The number two question that I get when folks come to me for guidance is “How will I pay for my kids’ college?” (For the curious, the number one question is “When will I be able to retire?”)
I help families answer this question by taking them through a series of questions that allow them to discover the best path forward for them. The first set of questions I ask focus on fully evaluating the magnitude of the challenge:
- Have you agreed as a family about what sort of college makes the most sense for your child?
- Have you researched what this sort of education will cost?
- Is your child properly preparing for this college?
These questions help to make sure that:
- The planned college choice will provide the child the proper training for their desired path forward in life.
- The family understands the magnitude of financial commitment to this path.
- The child is fully invested in the process.
Unless there is clarity on these three questions, it is VERY likely that things will go “off the rails.” When these three questions are not fully answered and fully understood, there is HIGH probability that (i) the college experience is going to take longer than expected and (ii) the college experience is going to be less than ideal.
Clarity on the “why” behind college is the most critical step in the process. It ensures that the required investment is appropriate—not too little, not too much.
After we go through the above, the attention turns to putting the right financial vehicles in place to fund the education. The tool that often proves to be the most valuable is a 529 plan. 529 plans allow for investments to grow tax deferred AND allow for withdrawals for education to be removed tax free. This is one of the best deals going! Further, many states have additional tax incentives for funding a 529 account. I STRONGLY recommend that you review your college funding strategy for the appropriateness of a 529 plan.
Finally, we come to the topic of what and how to do the actual investing. In general, I normally advocate an approach that starts with a fairly high percentage of equities and slowly reduces the equity exposure as the child reaches the age when he/she will attend college.
It is important to know that investing for college is dramatically different than investing for retirement! While in both cases, we can make a reasonable estimate of the expenses, retirement’s duration is not totally clear whereas the college duration is well defined. Furthermore, the commencement date for retirement often has a much higher degree of flexibility than the commencement date for college.
Because college is so “certain,” I advocate a very conservative strategy once the child enters college. Volatility is NOT your friend when you have a short, well defined event that requires financial outflows.
The attached article goes into more details on the how-to part of investing. However, I would encourage you to take the time to walk through the aforementioned process before focusing too much on the mechanics of investing.
This same message carries over into all aspects of planning for your financial life. Do not get hung up/fixated on the “magical investment” that is going to solve all of your problems. Rather, take the time to work through a systematic process and then turn your attention to selecting the right investments to support the plan you have developed.
Hopefully, after reading this blog post, you will have a bit more motivation to dig deeper into both your plan to fund college and your plan to fund retirement and to evaluate how things are going regarding the achievement of your desired outcomes.
- Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?
- If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?
If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.
Enjoy the read and remember, it’s NOT about the money. It’s about how the money supports your goals!
Photo credit: Muhammad Rizwan on unsplash.com
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