Lesson Learned: Find A Way To Save For College

Summer 2006

Amy and her husband, Air Force Captain Joseph (Jody) Palmer, really don't mind living on a budget. A former ESPN statistician, Capt. Palmer is good with numbers, and Amy is supportive of a frugal but fun lifestyle.

"My husband keeps track of our budget, which covers everyday expenses and family fun like taking our RV to go camping," Amy said.

The dual focus on following their budget has paid off. The Palmers have an emergency fund covering six months of living expenses. Jody is contributing to his Thrift Savings Plan (TSP), and Amy is contributing the maximum to her employer-sponsored 401(k) plan to get the company's matching contribution. They have even started money market accounts for their seven- and 13-year-old children, though they aren't sure how this money will be spent.

And the Palmers "hold on to cars until they die," says Amy, who works for Operation Homefront, a non-profit organization that helps military families with deployed loved ones. She kept her last car for 11 years, getting all of $500 when she finally traded it in several years ago.

But the Palmers haven't planned for one of their financial goals - paying for their children's college education. With Jody anticipating a pay raise due to a recent promotion, they think now is the time to figure out how to save for this expense.

"I also got a raise in January, and we don't want to spend the extra money on the wrong things," Amy said. "One of my biggest concerns right now is that we won't have enough to pay for our kids' college. When it comes to saving for college, you always think, 'next year, next year.'"

Putting A Plan In Place

With the help of Brian McGlinchey, a USAA CERTIFIED FINANCIAL PLANNER^TM practitioner and a U.S. Army veteran, the Palmers set out to end their college-savings procrastination.

McGlinchey recognized that the Palmers had "laid a firm financial foundation" in terms of saving and investing but missed some crucial steps to protect their family and finances.

Before they start saving for college, McGlinchey recommends the following:

Eliminate the car loan. Though Jody's car is paid for, Amy's is not - and neither is their RV. By reducing their emergency fund, the Palmers could pay off Amy's $12,000 car loan that has a 5.5 percent interest rate.

"You need three to six months of living expenses in an emergency fund but, with their job security, the Palmers can swing closer to three months," McGlinchey says. "Where you keep it is important. A good choice is a money market mutual fund that could currently yield over four percent."

With an extra $250 freed up from the car note, the Palmers can make extra payments toward their RV loan and pay it off much sooner.

Get an estate plan. Since basic JAG or military legal services are free, McGlinchey recommends the Palmers work with their local JAG office to develop a will naming guardians for their children, durable power of attorney, healthcare power of attorney, living will and letter of instruction. He also suggests making sure the beneficiaries for their Individual Retirement Accounts (IRAs), TSPs and life insurance policies are up to date and that they name backup beneficiaries.

Update insurance. McGlinchey recommends increasing their auto insurance liability limits from $25,000 per person, $50,000 per accident and $25,000 for property damage to $100,000, $300,000 and $100,000, respectively.

"It's important to monitor your liability protection and increase it as your wealth grows. It would be disastrous to lose in a lawsuit what you've worked so hard to accumulate," he added.

While Jody's military benefits provide excellent disability insurance coverage, Amy also needs disability insurance since her income is important to the Palmer household. But before shopping around, Amy should find out what her employer offers.

Though Jody's Servicemembers Group Life Insurance (SGLI) and other benefits would give Amy strong financial support in the event of his death, Amy's own life insurance coverage is lacking. "Amy plays a vital role in her family's financial security. She should increase her life insurance from $100,000 to $300,000."

Revisit retirement investments. While saving for college expenses is important, saving for retirement must come first. Though the Palmers do not have a retirement age in mind, McGlinchey notes that they should make full contributions to a Roth IRA to help ensure a comfortable retirement. "That money grows tax free, so every dollar in a Roth is yours to spend in retirement," he said.

Jody also would need to make some adjustments to his TSP allocations.  Based on his investment profile (moderately aggressive), McGlinchey suggests he invest 35 percent of his contributions in the C Fund, 10 percent in the S Fund, 15 percent in the I fund and 40 percent in the F Fund. For more information on the funds available through the TSP, visit www.tsp.gov.

Creating A Path For College Savings

And, finally, the moment the Palmers had been waiting for: Can they afford to save for their children's college education?

To send their children to a public college, the Palmers would need to save about $800 a month: $315 for seven-year-old MacKenzie and $470 for 13-year-old Cary. With their raises and other budget adjustments, Jody and Amy can afford to start saving right away.

But rather than add money to the children's money market accounts, McGlinchey recommends opening a no-load, low-cost 529 account for each child.

While these investment accounts carry greater risk, withdrawals from these accounts will be tax-free if used for college expenses and will not be considered as heavily in financial-aid decisions compared to funds held in the children's names.

Now that they're on the right track to send their kids to college, the Palmers can move onto other things - such as planning their next RV camping trip.

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Michael Kelly is Executive Director of Military Communications at USAA and a retired Air Force Public Affairs Officer with 25 years of service. USAA is a diversified insurance and financial services organization that has served the military community since 1922.

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Three Steps For Selecting A 529 College Savings Plan

1. Set your savings goal. College cost calculators can help you estimate annual costs for tuition, housing and food so you know how much to save. Visit www.usaa.com.

2. Look for low costs. Spend some time researching plans. Each state offers a 529 plan, and the plans differ in terms of expenses and state income tax benefits. Seek out a no-load, low-cost account. Go to www.savingforcollege.com for more information.

3. Keep it simple. Some 529 plans offer "age-based" investment options, which means your investments become more conservative as your child gets older to help preserve your investment.

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