Hugh F. Doherty, DDS, CFP
Last year, a dentist asked me where he should invest for his kids` college education. He stated that both children would attend universities, and one of them would likely go to dental school. When I asked how old the kids were, Doctor Jim`s answer nearly floored me. They hadn`t been born yet! He had attended one of my lectures and became very concerned when I mentioned that one of the biggest road blocks to achieving future financial security and retirement was the cost of funding a college education. I gave the doctor an A+ for prudent planning, even though he appeared to be jumping the gun.
Unfortunately, many doctors are not as disciplined as Jim, but success will be yours if you can discipline yourself to start early. Keep in focus these four important investment factors: time horizon, risk tolerance, investment objective, and rate of return. The earlier you begin to save and invest, the less you will feel the pinch later!
When and how to invest
Start saving when the kids are born and put your money into equities, preferably through no-load mutual-stock funds which charge no sales commission and spread your risk over dozens of stocks. Since your child won`t be starting college for 14 years or so, you should invest in growth funds, which could give a return for that period of time of 14-16 percent (providing history repeats itself). One such solid bet would be Vanguard index growth funds.
If you have a shorter time to invest and your child is between eight and 11 years of age, your portfolio will have less of an opportunity to rebound if the market takes a dive. Therefore, mix in some conservative securities, such as intermediate government bonds. When your child is about 12 years old, shift 35-40 percent of your assets into municipal bonds or more intermediate treasuries. Stay with this 60/40 mix of stocks and bonds until your child is within four years of college. Then, increase your exposure further to bonds (60-65 percent) to protect your assets from a sharp drop in the market.
The move from a heavier equity portion of your portfolio into this more conservative investment posture is a must to make sure the funds are there when you need to make the tuition payments. I recommend that you buy AAA+ corporate bonds, as opposed to buying and investing in bond funds. For each of the precollege years, make sure each bond purchased matures before the tuition is due - a process called "laddering."
Hire your child
When planning for college, one of the best ways to provide "inexpensive dollars" for college tuition is to hire your child in the dental practice. This strategy applies to children ranging from age six to 14. With this "earned" income, the child can obtain $4,300 in tax-free money annually. There will be some payroll taxes on this money if you are incorporated (nothing so severe to discourage you from using this strategy though). Any amounts over the $4,300 amount are taxed at the parent`s rate. When your child attains the age of 14 or older, the income is taxed at the child`s rate (15 percent).
Where to invest the money
Taxwise, it is not a good idea for you to put the money into an education trust or place the monies in your personal savings. I recommend a custodial account. The danger here is, if you place the money into a custodial account, once the child reaches the state`s age of majority, he/she is entitled to all the money in this custodial account. The concern that faces you is whether "Billy" or "Mary" will be buying textbooks ... or a BMW! Sage advice might be never to mention the existence of this custodial account to the child. In the event you perceive that the child will not seek a college education, you can then place the account in a Family Limited Partnership, thereby negating the child`s ownership of these funds.
Hugh F. Doherty, DDS, CFP, is a certified financial planner, national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. Dr. Doherty is also director of The Personal & Practice Financial "Boot Camp." For further information on the "Boot Camp," lectures, consultations, or study club workshops, call him at (800) 544-9653 or visit his Web site www.dr.hughdoherty.com.