The numbers are mind-numbing.
If college costs continue to rise at an annual rate of about 6 percent, parents who intend to send their newborns to a public college can expect to pay about $107,000, according to the College Board’s Annual Survey of Colleges.
Average cost of a private school by then could be a whopping $223,000.
But with the right planning and an early start, you can come up with equally big numbers.
Where to begin?
That depends on how much time you have before college begins. Ideally, you should start investing for college as soon as the child is born, or even before. That’s not possible for many people. Rule of thumb: Whatever you can, as soon as you can.
For example, after 18 years of investing only $25 a month at 8 percent interest, you’d have more than $12,000.
Your goal doesn’t have to be to pay for all of college, nice as that might be. The goal should be to start saving, if you haven’t already, and to do so intelligently.
That’s what Margaret and Brian Demery of Berkley, Mich., are doing for daughter Mary, 4, and son Joe, 19 months, setting aside $100 per month per child.
“We’re not looking to pay for the whole college bill,” Margaret said. “But my husband and I both paid for our own college. We thought we’d like to at least help our kids out.”
Their situation was brought to the attention of various financial experts, who devised a long-term, college-investing strategy. But the advice applies to anyone trying to save for college.
By the time Joe Demery enters elementary school, Margaret and Brian should diversify their college investment.
Stocks are still the best place to be for maximum long-term growth. And an aggressive fund such as Ultra still makes sense because Joe still has 12 years before college begins.
“As long as you have time on your side, you’ll do better in stocks than in bonds or cash,” said Margaret Southworth, a Troy, Mich., financial planner.
But the Demerys may want to reduce risk by adding some slightly less aggressive funds, as well. “I’d pick two more stock funds,” Southworth said. “A U.S. stock fund and an international fund.”
Southworth suggests the Demerys put a third of their money in each fund.
For the U.S. fund, she recommends a “value” fund, one that invests in companies that are believed to be undervalued. Among the better-performing value funds are Alliance Growth (800-227-4618) and New York Venture (800-279-0279).
Either would complement the Ultra investment. Ultra invests in small- to medium-size companies. Alliance Growth and New York Venture invest in larger companies. If either sector performs well, the Demerys should prosper.
But it’s a big world. Southworth said the Demerys should also invest overseas.
“Most of the time, U.S. and international markets do not move up and down at the same time,” she said. “Adding international adds stability to your investments.”
Two leading candidates are GAM International (800-426-4685) and Ivy International (800-456-5111).
When Joe enters middle school, it will be time to diversify further, says Russ Jalbert, president of the Quadrant Group, a financial planning organization in Troy, Mich.
Anyone with five years before they need money from an investment should buy stocks. With as many as 12 years, investors can afford to be somewhat aggressive. But as Joe gets closer to college age, aggressive investing gradually should give way to less risky investments.
To do that, Jalbert recommends the Demerys divide Joe’s college money equally among four funds: an aggressive growth fund (the Demerys can leave 25 percent of the money in their original fund, Twentieth Century Ultra), an asset allocation fund (recommended: CGM Mutual, 800-345-4048, and Fidelity Asset Manager, 800-544-8888), a balanced fund (stocks and bonds; two highly rated ones are Evergreen Foundation, 800-235-0064, and Phoenix Balanced, 800-243-4361); and an international fund (consider Scudder International, 800-225-2470, and T. Rowe Price International Stock (800-638-5660).
As Joe enters high school, the Demerys will enter the trickiest investing period. College is four years away. Graduation is eight years off.
That’s too much time to consider putting the college nest egg in a safe-but-low-paying money market account, where you might lose ground. On the other hand, a high school freshman is too close to college to leave all the money in stocks. The last thing the Demerys want is a stock market tumble just as they need some of their money.
“The stock market can swing by as much as 20 percent,” said Janice Shatzman, a partner and personal finance specialist with KPMG Peat Marwick in Detroit. “We are not at a point where we can afford a dip.”
Furthermore, she points out, “We can afford to be conservative now because we started investing early and have accumulated a lot toward our goal.”
Shatzman recommends moving much of the money into bond mutual funds. Bonds generally produce lower returns than stocks. But they’re less risky, too. And they generally offer better returns than money market accounts.
The CGM Mutual balanced fund is still appropriate for 25 percent of the investment, Shatzman said. Since the fund holds stocks and bonds, it’s already diversified.
Shatzman said another 25 percent should go into a fund that invests in large, conservative companies with good long-term track records. Two possibilities are IDS New Dimensions (800-328-8300) and the Janus Fund (800-525-8983).
But to preserve much of the money already acquired, Shatzman recommends that half the college fund be put into a mutual fund that invests in bonds that mature in less than five years. Bonds that mature in only a few years are less risky than ones that mature in 20 or 30 years. Good choices include Scudder Short-Term Bond (800-225-2470) and Vanguard Fixed-Income Short-Term Corporate Portfolio (800-662-7447).
Shatzman estimates this mix of investments could return about 8 percent a year, two to three times what you could expect from a money market account or certificate of deposit.
When Joe enters college, the Demerys may be tempted to put all his education money in a savings account, certificate of deposit or money market fund.
That’s understandable; they wouldn’t want to jeopardize the money they’ve worked so hard to save. But having all the college cash in a low-paying account is a mistake.
Remember, they still have to worry about the rest of the college years, when costs likely will continue to increase by about 6 percent a year.
That’s double what money market accounts are paying. Even bond funds, which generally pay higher interest, might not be able to keep up with rising college costs.
That means they should keep some stocks. But since they will need all the money within three years, the trick is figuring out how much to keep in cash, how much to put in bonds and how much to leave in stocks.
Ron Humenny, president of Starfire Financial Services in Southfield, Mich., recommends this division of funds:
– 25 percent in a low-risk money market or savings account. That’s enough to pay the first-year bills.
– 25 percent in a mutual fund that invests in bonds that mature in three years or less. These funds generally pay higher interest than money market funds, and are less risky than long-term bond funds.
– Split the remaining 50 percent between two stock mutual funds. Two Humenny likes are Invesco Industrial Income (800-525-8085) and Warburg, Pincus Growth & Income Fund (800-257-5614).
As the Demerys need money for school, they should gradually sell off the funds, starting with the stocks.
If the Demerys’ strategy is successful, there may even be enough left to buy Joe a nice graduation gift.
