Synchronize Your Student with College Savings

Here are two lessons for parents of future college students about saving enough money in time:

1. No one has figured out how to save and invest enough overnight to pay for a college education.
2. Timing is critical so that the college savings and investing package you put together is available exactly when the tuition, room and board, and book bills come due.

Most parents don't have a family income that is sufficiently substantial and a budget under strict enough control that, when their children are born, they can simply start saving with monthly contributions to a guaranteed fixed-income investment paying a low percentage of compound interest.

Instead, you will likely have to compensate for more limited investing resources by relying on the expected higher-average returns from stocks or mutual funds.

To be realistic, here are some steps to consider:

• Project how much you think you can save annually between birth and college.
• Then, assume about a six percent to eight percent annual compounded after-tax return to determine how much you'll end up with.
• Finally, try to adjust the amounts you must save in order to match the college expenses you expect 18 years down the road.

For many parents, these invested-savings projections tend to be very low or zero in the first several years of their children's lives, and higher as early-childhood expenses ease and salaries increase from career advancement.

This kind of planning can put you miles ahead of your peers, but even that's not enough to guarantee success.

The return you are assuming is a reasonable guess for any given year of investing, but it actually represents the average compounded return to expect from long-term investing.

However, the stock market tends to act in unpredictable up-and-down cycles. So the shorter the time frame over which you invest in stocks, the more likely you could end up with a much lower or higher average annual return. Consequently:

• If your savings/investing time frame is too short, you could miss out on some big-return years that could boost your overall return to the expected average.
• If you are lucky enough to be ahead of your target early, you could lose out if you keep your money invested the same way after achieving oversized returns, and the last few years turn out rocky.

You're better off with the longest time frame possible, with the most invested as early as possible. Then, at points where you might get ahead of your projections, you move some of your funds into increasingly conservative investments that will preserve much of what you've accumulated, and rely on lower-expected growth from the balance that you keep in the original equity investments.

As if all these calculations weren't enough, to do them meaningfully requires many other detailed assumptions (see right-hand box above).

Note: Section 529 investors should consider the investment objectives, risks, and charges and expenses of the municipal fund security before investing. More information about municipal fund securities is available in the issuer's official statement; which should be read carefully before investing.