Figure 1 shows the impact of different savings strategies on the amount of money potentially available for retirement and college.
All scenarios assume that a 30-year-old couple with a combined income of $100,000 invests 6% of their income each year over the next 36 years (18 years prior to their child starting college and 18 years from the start of college until the couple retires).
The examples also assume:
- The couple’s income grows 3% annually;
- The investments earn an average annual 8% pretax rate of return;
- Retirement savings are invested in a 401(k) plan and college savings in a 529 plan;
- Earnings grow tax-deferred in both types of plans, but can be withdrawn tax-free from the 529 plan, while the entire savings in the 401(k) is subject to taxation upon withdrawal;
- The assumed 401(k) match is 50%; and
- In the scenario where the investor takes out a loan for college (Option B), the amount borrowed is based on a 5% bank loan that could be paid back over a 10-year period with the amount allocated to college savings.