The 529 Solution

Mary Hinojosa and her husband Miles Sigwell have two children to put through college--Franky, born in 2001, and Juliet, born in 2006. They would like to continue the family tradition of attending Caltech in Pasadena, California, so they must brace themselves for the annual $50,000 it will cost for each child in tuition, room, and board.

Mary and Miles have good incomes and still have some time to save. But after putting pencil to paper, they realize that this is not a simple calculation. Here's what they want to know:

Given that the $50,000 annual cost (measured in today's dollars) will arise in 2019-2022 and 2024-2027, how much do they need to save and when not only to meet this bill, but to have a stable living standard before and after they get the kids through college?

Mary and Miles realize that once their kids leave home, they won't have to cover their upkeep. They also realize that their mortgage payments will be a smaller real burden over time as inflation reduces their real value and that the payments will stop once they have the mortgage paid off. They also know that the more they save in regular saving vehicles, the more taxes they'll have to pay on the income earned on this saving.

What they don't know is how to make these incredibly complex calculation on their own and whether using a 529 plan for college savings is worth it.

ESPlanner is ideal for helping Mary and Miles with these questions.

The Data:
Income: Mary 150K; Miles 150K
Each spouse earns $150K each in today's dollars until they retire at 65.

Saving: They each have $100K in a 401(k); they each contribute $2,000 and their employers each contribute $4,000 per year to these accounts.

Retirement: They plan to take Social Security starting at age 65. (Not smart as our "When Should I Take Social Security?" case study points out because they forego free spousal benefits for one spouse.)

College Costs: $50,000 in each of the four years 2019-22 and again in each of the years 2024-27.

Assumptions: Inflation is 3 percent; retirement assets earn 6 percent before inflation, and regular assets 5 percent. The spouses' maximum ages of life are 100; two adults can live as cheaply as 1.6; children cost 70 percent of an adult to provide the same living standard.

ESPlanner's Answers.

If Mary and Miles didn't have to pay for their kids' college, they could enjoy a stable living standard of $70,240 per adult from their current age of 41 through age 100. Living standard refers to the couple's discretionary spending per household member adjusted for economies in shared living and the relative cost of children.

When Mary and Miles save for college without using the 529 plan, their lifetime living standard drops to $66,145 from $70,240 (a 5.8 percent decline).

However, by using the 529 plan, the couple can achieve a $67,697 living standard -- which is 2.3 percent larger than had they simply saved in regular asset accounts.

This is a very hefty living standard gain given that it will take Mary and Miles very little time and effort to set up their 529 account.

[There are contribution limits and various tax considerations you should be aware of when using a 529 plan. There is lots of good information on the web, but here are two good places to begin: CNN Money and FinAid.]