MONEY college savings

The Earnings on Your 529 College Savings Account Stink. Here’s Why That’s OK

dollar bill shoved in pile of books
Mudretsov Oleksandr—iStock

It's not all bad news.

The average investor in a college savings plan made just about 4% last year, even though the total U.S. stock market rose by almost 14%, a new study from Morningstar found.

But the lead author of the report, Leo Acheson, says that performance may not be quite as depressing as it sounds, for these six reasons:

  • It still beats tuition: Although 4% severely lags the Standard & Poor’s 500, it beat tuition inflation, which rose by 3.7% in 2014, according to the College Board.
  • Older students should earn less: A disproportionately large percentage of all 529 assets are funds that have been saved over time for students who are now at or nearing college age. Funds for those students should be—and typically are—invested very conservatively. Savings plans designed for current college students, for example, are typically almost entirely in safe bonds, which means they are earning less than 2% a year right now, Acheson notes.
  • Diversification setbacks should be short-term: Younger and more aggressive investors whose portfolios were globally diversified also earned less than the Standard & Poor’s 500 in 2014 because of trouble in international markets. Overall, emerging markets funds lost about 5% in 2014, for example. But, in theory, at least, globally diversified portfolios should do better over the long run.
  • Savers get federal tax benefits: When parents take the money out of 529 accounts to pay college bills, they don’t have to pay taxes on the gains, which boosts their effective return. Morningstar estimated that a family in the 25% to 35% tax bracket that saved $2,400 annually over the last five years would have netted $15,275 after taxes in a typical mutual fund, but $15,628 after taxes from the same investment in a sheltered 529 account.
  • Some also get state tax benefits: About half of Americans live in one of the 34 states that give deductions or credits on state tax returns for contributions to 529 plans. Those initial tax breaks reduce families’ state tax bills by an average of 8.7% of the contribution, according to Morningstar. (See if you live in a state with a 529 tax break.)
  • Fees are shrinking: One of the biggest criticisms of 529 plans has been the high fees that eat away at parents’ investment returns. Morningstar found that, for example, large value index funds offered in 529 plans charge expense ratios of .78% of assets, while the equivalent mutual fund outside of 529 plans charges just .56%. But 40 plans cut their fees in 2014, bringing the average gap between mutual funds and similar 529 plans down by more than half, Acheson found. In addition, the best plans, recommended by MONEY and by Morningstar, have fees as low as .08%.

The bottom line of all of these developments, Acheson says, is that for families in moderate to high tax brackets, and those who live in a state with a 529 tax break, “it makes sense to save for college in a 529 plan…especially one with low fees.”

MONEY college savings

Six Misconceptions That Are Costing You Free Money for College

college students listening to professor in lecture hall
Getty Images

In honor of 5/29 College Savings Day, MONEY answers parents' most common questions and concerns about 529 accounts.

Despite being promoted for more than a decade as the best way to save for college, 529 plans are a mystery to almost two-thirds of American families. Which means they’re losing out on what is essentially free money for college.

Part of the problem, of course, is that many Americans feel they don’t have any extra money to save for any reason, college included, one recent survey found.

But today—5/29 (get it?)—is a great day to take a closer look at how these college savings plans work. For one thing, so-called “529 Day” comes with cash bonuses. Many hospitals, for example, will give babies born on this day $529 toward college savings. The state of California will kick in $50 in matching contributions made to its 529 accounts today. And Virginia is giving anyone who opens a new college savings account this month a chance to win $10,000.

These short-term promotions are designed to draw attention to the more permanent advantages of the 529 plan. Thirty-four states offer state tax breaks or scholarships to residents who invest in college savings accounts that add, on average, the equivalent of 8.7% to your contributions. And earnings on any 529 investment can be used tax-free to pay for your child’s college expenses, which boosts the net value of your college savings over what you would earn in a regular investment account.

Unfortunately, many parents who can afford to save don’t do so, often because they have misconceptions about the costs and benefits of 529 plans. Here’s the truth behind six of the most common false assumptions that experts say they hear.

It will impact financial aid. Some parents who have saved for college fear that their nest egg could turn into a financial hand grenade when their student applies for financial aid, says Lynn O’Shaughnessy, author of The College Solution. And, in fact, every $1,000 you’ve saved in a college savings account can reduce need-based aid offers by up to $56. But many families don’t see that much of a reduction. And even those who do are still wealthier and far more able to pay for college than they would have been without saving, O’Shaughnessy says.

I can’t afford the contribution minimums: A lot of families get paralyzed by the idea that they can’t put a large sum aside, and so they don’t save anything at all, says Betty Lochner, Director of the Guaranteed Education Tuition plan in the state of Washington. “They think it’s too steep a hill to climb, and it’s not,” she says. At least 33 states allow you to open accounts with deposits of $25 or less, according to the College Savings Plans Network’s tool to compare plans.

The investments are too risky. Many parents are naturally afraid to put money in investments they don’t understand or trust. But most states offer low-cost, professionally managed plans specifically designed for parents who don’t want to have to worry about the ups and downs of the market, says Joe Hurley, an expert on 529 plans and founder of Savingforcollege.com. For example, the increasingly popular age-based portfolios, many of which are managed by well-respected firms such as Vanguard, Fidelity, or T. Rowe Price, will manage the risk of stock markets by moving money to more conservative portfolios as students get closer to college age.

There are also several independent guides to help you pick a good plan. Savingforcollege.com compiles a quarterly list of the top performing plans, and Morningstar publishes an annual research analysis.

It limits college choices: Although most 529 plans are sponsored by a state, the funds can be used at any accredited college in any state, says Lochner, who is also chairwoman of the College Savings Plans Network, a consortium of state plan administrators.

But my kid’s going to get a full ride! Time for a reality check: The idea that bright students can easily earn full-ride scholarships is a myth, says O’Shaughnessy. Only .3% — that’s less than one third of 1% — of college students receive true full rides, according to research by Mark Kantrowitz, publisher of Edvisors and author of “Secrets to Winning a Scholarship.” Even if your child gets a scholarship to cover tuition, there’s still room and board and books to pay for, both of which qualify as educational expenses for 529 accounts. (Congress is considering a proposal that would expand what qualifies to include computers, software, and internet access.)

Any additional money left over in a 529 can be easily transferred to a college savings account for yourself, or for a sibling, cousin, or future grandchild. Alternatively, you can withdraw 529 money from an account and spend it on anything you want—you’ll just have to pay taxes on the gains (as you would have done for funds from a regular investment account), and there will be a 10% additional tax penalty on those gains. If you are spending money left over in a 529 because your child won scholarships, however, the tax penalty is waived, Lochner says.

My kid will blow the money on video games. Having a nightmare about your daughter going through a rebellious teenage phase and cashing out the college savings plan to finance a backpacking trip across Europe? Not going to happen. Parents remain in control of the account even after a child turns 18.

To learn more about 529 plans and get help figuring out which 529 plan is right for you, check out MONEY’s guide.

MONEY College

Don’t Be Too Generous With College Money: One Financial Adviser’s Story

When torn between paying for a child's education or saving for retirement, parents should save for themselves. Here's why.

Saving money isn’t as easy — or as straightforward — as it used to be. Often, people find they have to delay retirement and work longer to reach their financial goals. In fact, one of the most common issues parents face these days is how to save for both retirement and a child’s college fund.

Last month, for example, I met with a couple who wanted to open college savings funds for each of their three children. They were already contributing the maximums to their 401(k)s with employer matches. I applauded their financial foresight; it’s great to see people thinking ahead.

Then I gave them my honest, professional opinion: Putting a lot of money into college funds isn’t going to help if their retirement savings suffer as a result. Sure, they’ll have an easier time paying tuition in the short term, but down the road their kids may end up having to support them — right when they should be saving for their own retirement.

The tug-of-war between clients’ retirement and their children’s education can lead to difficult conversations with clients, and difficult conversations between clients and their children. Who wants to deprive their children of their dreams and of their top-choice school?

I try to be matter-of-fact with my clients about this sensitive subject. I start with data: If you have x amount of money and you need to put y amount away for your own retirement, you only have z amount left over for your children’s college.

I also talk a little about my own experience — how my parents were able to write a check for my college tuition. But college was less expensive then, and costs were a much smaller percentage of their salary than they would be today. Times have changed.

As much as we all want to be friends with our children, we have to put that aside. I tell people that if they don’t know whether they should put their money in a 529 account or their retirement account, they should put it in their retirement account. Financial planners commonly point out that you can get a loan for college but you can’t get one for retirement.

I don’t think people realize that. I think that they just want to do right by their children.

After I talk about my own experience, I move on to my recommendation. I tell clients that one way to approach this issue with their children is to make them partners in this venture. Tell them that you’re going to pay a portion of the cost of education. Set a budget for what you can afford, then work with them to find a way to fill in the gaps. Make a commitment, then stick to it.

I explain to my clients that choosing their retirement doesn’t mean that they can’t help your children financially and it doesn’t mean they are being a bad parent or are being selfish. It does mean that they should prioritize saving for retirement.

When clients tell me that they feel guilty for putting their retirement first, I ask them this: “Where is the benefit in saving for your children’s college but not for your own retirement?” Without a substantial nest egg, I tell them, you could end up being a burden on your children when you’re older.

And there’s an added bonus, I tell them: If your kids see you putting your retirement first, it might teach them about the importance of saving for their own retirement. That could end up being the best payoff of all.

Read Next: Don’t Save for College If It Means Wrecking Your Retirement

———-

Sally Brandon is vice president of client services for Rebalance IRA, a retirement-focused investment advisory firm with almost $250 million of assets under management. In this role, she manages a wide range of retirement investing needs for over 350 clients. Sally earned her BA from UCLA and an MBA from USC.

MONEY First-Time Dad

How to Avoid Spoiling Your Child

Luke Tepper
One-year-old Luke, having his cake and eating it too

First-time dad Taylor Tepper learns how not to be the kind of parent he fears becoming.

Our son, Luke, recently celebrated his first birthday. Family and friends generously gave the tyke rubber soccer balls, race cars, pegs, hammers, marbles, and chic winter gear. Luke now has more toggle coats than I do.

Luke’s things, like a rebel army, have begun to outnumber my own. He now has nearly a dozen bins filled with plastic and wooden products crafted by large companies and bought by suckers like me. His clothes occupy a spacious three-drawer dresser, while mine are packed tightly in a small closet. He has twice as many pairs of socks as I do. This all feels silly. Give Luke the option to play with an empty milk carton or a fluffy stuffed animal, and he’ll be shaking the carton between his hands like a boy possessed before you can blink. The box carries more value than the toy inside.

As I cleaned up after Luke’s party, I started thinking about the nature of toddlers and their stuff, and I’ve been mulling over a few issues ever since. The first has to do with spoiling. I know that you can’t really spoil a baby—infants’ needs must be met. But am I developing habits of indulgence now that will ossify over time and lead me to spoil Luke when he’s older? Am I setting myself up to be a bad parent? The second issue has to do with the presents themselves, the catalyst of my spoiling concern: there must be a better use for all that money.

The truth about spoiling

On the first question, the experts are clear. “You’re not going to spoil a baby,” says Tovah P. Klein, assistant professor of psychology at Barnard College and author of How Toddlers Thrive. “They need to be comforted and cared for.”

That Mrs. Tepper and I do. We also warm Luke’s baby wipes, pull him around in a red wagon for hours on end, and turn on “Sesame Street” whenever he’s systematically broken us down. My fear is that our good-natured, responsive parenting will morph into something more unseemly as he ages. It’s not a big leap to image a world where I’m cooking a second dinner because 2-year-old Luke is dissatisfied with the first. I shudder when scenes like that unfold in my mind’s eye.

The key thing for me to recognize, says Klein, is that I don’t need to protect my son from unhappiness.

“If you think, my role is to make him happy all the time, or to entertain him, the child doesn’t learn how to handle hard times, like when he’s angry or frustrated or sad,” Klein says. “Your goal as parents is, how do you help him deal with anger when limits are imposed.”

That’s an intuitive point, but one slightly difficult to reconcile with experience. Luke is our first child, so everything is new to us. Call it the Unbearable Lightness of Parenting. So in the next five to 12 months, as he develops a sense of self and forms his own ideas of what he wants, it will be challenging to hold a firm line. How do I know this tantrum isn’t just a test of limits but a true expression of real pain? Will I have the stomach to stay the course?

“He’ll be happy if you love him and let him know you’re there,” Klein told me. “Put up some reasonable limits and help him through those frustrating moments. That is what counters spoiling.”

Children, especially really young ones, crave structure. It’s the lack of it that results in insecurity. So if he doesn’t want to eat what I’ve cooked for dinner, fine. But I’m not frying up another meal.

Getting presents—and other stuff—under control

Limits are certainly in order for all of his toys. Between Christmas and his birthday and well-meaning friends doting on the little guy, we have enough Elmos and plastic cell phones and wooden school buses to open up our own boutique. This overflow of generosity leads to a short-term concern as well as a longer-term one.

In the here and now, the problem is sheer volume. “Children need less material goods,” says Klein. “More stuff tends to overstimulate them.” We already try to highlight only a few options for him to play with, but we’ll resolve to be even more selective going forward. We’ll offer him one bin to tear apart rather than two.

Later on, though, I worry about relying on toys (and ice cream and other objects that cost money) as a means of reinforcement. I don’t want to get into the habit of giving him things all the time so that he’ll do X or Y. Plus, I don’t think I’ll be able to afford it.

“Not every reward has to be a material reward,” says psychologist and parenting expert Lawrence Balter. “Sometimes rewards can be privileges as they get older.”

I was discussing the issue of presents at Luke’s party with a friend from college, and she asked me if we had starting saving for his college fund. (We started a 529, but it’s tragically underfunded.) Instead of toys, she asked, why don’t you ask people to donate to the fund instead?

Which is what we’re going to do from now on. Rather than stuff our bins full of perfectly fine but ultimately useless things, we’ll ask friends and family to chip in to help pay for his insanely expensive education. While that might make the act of gift-giving a little less fun for them, it will help us afford an essential good that will dramatically improve his life.

Plus, it’s one less spaceship for me to trip on in the middle of the night.

More From the First-Time Dad:

MONEY College

My Son Isn’t Going to College. Now What?

College savings seemed to go according to plan, but now the beneficiary has strayed from the script, and the parent is worried he'll get the funds.

Q. My son is turning 18 and I’ve saved more than $200,000 for him for college. He doesn’t want to go. Some of the money is in UTMAs, some in a 529 Plan and some in savings bonds. I don’t want him to live off the money and not get a job. Help!

A. Bet that threw you for a loop.

Each of the kinds of assets you saved for your son is treated a bit differently, so let’s take stock of what you have.

Custodial Accounts

The assets you saved in a custodial account — Uniform Transfer to Minor Act accounts, or UTMAs — will be his when he reaches the age of majority, said Bryan Smalley, a certified financial planner with RegentAtlantic Capital in Morristown.

In New Jersey, the age of majority is 21. That means that there are three more years before the assets officially become your son’s.

“A lot can happen in the next three years: your son could start a career and be self-sufficient — therefore not needing the money to support his lifestyle — he could start his own company and use the UTMA funds to help grow the business, or he could end up deciding to go the college,” Smalley said. “Who knows, a few years of earning minimum wage and seeing all of his friends move on with their lives may be all the motivation he needs to hit the books once again.”

The 529 Plan

The 529 account is different. As long as you’re the owner of the account, you retain control of the funds and there is no time limit on when you need to use them,” Smalley said.

If your son decides to go to college in a year or two, the funds will be there.

“If your son does not go to college, you can always use the funds for another of your children’s college education — if your son is not an only child — or hold onto the account and use it for a future grandchild’s college education,” Smalley said.

Savings Bonds Earmarked for College

If either of those options are not of interest to you, you can always withdraw the funds from the 529 account and use them elsewhere, Smalley said. But that move comes with a price. You’ll have to pay a 10% penalty plus taxes on the earnings in the account if you use the funds for anything other than qualified higher education expenses.

On your savings bonds — assuming they are either EE or I bonds — if they are owned in your name, your son does not have a right to them even though they were purchased with the intent to pay for his college education, Smalley said. You may continue to hold onto them or cash them in.

“Please note that if they are not used to pay for higher education expenses the interest on the bonds is not deductible on your tax return,” Smalley said.

If you purchased bonds in the name of your son, you can have them reissued in your name. The caveat here is that you cannot have them reissued if they were purchased with your son’s own money, such as with money from an UTMA.

“As you can see, not all is lost. While it must be disappointing that your son does not want to go to college now, it is not an irrevocable decision,” Smalley said. “He could always change his mind and go later or perhaps he finds his success on a path that does not travel through a college education.”

More from Credit.com

This article originally appeared on Credit.com.

MONEY College

How College Costs Will Change in 2015

Although college costs are still increasing, they're increasing at a much lower rate than they have in recent years. Interest rates and repayment for federal loans have eased as well.

MONEY College

How to Give the Gift of College This Holiday Season

stacks of money wrapped with a gold bow
Deborah Albers—Getty Images

The kids in your family could probably use cash towards school more than a new toy (or at least parents might prefer that). Here's how to make it happen.

Saving for college can be tough, but many families do not tap a potentially generous resource: relatives and friends.

Various companies are trying to change that by making it easier for parents to ask for, and receive, contributions to college savings plans. As the holidays approach, these providers are stepping up their efforts to publicize these options and convince families to try them.

“I think people can feel comfortable going out and saying they prefer gifts that are more meaningful,” says Erin Condon, vice president of Upromise, a college savings and cash rewards program, run by Sallie Mae.

“They can say, ‘Instead of giving our son a truck, how about helping us save for college? Or giving him a smaller truck and putting $20 into his college savings plan?'”

Named after Section 529 of the Internal Revenue Code, 529 college savings plans allow contributors to invest money that can grow tax-free to pay for qualified higher education costs.

Although typically sponsored by states, the plans are run by investment companies and account balances can be spent at any accredited college or vocational school nationwide.

Upromise released a survey last week that found seven out of 10 parents would prefer their children received money for college rather than physical gifts. Upromise offers a way to let others do just that: it is called Ugift, a free online service that families can use to solicit their social networks for college contributions.

Friends and family are emailed bar-coded coupons they can print out and send in with a paper check. The service is available to customers of the 29 Upromise-affiliated 529 plans, which include two of the country’s largest: New York’s 529 College Savings Program and Vanguard 529 College Savings Plan in Nevada.

Upromise has found that customers who enlist others to help them save via the site’s rewards program and shopping portal typically accumulate three times as much as customers who do not, Condon says.

The 529 plans run by Fidelity Investments also offer a free service that allows parents to set up a personalized contribution page and share links via email or social media that allow direct contributions to a child’s college savings account via electronic check.

Fidelity released its own poll recently, which found 9 out of 10 grandparents surveyed said they would be likely—if asked—to contribute to a college savings fund in lieu of other gifts for a holiday, birthday or special occasion. Fidelity manages 529 plans for Arizona, Delaware, Massachusetts, and New Hampshire.

These programs tap into the crowd-funding zeitgeist that has seen people appealing to their social networks to help pay for creative projects, charitable causes as well as personal costs such as medical expenses, travel and weddings.

As college costs rise, more people see the need for such help, according to Joe Hurley, founder of the 529 information site SavingForCollege.com.

“It’s a reaction to material gifts, and also the rising cost of college that’s creating so much anxiety for parents,” says Hurley.

Create a College Registry

A few sites facilitate contributions to any 529 plan. GradSave, for example, lets parents set up a free college savings registry that accepts contributions from friends and family. The money is held in an FDIC-insured account until the parents transfer it to their 529 accounts.

Leaf College Savings, meanwhile, offers an education gift card that anyone can use to make a 529 contribution for someone else. The giver loads an amount between $25 and $1,000 onto the card and gives it to the parent, who can then redeem it at the Leaf site and transfer the funds to his or her 529 plan. If the parents do not have a plan, the site helps them set one up.

The gift card, however, comes with an “activation fee” of at least $2.95 plus another $2.95 to get a physical card rather than one sent by email or Facebook or printed out on your computer.

But givers do not need an intermediary to contribute to a college savings plan, says Hurley, since virtually every 529 plan accepts third-party gifts. Those who want to contribute directly to a child’s account typically will need to include the account number and perhaps the child’s Social Security number, but Hurley notes there is a way to bypass that requirement.

“Just make the check out to the 529 plan, hand it to the parents and say, ‘Here, put it into the plan,'” he says. “That’s pretty easy.”

One thing that may not be easy is figuring out who gets the tax break for the gift. Most states offer tax deductions for 529 contributions when the contributor is a parent. Some offer the break to any contributor. And some do not offer any tax break at all.

The solution? Talk to your tax professional.

Related: More on college savings plans

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.

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