Craft a Balanced Long-Term Savings Plan

Physician's Money Digest, June30 2003, Volume 10, Issue 12

Kiplinger's Personal Finance

Last year, tuition costs rose by nearly 6%at private colleges and 10% at publicuniversities. With hikes like that and thecurrent cost of a 4-year private college educationapproaching $150,000, according tomagazine, it'slikely that by the year 2025 a college educationcould exceed $350,000. Because ofthis, you're probably looking to balancesaving for your child's education with savingfor your retirement. In the face of limitedsavings, how can you effectively planfor both? By establishing a realistic financialplan and a disciplined investmentapproach, you can sufficiently balance yourgoals for both college and retirement. Thiswill allow you to happily look forward toyour "golden years" and their graduation.


Start by building a sound financial planeither on your own or by consulting with afinancial advisor. Determining how muchmoney you'll need for retirement willdepend on a number of factors (eg, yourlifestyle, family, health, planned retirementage, and life expectancy).

Once you have satisfactorily determinedyour retirement goals, the next step is todetermine your family's future collegeexpenses. Studies have shown that afterretirement, most families regard collegesavings as their second most importantinvestment or financial goal. One way todo this is by using a college cost calculator,which you can find on Internet sites, or through a financial advisor. There are a variety of availablemechanisms for funding college costs.So, should you fall short of your goals foreducation costs, there may be loans, scholarships,and grants available to your child.


After establishing your savings goals forboth retirement and a child's college education,determine a monthly savingsamount that will put you on the right trackto meet your goals. For some, the combinationof putting away money monthly forretirement, college, and short-term savingsgoals might be more than they can handle.To make this task more manageable, keepyour goals in perspective.

The first and foremost financial goal inyour life should be providing for your ownretirement. Another goal in your attemptto meet your overall savings goal is to capitalizeon your returns. And since tax deferralis key to capitalizing on returns, considerusing tax-deferred savings plans to theirmaximum. These plans include:

A must:

401(k) plans and 403(b) plans. The cornerstonesof many Americans' retirementsavings, these 2 plans are used for tax deferredcontributions from your paycheck.Take full advantage of anymatching employer contributions.

Traditional and Roth IRAs. TraditionalIRAs offer tax deductions for certain individualswho qualify, but you pay tax on distributionsfrom the account. Even if you'renot eligible for an upfront deduction, youstill may be able to contribute to a traditionalIRA and enjoy tax-deferred growth.

Roth IRAs don't offer upfront deductions,but do offer tax-free distributions forretirement and other purposes, if you meetthe requirements. These programs alsohave income limitations, so check withyour advisor to see if you qualify.

Coverdell Education Savings Accounts.Coverdell accounts were createdto help families save in a tax-advantagedway for children's educations. To date,they have not gained much popularity.Relatively low contribution limits andincome restrictions have probably playeda part in their slow uptake.

529 college savings plans. These plansallow tax-free distributions for qualifiedhigher education expenses. In addition totax-free withdrawals, these also offer severalunique features, including donor controlof the account, gifting and estate planningbenefits, and high contribution limits($100,000-$300,000, depending on the 529plan). Some of these features can positivelyimpact your retirement plans. State sponsored529 college savings plans are themost popular savings vehicle today.

Jeffrey T. Coghan is assistant

vice president and 529 product

manager at AllianceBernstein

Investment Research and Management.


manages Rhode Island's 529

plan, CollegeBoundfundSM, which is the

largest single-state 529 plan in the nation.