceptions. Morningstar downgraded two plans—South Dakota’s CollegeAccess 529 and Arizona’s Ivy Funds InvestEd 529 Plan—to “negative” because of South Dakota’s high fees and problems with Arizona’s fund managers.

Rhode Island’s two college savings plans moved off the negative list this year after the state started offering a new investment option based on Morningstar’s recommended portfolio of low-cost index funds. Given the potential conflict of interest, Morningstar did not rate the plans in 2014.

Joseph Hurley, founder of Savingforcollege.com, which also rates 529 plans, says he hasn’t analyzed the Morningstar-modeled funds because they are new and don’t have enough of a track record. But, he adds, the Rhode Island direct-sold 529 plan offers several low-cost index fund options.

Here are Morningstar’s top-rated 529 plans for 2014:

State Fund company Investment method Expenses (% of assets) for moderate age-based portfolio (ages 7 to 12) Five-year annualized return for moderate age-based portfolio (ages 7 to 12)
Alaska T. Rowe Price Active 0.88% 11.25%
Maryland T. Rowe Price Active 0.88% 11.42%
Nevada Vanguard Passive 0.19% 8.65%
Utah Vanguard Passive 0.22% 8.01%

Related:

 

 

 

MONEY bonds

Why Does Grandma Still Buy EE Savings Bonds?

granddaughter hugging grandma after graduating from college
Alamy

This popular investment pays much lower interest than people think and probably won't return much in time for college.

Last month I made a presentation to a bunch of high school students on the importance of basic financial planning skills. I had hopes of starting a conversation about saving for large purchases such a college education or a car. But the students were surprisingly interested in learning about EE savings bonds — those gifts that grandparents and other relatives give children to commemorate life events such as a birthday, first communion, or a Bar Mitzvah.

One student said he had savings bonds that were worth over $2,000. On special occasions, he said, his grandparents would give him a $50 EE savings bond. They told him that in eight years it would be worth $100 and then it would continue to double in value every eight years thereafter.

The Truth About Savings Bonds

Savings bonds that double in value every seven or eight years, however, have gone the way of encyclopedia salesmen, eight-track tapes, and rotary telephones. EE bonds sold from May 1, 2014 to October 31, 2014 will earn an interest rate of 0.50%, according to the US Treasury website. It’s not surprising that these interest rates are so low; what is surprising is that people are still buying these securities based on very old information.

You can buy EE savings bonds through banks and other financial institutions, or through the US Treasury’s TreasuryDirect website. The bonds, which are now issued in electronic form, are sold at half the face value; for instance, you pay $50 for a $100 bond. The interest rate at the time of purchase dictates when a bond will reach its face value.

This rate is detemined by discounting it against the 10 year Treasury Note rate, currently about 2.2%.

Years ago, you could calculate when your bond would reach face value by using a simple mathematical formula called the Rule of 72. If you simply divide an interest rate by 72 you can determine the number of years it will take for something to double in value. So, let’s try it. 72 divided by 0.5% = 144 years. Ouch!!

Fortunately, the Treasury has made a promise to double your investment in a EE savings bond in no less than 20 years. Actually it’s a balloon payment. So if you happen to cash out your EE bond in it’s 19th year, 350th day, you’ll only get the interest earned on the initial investment. You need to wait the full 20 years to get the face value. At that point, you’ve effectively gotten an annualized return of 3.5% on your initial investment.

So let’s recap. If Grandma wants to buy a EE savings bond for a grandchild to cash in to cover some college costs, she ought to buy that bond at the same time she’s pressuring her kids to start working on grandchildren. I joke, but, I think it’s very important to recognize the world has changed, and savings bonds don’t deliver the same solutions that many people remember from years past.

But back to the boy who stood up in class to talk about the savings bonds. What about the bonds his grandparents had purchased over the past several decades? Well many of those bonds may in fact be earning interest rates of 5% to 8%. It just depends on when they were purchased. The Treasury has a savings bond wizard that will calculate the value of your old paper bonds. Give it a shot. You may be pleasantly (or unpleasantly) surprised at the value of the bonds you have sitting around.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY family money

This Company Will Give You $500 If You Have a Baby Today. Wait, What?

141017_FF_BabyMoney
Mike Kemp—Getty Images

It's no joke. As part of its rebranding campaign, investment firm Voya will give money to the newest of new parents.

Lucky for you if you’re in labor right now.

A company called Voya Financial has announced that it will give every baby born today—Monday, Oct. 20, 2014—500 bucks.

The promotion, timed to coincide with National Save for Retirement Week, is part of a marketing campaign to alert the public that the business that once was the U.S. division of ING is now a separate public company with a new name.

Get out the castor oil and order in Indian if you’ve already hit 40 weeks, because the offer is only available to those who exit the womb before midnight tonight—though soon-to-be-sleep-deprived new parents have until December 19 to register a child.

Voya estimates that it may have to kick in as much as $5 million, since there are about 10,000 babies born every day in the U.S.

While the company has promised that families will not have to sit through a marketing pitch to get the money, and that the baby’s information would be kept private, this special delivery still comes with a catch.

The money is automatically invested into Voya’s Global Target Payment Fund, which according to Morningstar has above-average costs and below-average performance.

Regarding the fees, Voya’s Chief Marketing Officer Ann Glover says that the funds Morningstar uses as comparison are not apples to apples. In any case, Glover says families are free to sell out of the fund if they so choose. “Of course, we would hope people would hold on to the investment,” she adds.

But hey, money is money, so if you’re due, you may as well take what you’re due.

And for those mamas and papas whose progenies aren’t quite ready to make their debuts? While you won’t get money from Voya, you may have other opportunities to get big bucks for your little one.

Start by checking in with your employer to see whether the company helps with college savings. A growing number do. Unum, for example, offers its workers with newborns $500 towards a college savings account.(Our Money 101 can help you find the best 529 college savings plan.)

Also, in several communities around the country, charitable or government programs seed savings accounts for kids. For example, residents of northern St. Louis County in Missouri can get $500 through the 24:1 Promise Accounts. Babies born in Connecticut get $100, plus $150 in matching funds by age four, thanks to the CHET Baby Scholars program.

“This is gaining significant momentum nationwide,” says Colleen Quint, who heads one of the nation’s most generous free savings program, the Harold Alfond College Challenge. Started by the founder of Dexter Shoes, the charity gives every resident newborn in Maine a $500 college savings account.

In fact, Mainers can get the most free money for their children according to a survey of such programs by the Corporate for Enterprise Development, which has gathered details on at least 29 free childrens’ savings programs.

Besides the $500 college savings account, a state agency will match 50¢ for every $1 parents contribute each year up to $100 a year and $1,000 over a child’s lifetime. So Mainers can, in theory at least, get up to $1,500 in free college savings money on top of any additional freebies they can get from companies.

That should be more than enough to buy a chemistry textbook in 2032.

MONEY Ask the Expert

Why You Might Want More Than One College Savings Account

Robert A. Di Ieso

Q: I have college savings for my children in both education savings accounts (ESAs) and 529s. Is there a difference in the way those accounts are calculated for potential financial aid? Would there be any benefit to consolidating into one type of account? — Mike Spofford, Green Bay, Wisc.

A: The good news: There is no difference in how Coverdell ESAs and 529 savings plans factor into your child’s student aid, says Mark Kantrowitz, publisher of Edvisors.com, a website that helps people plan and pay for college.

Both of these education accounts are considered qualified tuition plans. So as long as they are owned by a student or a parent, the plans are reported as an asset on financial aid forms and have a minimal impact on your aid eligibility (federal aid will be reduced by no more than 5.64% of the value of the account). What’s more, your account distributions are not considered income, Kantrowitz adds.

Education savings accounts and 529s share other appealing features: Your savings grows tax-deferred and withdrawals are tax free as long as the money goes toward qualified education expenses. If you spend it on anything else, you will be hit by income taxes on the earnings as well as a 10% penalty.

One of the biggest differences is how much you can put in. ESA contributions max out at $2,000 per child per year, while 529s have no contribution limits. However, if you put more than $14,000 a year into your child’s 529—or $28,000 as a couple—the excess counts against your lifetime gift tax exclusion and must be reported to the IRS. You can get around that by using five-year tax averaging, which treats the gift as if it were made over the next five years.

Coverdell ESAs give you more investment options—from certificates of deposit to individual stocks and bonds to mutual funds and ETFs; you’re usually limited to a small number of mutual funds in a 529 plan. But you don’t need that much investing flexibility, Kantrowitz notes, since you want to keep risks and fees to a minimum over the short time you have to save for college.

Another key difference is that ESA funds can be spent on K-12 expenses; 529s must wait until college. ESAs also come with age restrictions. You can contribute only while the beneficiary is under 18, and to avoid penalties and taxes you must spend the funds by the beneficiary’s 30th birthday (with a 30-day grace period).

You can get around this age limit by changing the beneficiary to an under-18 close relative of the beneficiary. Or you can roll it over into a 529 plan with no tax penalty. (You cannot roll your 529 into a Coverdell ESA, however.) In fact, later-in-life education is one of the only reasons to consolidate plans. Otherwise, says Kantrowitz, there is no compelling reason to combine your two savings accounts into one.

MONEY Financial Planning

The One Time Raiding Your Kid’s College Savings Makes Sense

Broken money jar
Normally, breaking into your college savings accounts is a no-no. Jeffrey Coolidge—Getty Images

It's never a great idea, but in an emergency tapping funds earmarked for education beats sabotaging your retirement plans.

Lauren Greutman felt sick.

She and her husband Mark were about $40,000 in debt, and were having trouble paying their monthly bills. As recent homebuyers, the Syracuse, N.Y. couple were already underwater on their mortgage and getting by on one income as Lauren focused on being a stay-at-home mom.

“We were in a really bad financial position, and just didn’t have the money to make ends meet,” remembers Greutman, now 33 and a mom of four.

There was one pot of money just sitting there: their son’s college savings, about $6,500 at the time. That is when they had to make a tough decision.

“We had to pull money out of the account,” she says. “We thought long and hard about it and felt almost dishonest. But it was either leave it in there, or pay the mortgage and be able to eat.”

It is a quandary faced by parents in dire financial straits: Should you treat your kids’ college savings—often housed in so-called 529 plans—as a sacred lockbox, or as a ready source of funds that may be tapped when necessary.

Precise figures are not available, since those making 529-plan withdrawals do not have to tell administrators whether or not the funds are being used for qualified higher education expenses, according to the College Savings Plans Network. That is a matter between the account owner and the Internal Revenue Service.

TIAA-CREF, which administrates many 529 plans for states, estimates that between 10% to 20% of plan withdrawals are non-qualified and not being used for their intended purpose of covering educational expenses.

It is never a first option to draw college money down early, of course. Private four-year colleges cost an average of $30,094 in tuition and fees for 2013/14, according to the College Board. Since that number will presumably rise much more by the time your toddler graduates from high school, parents need to be stocking those financial cupboards rather than emptying them out.

Joe Hurley, founder of Savingforcollege.com, has a message for stressed-out parents: Don’t beat yourselves up about it.

“The plans were designed to give account owners flexible access to their funds,” Hurley says. “I imagine parents would feel some guilt. But I don’t think they should. After all, it is their money.”

Why the Alternative Might Be Worse

Keep in mind that there are often significant financial penalties involved. With non-qualified distributions from a 529 plan, in most cases you are looking at a 10% penalty on the earnings. Withdrawn earnings will also be treated as income on your tax return, and if you took a state tax deduction on the original investment, withdrawn contributions often count as income as well.

Not ideal, of course. But if your other option for emergency funds is to raid your own retirement accounts, tapping college savings is a last-ditch avenue to consider. That’s not only because you do not want to blow up your own nest egg, but because it could make relative sense tax-wise. And as the saying goes, you can borrow money for college, but not for retirement.

“If you think about it, a parent who has a choice between tapping the 529 and tapping a retirement account might be better off tapping the 529,” says James Kinney, a planner with Financial Pathway Advisors in Bridgewater, N.J.

If the account is comprised of 30% earnings, then only 30% would be subject to tax and penalty, Kinney explains. And that compares favorably to a premature distribution from a 401(k) or IRA, where 100% of the distribution will be subject to taxes plus a penalty.

Lauren Greutman’s story has a happy ending. She and her husband made a pledge to restock their son’s college savings as soon as they were financially able. It is a pledge they kept: Now eight-years-old, their son has a healthy $12,000 growing in his account.

She even runs a site about budgeting and frugal living at iamthatlady.com. Still, the wrenching decision to tap college savings certainly was not easy—especially since other family members had contributed to that account.

“We tried to take emotion out of it, even though we felt so bad,” Greutman says. “Since we didn’t have money for groceries at that point, we knew our family would understand.”

Related: 4 Reasons You Shouldn’t Be Saving for College Just Yet

MONEY College

Here’s How to Get Your Parents to Pay for Your Kids’ Education

Grandma opening coin purse
Getty

A 529 plan can help grandkids with their education -- and provide a tax break for Grandma and Grandpa.

Many grandparents want to help their grandchildren pay for college, but don’t know the best ways to do that. Good news: They can make those contributions while reaping financial advantages for themselves.

Nearly half of grandparents expect to contribute to their grandkids’ college savings, with more than a third expecting to give $50,000 or more, according to a 2014 Fidelity Investments study. That generosity can also be channeled toward significant tax and estate planning benefits for the grandparents.

Enter the 529 plan, a college savings investment account that provides tax-free growth as long as the money is put toward tuition and most types of college expenses such as fees and books. What’s more, grandparents can score their own financial perks, said Matt Golden, vice president of college savings for Fidelity Financial Advisor Solutions.

Grandparents can use 529 accounts to reap tax deductions or reduce the value of their taxable estates.

Furthermore, 529 plans have limits that might be comforting for grandparents who worry that their grandchildren might spend the money frivolously, or that they might end up needing it themselves. Grandchildren must use the funds only for certain college expenses, such as tuition and books. What’s more, grandparents can keep the money if they need it, subject to penalties and taxes, say advisers.

Working the Angles

For financial advisers, conversations with clients about these issues can build trust, said Charles Wareham, a Hartford-based adviser specializing in college funding strategies. Wareham’s firm holds Sunday brunches for parents and grandparents to teach them about college funding. The events have become relationship-builders, he said.

One way to showcase 529 accounts is by highlighting their advantages over other savings strategies.

“Many grandparents give EE bonds for holidays and birthdays, which can hurt more than help as far as tax purposes,” says Wareham.

For example, grandchildren who receive Series EE bonds as birthday gifts can later be socked with federal income taxes on the interest if they don’t use the funds for college, according to the U.S. Department of the Treasury.

A 529 plan, in contrast, provides for tax-free distributions for college. It also allows grandparents to give the funds to another grandchild if the intended recipient does not go to college or need the money.

Grandparents may also be eligible for state income tax deductions when they make 529 contributions – they are available in 34 states and the District of Columbia, according to FinAid, a website about financial aid. They can also take required minimum distributions from their IRA accounts and transfer those funds to the 529 plan, where they can continue to grow tax-deferred, Fidelity’s Golden says.

Savvy advisers can compare plans from various states and help their clients find the best ones, though usually tax breaks are only available to people who invest in their own state’s plan.

A 529 plan is also a unique way for grandparents to reduce the value of their estates: they can contribute up to five years’ worth of allowable gifts in one year without triggering federal gift taxes. That means clients filing jointly can invest $140,000 in one lump sum per grandchild.

One caveat: 529 accounts could make a grandchild ineligible for financial aid, says Golden. That is because the money, once withdrawn for the beneficiary, counts as income that schools use to determine financial aid awards. But grandparents can avoid the problem by waiting until the recipient’s junior or senior year to hand over the money, when students may not need as much aid, Golden says.

MONEY Kids and Money

This is What Sting Should Have Done for His Kids

140623_FF_Sting_Sting
Musician Sting performs during the 44th Annual Songwriters Hall of Fame ceremony in New York June 13, 2013. Carlo Allegri—Reuters

Financial Planner Kevin McKinley argues that there are ways to give your children money without having to worry about them becoming trust-fund brats.

Recently rock legend Sting made headlines when he declared that his six children would be receiving little to none of his estimated $300 million fortune.

He joked that he intended to spend all of his money before he died. But on a more serious note, he explained that he wanted his kids to develop a work ethic, and not let the wealth become “albatrosses around their necks.”

His motives are admirable, and he’s certainly within his rights to use his money however he pleases. But as a financial planner and a dad, I’d argue that there is a lot of room between over-indulgence and complete denial. And in fact, used the right way, your wealth can help motivate your child.

Here are three ways you can sensibly use a relatively small amount of your own money—during your lifetime—to encourage your kid’s productivity and self-reliance, without spoiling him rotten.

1. Save something for his college

You don’t need to put every dollar you have in to a college savings account, nor do you need to pay the full cost of some high-priced private school.

But setting a little aside sets an example of your commitment to your child’s education. It also can ensure that she doesn’t have to choose between taking on a six-figure debt load, and not going to college at all.

Let’s say the parents of a recent high school graduate started saving just $50 per month at her birth, and it returned a 6% hypothetical annual rate. By now they would have over $19,000—enough to pay tuition, room, and board for a year at a typical in-state four-year university, according to the College Board.

The remaining years can then be paid for by some combination of parent earnings, a relatively manageable amount of student loans, and the student’s part-time job.

2. Jumpstart retirement savings

Speaking of jobs, once your kid earns his first paycheck you have another chance to use a little money to teach a valuable lesson.

Open a Roth IRA on his behalf by April 15th of the year after he gets his first job. He’s eligible to deposit the lesser of his earnings, or $5,500.

Kudos to you if you can get him to contribute his own money. But if you can’t get a teenager to understand the importance of retirement—I mean, let’s be realistic—you can instead make the contribution out of your own pocket. Or offer to match an amount he puts in, which you can explain to him is the easiest way to double his money. (This is also a good way to set up his understanding of an employer retirement match down the road.)

One way or the other, saving a little now could mean a lot down the road. A $5,000 deposit today into a 16 year-old’s Roth IRA earning the aforementioned 6% annually would be worth almost $100,000 by the time he turns 66.

And if the initial gesture inspires him to deposit $5,000 of his own money into the Roth IRA every year for those fifty years, the account could be worth a cool $1.5 million by the time he hits 66.

3. Help with the house

Hopefully your child eventually becomes an adult in both age and responsibility. That might be the time she wants to buy her first home.

The National Association of Realtors says the median home price in the U.S. as of May of 2014 is about $214,000.

If your child’s (and/or her spouse’s) annual income totals around $60,000, she should be able to qualify for a 30-year 4% mortgage to purchase a home in that price range, leaving her with a monthly mortgage payment of about $1,300. But she may still need to overcome the biggest obstacle to the purchase of a first home: the down payment.

Even the savviest young adult might have a hard time saving up the $42,000 needed to make a 20% down payment on that average purchase price.

Helping her meet that down payment requirement will not only get her the satisfaction of home ownership, but it will help her build equity in something with her own money. And it might mean you have a place to stay if, like Sting, you end up spending all of your money before your time is up.

__________

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

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MONEY College

Grandma’s Willing to Pay $50,000 of College Tuition—if Only You’d Ask

New survey finds that more than half of grandparents want to help with 529 savings, according to Fidelity. Here's hoping your folks are in that generous majority!

With college admissions season behind us, many high school seniors are eagerly anticipating heading to college in the fall—while parents, on the other hand, are likely be anxious about how they’ll pay for it. Fortunately, many of them appear to be getting help from their own parents: According to a new study by Fidelity Investments, many grandparents are contributing to 529 college savings plans to help finance the high cost of education.

The study found that 53% of grandparents are either already saving or plan to save to assist in paying for their grandchildren’s college costs. Among those who have been socking away money, the median contribution is $25,000, though 35% said they expect to contribute at least $50,000. That’s enough to cover more than two years tuition, room and board at an in-state public college, and more than a year at a private college.

The 529 accounts specifically are an attractive option for grandparents because of the flexibility they offer, said Keith Bernhardt, vice president of college planning at Fidelity. Earnings are not taxed as long as the money is used toward education expenses. Additionally, grandparents are free to change the beneficiary of the account or take the contributions back at any point should they find themselves needing the money for their own retirement. (They will, however, owe income taxes and a 10% penalty on any earnings withdrawn.)

While 529s offer many benefits, families should understand the difference between how parent and grandparent accounts are treated in financial aid assessments. Any distribution from a grandparent-owned 529 counts as untaxed income on the following year’s Free Application for Federal Student Aid (FAFSA). Parent accounts, on the other hand, are counted as assets on the FAFSA— not as income—and factor into determining the Estimated Family Contribution.

“Income is assessed much more heavily,” said Joe Hurley, head of Savingforcollege.com.

Because grandparent accounts have a larger impact on financial aid, he added, owners of these accounts might want to wait to use the account until the final year of college, or they could shift the ownership to the parent.

While the amount and frequency of 529 contributions depends on individual financial circumstances, Mary Morris, chair of the College Savings Foundation and CEO of Virginia529, said she’s seen an overall increase in grandparents getting involved education expenses. Anecdotally, she estimated that 20% of Virginia accounts are owned by grandparents. Many contributions are made as gifts on special occasions, a pattern Morris expects to see more often going forward

Despite the trend, however, “there’s a real disconnect” between generations when it comes to communication about finances, Hurley said. According to the Fidelity survey, 90% of grandparents said they would likely make a contribution to a college savings plan—if asked.

“Parents feel it’s their responsibility to help their children if necessary,” Hurley said. So they’re “reluctant” to ask for help.

But the price tag of higher education has made that conversation one worth having.

“Parents cannot save enough, on average, to pay the full cost of college,” Bernhardt said. “Grandparents recognize that and want to chip in.”

MONEY

Budgeting for a New Home, and a Disability

The Crosbys, with son Owen, are eager to move to a bigger home. Kinzie+Riehm

Tim and Jennifer Crosby are ready to trade up from their 2,000-square-foot suburban Orlando home. They’d like more space — maybe even a pool — in a district with better schools for their son, Owen, 7.

Expected cost: $450,000.

With real estate in the area recovering, the Crosbys’ house is worth close to their 2004 purchase price of $268,000.

Between equity of more than 20% and savings, they can foot a bigger down payment; plus, they have $2,000 a month after savings and bills for higher carrying costs. (Combined, they earn $147,000 from his job as a network administrator and hers as a business analyst.) But they’d like to be sure it all pencils out.

“We want to enjoy what we have now without blowing it for later,” says Jennifer, 42.

Related: Baby on the way? Time to make a budget

They’re also dealing with a major unknown: Tim, 43, has Charcot-Marie-Tooth disease, a neurological disorder that could one day affect his mobility.

“I’d like to work into my sixties,” he says, “but don’t know what my condition will bring into play.”

WHERE THEY STAND

Real estate value: $243,000
Retirement savings: $189,500
Cash: $80,000
Cash value of life insurance: $23,000
Stocks/other investments: $15,500
TOTAL ASSETS: $551,000

Student loan: $50,000
Mortgage: $180,000
TOTAL LIABILITIES: $230,000

THREE FIXES

Fix retirement first. The Crosbys save $16,000 a year for retirement. At that rate, they’ll have around $1 million in today’s dollars by their mid-sixties, estimates Jacksonville financial planner Carolyn McClanahan.

A great start, but not enough to maintain their lifestyle in the best of circumstances — and definitely not if Tim has to leave the workforce before 67. (The disability insurance he has through work will replace only 60% of his income.

McClanahan wants them to stash $8,000 more a year, preferably in Roth IRAs.

Related: Don’t let divorce wreck your finances

Downscale the dream. Figuring a 20% down payment, a 30-year mortgage on a $450,000 house adds $650 to their monthly nut, not including higher taxes, insurance, utilities, and maintenance. Adding the higher retirement contributions, along with $3,000 a year that McClanahan would like them to save for Owen’s college, the Crosbys will nearly erase their monthly surplus.

McClanahan would rather they dial back their budget to, say, $350,000, so that they can …

Speed-pay the debt. McClanahan wants the Crosbys to get a 30-year mortgage, but put their leftover funds each month toward the debt. Erasing the loan early will reduce their retirement income needs and give them leeway if Tim is forced to retire early.

Plus, it’s a “backdoor college savings plan,” she says. “If you can’t fund tuition through cash flow, you can use a HELOC to help.”

MONEY makeovers

Saving for College and Early Retirement

Scott and Michele Groth want to fully fund state college tuition for their daughters Casey, 17, and Sydney, 12. Photo: Miller Mobley

For Scott and Michele Groth, the dream of early retirement almost seems within reach.

At age 58 both can start collecting pensions worth about half their current pay, plus cost-of-living increases.

Since Scott is a federal employee, they will also get low-cost retirement health care benefits. All that’s on top of the $315,000 they’ve saved in retirement accounts.

But there’s a big hitch: The Groths want to fully fund state college tuition for their daughters Casey, 17, and Sydney, 12.

Though recent promotions and raises have boosted their income by $20,000 over the past two years, they’ve got only $8,000 in college savings, and Sydney will graduate just a year before their hoped-for retirement age.

Related: Couple with $455,000 plays it too safe

The Groths caught a break when Casey, who will start at New Mexico State University next year, became eligible for a state scholarship that covers eight semesters of tuition as long as she maintains a 2.5 GPA. (Son Jacob, 21, is in the Air Force, which will pay for his degree in full.)

They figure modest retirement dreams will take them the rest of the way. “We just want to spend time at home with our future grandkids,” says Michele.

Occupations: Director of logistics at an Air Force base; first-grade teacher

Goals: To retire by 2023 and pay for their kids’ college educations

Total income: $169,000

Total assets: $375,000
Retirement savings: $315,000
Home equity: $30,000
Cash: $22,000
College savings plan: $8,000

THE PROBLEM

The Groths are underestimating how much their children’s higher education will cost, says Lee Munson, a financial planner in Albuquerque.

Even with her scholarship, Casey’s student fees, room and board, and daily living expenses are likely to add up to about $7,500 a year. And the $50 a month the Groths are putting in Sydney’s 529 plan now won’t pay for much school in six years.

THE ADVICE

Save for college — quick! The Groths will need to tap some of their $22,000 emergency fund immediately for Casey’s living expenses.

Munson recommends they put $450 a month aside to rebuild that account. They should also put $200 more a month in Sydney’s 529.

Go aggressive. Nervous about what’s going on in Washington, Scott moved 70% of the couple’s retirement savings into short-term bonds last year.

That won’t give the couple the growth they need for a retirement of more than 30 years.

Since they have substantial pensions and can absorb periodic losses, Munson recommends an 80%/20% mix of stocks and bonds. They’ll need to sock away an additional $750 a month to hit their goal of retiring in 10 years.

While that will require some belt-tightening for the next few years while Casey is in school, Scott isn’t fazed: “We can definitely put away more,” he says.

Don’t become landlords. The Groths hope to cut Casey’s living costs by buying a house near the campus in Las Cruces that she can share with roommates.

Related: $214,000 real estate bet a big risk for a couple

Don’t do it, says Munson. They’ll be on the hook for long-distance repairs and maintenance, will need expensive liability insurance, and will add to their debt load with retirement just a decade away.

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