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College trumps McMansion

How one couple is saving for their four kids' college educations and their own retirement.

College trumps McMansion

When Paul met Karen online he already had a daughter from a previous marriage, and so did Karen. His personal ad mentioned he would consider adopting a child, and that caught Karen’s attention. They both saw adoption as a great way to continue building their family. Within 10 months they were married.

What happened next is an eight-year journey that combined their talents and values to create a savings plan aimed at getting four children through college, and still save for their own retirement.

Four kids and six dreams

Paul and Karen Rich currently live in Seattle, Washington, and now have four children. Aisha, Paul’s daughter, is 24 and in law school in Boston. Emiko, age 12, is Karen’s daughter. She’s a gifted student in seventh grade, loves math and science, and plays bass in a band with two of her cousins. Joon, age four and in preschool, was adopted from South Korea by Paul and Karen when he was eight months old. Soon after adopting Joon, Karen and Paul discovered they'd be having a baby together. Jan, their youngest, is now two years old.

Aisha's goal is to become a U.S. Supreme Court justice, and she's already well on her way. Emiko plans to become an architect and a sonographer on the side. While Joon wants to be a robot and Jan a cowboy, the Richs have loftier plans for the boys. Karen is a lawyer, and Paul has had a long-term career with Microsoft. It’s the goal of the Richs to give their children the opportunity to build fulfilling careers without being weighed down by student loans.

Advantages of 529 plans

There are several ways to save for college in addition to a 529 account, including a custodial account (Uniform Gifts to Minors Act/Uniform Transfers to Minors Act accounts), a Coverdell Education Savings Account (ESA), or even setting money aside in a taxable account. A 529 college savings plan offers tax-advantaged distributions of qualified educational expenses, limited impact on financial aid, contributions not limited by income of the account holder, the ability to change beneficiaries within the family, and estate planning benefits. Any individual can contribute up to $70,000 in one year per beneficiary to any individual 529 plan without triggering the gift tax.1

Almost all 529 plans are sponsored by individual states, often in conjunction with a financial services company that manages the plan, although you don’t have to be a resident to invest in a state’s plan. The Richs chose Washington state’s prepaid plan, the Guaranteed Education Tuition (GET) Program, and have accounts that are already fully funded for their three youngest children.

In addition, the Richs have separate 529 plans with Fidelity that will cover living costs and books. The Washington state 529 plan covers the actual cost of tuition for the most expensive public university in the state, regardless of how much tuition has increased over time, but it doesn’t cover living costs and books. The 529 plans with Fidelity allow them to control investments within the accounts and give them greater flexibility when it comes to expenses, and also don’t have income or age restrictions or upper limits on annual contributions.2

Know your limits

With four children, ranging in age from two to 24, the Richs have defined their responsibility, believing that as parents they should cover each child’s baseline college education, which they consider to be a four-year undergraduate education, plus room and board, at a state university. While they encourage their children to advance further, any costs beyond this baseline are considered the child’s responsibility. The Richs believe that involving the children in some of the costs of their own education helps ensure they’ll make the most of it. Because of the Richs’ dual income, the children probably won’t be eligible for financial aid, except for student loans.

The Richs say they are pretty clear on how much they can afford to put toward education, and having clear, realistic goals has helped them to remain committed to those goals.

Balance saving for college and saving for retirement

While Paul and Karen's natural inclination is to support their children first, they also understand the importance of securing their retirement. The Richs pay themselves first by continuing disciplined saving through Paul's workplace retirement plan and Karen's SEP IRA. Paul always tries to contribute enough to take advantage of the company match so they're not leaving "free money" on the table. This regular investing also lets them take advantage of dollar cost averaging, which allows them to purchase more shares when prices are low but fewer shares when prices are high. This results in a lower total average cost per share of the investment. (Dollar cost averaging does not assure a profit against a loss in declining markets. For the strategy to be effective, you must continue to purchase shares both in market ups and downs.)

While conventional wisdom says it's possible to borrow for a college education but not to fund a retirement, Paul prefers not to borrow at all. He says, "We're fortunate that at this point in our lives we're earning high incomes and, instead of spending, we live conservatively, so we're well positioned to meet both goals."

The Richs believe it's easier to plan for college costs because they're more straightforward and tangible: four years of tuition plus cost of living. But retirement is more nebulous because it's a moving target: What will they need for health care or for cost of living increases over a long period, and for how long? They simply don't know their life expectancy, so they keep saving instead of spending.

Because Karen has a flexible schedule as an attorney, she plans to work well beyond normal retirement age, and that will also help. But it's important to keep in mind that both the body and mind have to cooperate, and unexpected illnesses do happen as we age, so there should be a fallback plan. Karen and Paul plan to resume traveling the world, but look forward to offering themselves as free babysitters so they can spend more time with their grandchildren, once again putting more value on family than on a luxurious lifestyle.

How the Richs approach investing

Paul describes their approach to investing as diverse, conservative, deliberate, and, most important, planned. The Richs invest primarily online. Although they do not invest with the help of a representative, they email or chat with their Fidelity representative when they need specific information and assistance.

Lessons from the Richs

"All in all, the Richs showed great foresight in deciding precisely how much they wanted to contribute financially toward their children's higher education and have taken very clear steps to hit their goals. They also seem to have their own retirement plan under control," says Keith Bernhardt, vice president of college planning at Fidelity Investments.

In addition to the steps the Richs have taken, here are a few more steps to consider when planning for college, and how to make sure your own goals for retirement stay on track:

  • Consider setting up a clear college savings goal each year and set up automatic contributions to hit those goals.
  • Consider the prospect that one or more children may aim for a more expensive school, which can cost as much as $50,000 or more per year. They may also have the desire to attend graduate school. Be sure to have honest conversations with your children as they approach college age, on what you are willing to help fund and what their responsibility will be. Recognize that loans may be a big component of any shortfall.
  • Also, these discussions may result in a desire to put more money aside in a 529 plan so the savings have the opportunity to grow, tax deferred, over the course of the child's life. You may want to suggest to family members and grandparents that they can contribute to a 529 plan, and so can the children themselves, from their earnings from summer jobs, and from cash gifts from relatives.
  • Continue contributing the maximum to your 401(k) or SEP IRA (or any similar retirement savings plan) so you can take full advantage of tax benefits and help create a secure retirement.
  • If your family has a high deductible health insurance plan, consider contributing to a health savings account (HSA) at least an amount to cover anticipated health care expenses. Contributions are pretax and withdrawals are tax free3 if used to pay for qualified medical expenses. Any amounts not used in the current year may be used in later years (e.g., for qualified medical expenses in retirement), without risk of forfeiture. After attaining age 65, funds can be withdrawn for non-medical purposes without penalty, but are subject to taxation.

Next steps


The tax and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide estate planning, legal, or tax advice. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. Always consult an attorney or tax professional regarding your specific legal or tax situation.

1. Note: In order for an accelerated transfer to a 529 plan (for a given beneficiary) of $70,000 (or $140,000 combined for spouses who gift split) to result in no federal transfer tax and no use of any portion of the applicable federal transfer tax exemption and/or credit amounts, no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the five-year period, and the transfer must be reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes.

2. Like all 529 plans, there is a maximum contribution limit on the amount that can be saved, often over $300,000. Once this limit is hit, further contributions are not permitted.

3. For federal taxation purposes, however taxation may vary from state to state.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

The experience of this customer may not be representative of the experiences of all customers and is not indicative of future success.

Fidelity Income Strategy Evaluator® is an educational tool.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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