BOSTON--(BUSINESS WIRE)--As high school seniors across the country eagerly contemplate where they’ll head to campus this fall, it’s a reminder for parents with younger children to revisit the age-old question “are we saving enough for college?” For many families, the answer remains elusive. According to Fidelity Investments’ ® annual College Savings Indicator Study, nearly half are hungry for additional education when it comes to how to best save for college, with seven-in-ten seeking more specific guidelines to define how much they should be saving. The difficulty in identifying how much parents should be setting aside may contribute to the fact that the average family is currently on track to save only 29 percent of the amount of college costs they intend to cover by the time their child graduates high school1.
To bring more clarity, Fidelity has designed a new College Savings ‘2K Rule of Thumb’ and customizable College Savings Calculator, providing parents with the ability to estimate how much they should be saving—whether they’re just getting started or already thinking about campus tours.
Taking into account that the average American family leverages multiple sources to fund college costs2, the ‘2k Rule of Thumb’ focuses solely on savings3. Assuming a goal of covering 50 percent of annual college costs for a four-year public school from savings, the rule is simple: multiply your child’s age by $2,000. Applying this rule, if your child is seven years old:
$2,000 x 7 years old = $14,000
This total represents how much you should have saved to date to be on track, assuming you will continue saving at the same rate and that your child will be age 18 come time to head to campus.
“Every family’s situation will be unique, which means there isn’t a one-size-fits-all answer to the question of how much to save,” said Keith Bernhardt, vice president of college planning at Fidelity. “However for many, a savings rule of thumb provides a much-needed starting point from which families can build a more robust plan to meet their goals.”
Customizing Your Savings Plan
While the ‘2K Rule of Thumb’ is a simple way for parents to calculate general savings guidelines, for those who may want to cover more or less of college costs, the rule can be flexible. Taking advantage of Fidelity’ new mobile-friendly and easy to use College Savings Calculator can help families tailor the rule to apply to their specific situation. By answering a few basic questions, the interactive calculator can quickly provide a customized view of how current college savings measure up and how much more they need to put aside moving forward to meet their goals.
- How Much Will It Cost? When it comes to the cost of college, the price difference between public and private schools can be substantial. According to College Board, the current cost of a four-year in-state public college is estimated to be $20,090 per year versus an annual cost of $45,370 for a four-year private college.4 By inputting the cost of one year of school in today’s dollars, our savings rule of thumb and calculator applies how those costs may grow by the time your child heads to campus.
- How Much Will You Cover from Savings? Fidelity research shows parents continue to be committed to helping their children pay for college, in some cases influenced by their own experience with student loan debt, and others simply wanting to help their children get off to the best financial start they can. While parents often take the lead in covering college expenses, it is still the case that most families don’t cover the full cost from savings. Parental and student income, grants, loans and scholarships all play a role as well.
- How Much Have You Saved So Far and How Long Do You Have Until College? Whether you started saving early or you’re catching up, increasing your savings and ensuring it is invested appropriately can provide the best opportunity for growth to achieve your goals.
“Kids grow up fast, which is why your savings plan needs regular attention in order to make adjustments as needed well before college arrives,” added Bernhardt. “At least once a year, take the time to ask and answer whether you’re on track to reach your goals. If you find yourself falling behind, don’t be discouraged. There are steps you can take to bolster your savings efforts now to alleviate financial stress later.”
How to Jump Start Your College Savings
The good news is that more parents are motivated to save than ever before, according to Fidelity research and customer data5. More families have started saving, are saving in dedicated college savings accounts and have established a plan to help them stay on track with their college goals. In fact, Fidelity 529 college savings plan account openings are up 36 percent through the first quarter of 2017, compared to the same time last year6.
For families looking for additional ways to kick their savings into high gear, check out these ways to give your college account a boost:
- Beat Procrastination: The best way to stop putting off saving for college? Make saving a habit by automating your monthly savings. Your college savings plan provider can help automate your college savings contributions so that regular monthly payments are transferred directly from your bank account. Or consult the human resources office at work for help, as many companies offer direct deposit as an option to put part of your paycheck into a college savings account. The easier you make it to save, the less likely you may be tempted to skip contributing.
- Dedicate an Account to College Goals: Consider using a dedicated account to save for future higher education expenses. One option is a tax-advantaged account such as a 529 plan, which allow you to invest savings that can grow over time, while account earnings can be withdrawn federal income tax-free for a range of college expenses. Saving in a dedicated account can also help families stick to their savings plan and feel more confident in reaching their goals. Fidelity research finds that 88 percent of 529 plan owners have a financial plan in place to meet their college savings goals, and on average, have saved nearly $12,000 more than families without a 5297.
- Invest Your Best: One key to reaching your college savings goals may be to adopt an age- appropriate strategy that reflects your child’s time horizon to college. Each year, revisit your plan to make sure the asset allocation suits your needs. 529 college savings plans can offer a range of investment options from low-cost index funds to actively managed age-based funds, which provide an age-appropriate asset allocation as your child grows up. Learn more about Fidelity-managed 529 Plan investment options here.
- Dedicate to Innovate: Whether it’s cutting out one restaurant visit a month, committing a percentage of a tax refund or paycheck bonus, or earmarking earnings from cash back credit cards, there are creative ways to save a little more each month that can significantly impact the growth of your college savings account over time. For more strategies to help families save and stay on track, check out Viewpoints: Five lessons learned for college savings and Fidelity’s Calendar of College Savings Strategies
Both online and in-person resources are available to help families saving for college. Parents can access a full library of educational articles, videos, calculators and other tools at Fidelity’s College Learning Center. College planning specialists are also available to answer questions and provide guidance at Fidelity 195 investor centers across the county, or by calling 800-544-1914.
About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $6.0 trillion, including managed assets of $2.2 trillion as of March 31, 2017, we focus on meeting the unique needs of a diverse set of customers: helping more than 26 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.
The UNIQUE College Investing Plan, the Fidelity Advisor 529 Plan, the U.Fund® College Investing Plan, the Delaware College Investment Plan and the Fidelity Arizona College Savings Plan are offered by the state of New Hampshire, MEFA, the state of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary are not a New Hampshire, Massachusetts, Delaware or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary’s home state offers its residents a plan with alternate state tax advantages or other benefits.
Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
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The third party marks appearing herein are the property of their respective owners.
Please carefully consider each plan’s investment objectives, risks, charges and expenses before investing. For this and other information, contact Fidelity or visit fidelity.com for a free Fact Kit or request a free Offering Statement from your advisor or through advisor.fidelity.com. Read it carefully before you invest or send money.
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1 Fidelity Investments, Fidelity Investments College Savings Indicator, August 2016
2 Sallie Mae, How America Pays for College 2016
3 Notes on Methodology: The analysis models a hypothetical investor's savings behavior in different market scenarios. Using the characteristics of the "average American" compiled from industry data such as:
- School type and cost – four-year public in-state college costing $20,090 per year
- Growth of college costs – 3% per year above inflation
- Desired savings percentage – 50% of gross tuition, fees, and room and board
- Time horizon and duration – assumed college start age of 18 and a four-year college duration
The rule of thumb assumes the hypothetical investor begins saving at the birth of the student. It then solves for the flat, real (grows with inflation) annual savings amount to meet the required spending need in 18 years. The spending need uses today's cost-per-year estimate and grows it annually by 3% + inflation until the expense is incurred over four years. The resulting savings level varies by market conditions but a “college x factor” (which helped to establish the 2K rule of thumb) is determined at the 75% confidence level based on the analysis used to arrive at the estimated effective rates of return. This means that in 75% of the hypothetical market scenarios (with differing market conditions) the amount saved meets or exceeds the required spending need and in 25% of the market scenarios the savings are not able to fully fund the spending need. The assumed asset allocation for the analysis uses three asset classes and a generic target date asset allocation appropriate for college savers. The analysis is then repeated for each age assuming the hypothetical investor had started saving a flat, real amount at birth and solves for the required assets at the current age to meet the spending need with 75% confidence. Once complete, the analysis illustrates that the college x factor is similar for all ages. In the “average American” scenario the college x factor is approximately 2,000 (2KX).
4 College Board, Trends in College Pricing Report 2016 - includes tuition, fees, room and board
5 Fidelity Investments, Fidelity Investments College Savings Indicator, August 2016
6 New account openings of Fidelity-managed 529 plans for 2017 through March 31, 2017, compared to the same time last year
7 Fidelity Investments, Fidelity Investments College Savings Indicator, August 2016