INVESTMENT POLICY GUIDANCE REPORT

A Strategy That Makes the Grade

Paying for Education

Plan for the Expected

The process for creating a strategy to pay for education has three major parts:

Developing Your GoalThis process starts with understanding your expectations, or vision, for your child’s or grandchild’s education. We can help you understand the potential costs, benefits and considerations, which can then help you determine your role in paying for education.

continued on page 52

Paying for Education

2 Increase over time: Look for ways to increase

your savings over time. For example, many parents with young children pay day care expenses, which can easily cost $800 to $1,000 a month. Some or all of this money could be reallocated to education savings once the child enters school. If the child starts public school at age 5, consider shifting this money to your educa-tion and retirement goals. As illustrated in orange, saving even part of this money for education expenses could dramatically increase the amount you have available, increasing your chances of reaching your goal on time.

1 Start early and save regularly:

While it may be difficult to set aside money for education when you’re still a young family, planning to cram at the last minute is not a good idea. Time is one of your biggest assets. Delaying even a few years can have a big effect on your portfolio’s value. In addition, just like regular attendance is crucial for success in school, setting aside money every month can make all the difference in reaching your family’s education savings goals.

Source: Edward Jones estimates. Average annual return of 7% to age 10, 6% to age 16, and 3% to age 18. Rounded to nearest thousand. The $120,000 that was saved by a child’s 18th birthday could potentially cover approximately a four-year college education with two years at a community college and two years at a public university. This graph is for illustrative purposes only and does not represent any currently available investments.

DON’T BE TARDY After you determine your role in providing for education, you and your financial advisor can determine how much you need to save each month to help get you there. The following graph illustrates two key points:

THE PRICE OF ADMISSIONDon’t be intimidated by rising education costs. The key is to start now. And your net cost of college may be lower than these estimates due to scholarships, grants and other financial aid. But these are not guaranteed – the more money you save and invest for education, the more control you and your child will have over how to pay for it.

Cost of Attendance per Year

Public University

Private University

Community College

$3,700

$6,000

$8,800

$21,400

$34,800

$51,400

$48,500

$79,000

$116,700

2018-2019

in 10 Years

in 18 Years

0 5 10 15 18

Age

$120,000

$38,000

$23,000

● Save $100 per month starting at birth

● Save an additional $360 per month starting at age 5

● Wait 5 years to begin saving $100 per month

START EARLY AND INCREASE SAVING OVER TIME

Age 5day care ends

Amounts represent one year of education expenses, including tuition and room and board for in-state public and four-year private universities. Community college does not include room and board. Assumes 5% annual inflation rate. Rounded to the nearest hundred. Source: collegeboard.org, Trends in College Pricing 2018 and Edward Jones estimates

Prepare for the Unexpected

You Can’t Predict, But You Can PrepareLife can be unpredictable, so it’s important to address the possibility of unforeseen financial challenges. As we develop your investing strategies, we’ll consider these potential challenges and discuss a variety of ways to help prepare for them.

3 3

POP QUIZZES“Put your books and notes away; it’s time for a pop quiz.” These words often struck fear in students’ hearts, but the better prepared you were, the less daunting those unexpected events seemed to be. It’s the same with risks that could derail your education savings strategy. Given that unexpected events can always occur, here are some methods to help prepare for these tests your strategy might face.

When it comes to preparing for unexpected events, we view these as either “incorporate” decisions, meaning we can incorporate them into your savings and investing strategy, or “insure” decisions, meaning they are best covered by insuring against them. Insurance can be an important tool to help cover your family’s education expenses. For example, we recommend having enough life insurance to replace your lost income and cover major needs, such as education and mort-gage expenses.

Prepare for Potential Solutions to Help You Prepare

Education Cost Inflation

Incorporate• Automatically increase your savings rate each year • Save a greater proportion of raises and/or

bonuses

Needs of Your Family/ Survivors

Insure*• Life insurance (based on expected needs such

as income replacement or a multiple of salary) through an employer and/or outside coverage

• Disability insurance through an employer and/or outside coverage

Unexpected Expenses/ Events

Incorporate• Build an emergency cash balance of three

to six months’ worth of living expenses Insure• Property and casualty insurance• Homeowners/renters insurance

Watching your children grow and imagining their future opportunities can be extremely exciting. You play an important role in their development, which of course can include helping to pay for their education. There are many things to consider: rising costs, numerous financial aid and investment options, and balancing other important goals, such as retirement. However, by doing your homework and developing a strategy, you can help ensure you are working toward achieving your children’s or grandchildren’s education goals.

* Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.

Position Your Portfolio for Both

The Right School SuppliesIt’s important to select an appropriate tool to invest for your education savings goal. Given the potential tax benefits, 529 education savings plans may be a primary option to consider. Alternatives include custo-dial accounts and even Roth IRAs, but be sure not to cut your retirement savings short if using a Roth IRA to meet multiple goals. These account types have dif-ferent contribution limits, rules and tax treatments, so it’s important to discuss your options with your finan-cial advisor to select the type of account that makes sense for your situation.

AN AGE-APPROPRIATE INVESTMENT APPROACH TO SAVING FOR COLLEGEGenerally, the younger the child, the more you should have in growth investments, such as stocks – not only because of the higher growth potential but also because you have more time to handle market declines. The older the child and the closer you are to paying for education, the less able you are to handle these short-term declines. Therefore, the portfolio should generally shift more toward bonds. Many 529 plans have age-based options that adjust your asset allocation as your child grows, which is designed to reduce risk as your investment time horizon shortens.

Other factors can cause you to adjust your education savings portfolio objective, including any outside resources that could be used for education as well as the ability to transfer money between beneficiaries. The following table can help provide a starting point for discussion with your financial advisor, who can help you determine an investment mix that makes sense for your situation.

4

Source: Edward Jones Investment Policy Committee. Growth Focus: 80% stocks/20% bonds; Balanced toward Growth: 65% stocks/35% bonds; Balanced Growth & Income: 50% stocks/50% bonds; Balanced toward Income: 35% stocks/65% bonds; Income Focus: 80% bonds/20% stocks; Preservation of Principal: 50% cash and 50% short-term fixed income. Diversification does not guarantee a profit or protect against loss. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

Portfolio Objective Guidance Table: College Education Savings Goal

Risk Tolerance

Child’s Age

0–3 Years 4–8 Years 9–12 Years 13–16 Years >16 Years

High Growth Focus Growth Focus Balanced toward Growth

Balanced Growth & Income

Balanced toward Income or Income Focus

Medium–HIgh Growth Focus Balanced

toward GrowthBalanced

toward GrowthBalanced

Growth & IncomeBalanced toward Income

or Income Focus

Medium Growth Focus Balanced toward Growth

Balanced Growth & Income

Balanced toward Income

Income Focus or Preservation of Principal

Low– Medium

Balanced toward Growth

Balanced Growth & Income

Balanced toward Income Income Focus Income Focus or

Preservation of Principal

Low Balanced Growth & Income

Balanced toward Income Income Focus Income Focus Income Focus or

Preservation of Principal

Possible tax and other advantages of 529 plans:• Investors who participate in their home state’s plan may be

eligible for a state income tax incentive for contributions made, as well as other potential state benefits, such as financial aid, scholarship funds and protection from creditors.

• Earnings accumulate tax free.

• Distributions for qualified higher education expenses and up to $10,000 a year per beneficiary for elementary and secondary school (public, private and religious) tuition expenses1 are not subject to federal income tax.2

Other features of 529 plans:• 529 funds can be used to pay for qualified college and

post-secondary training expenses, such as books, supplies, fees, and room and board – in addition to tuition.1

• If your child doesn’t go to college, the beneficiary of the 529 plan may be able to be changed.

1 Withdrawals not used for qualified expenses may be subject to taxes and a 10% penalty.

2 Each state has its own laws regarding 529 plans, and not all have adopted the broader federal definition of qualified higher education expenses. Before taking a distribution for elementary or secondary public, private or religious school tuition expenses, check with your tax advisor and 529 plan sponsor to determine if state tax, penalties, or other limitations on withdrawals apply.

RETIREMENT IS A PRIORITYMeet the retirement goal by saving $800 a month. The remaining $100 is saved for Lillian’s education.

Consider the following example:Jim and Mary Thompson are 32 and plan to save $800 per month for retirement based on their goals. They also want to start a college fund for their newborn, Lillian. Based on these goals, they developed the following strategy with the help of their financial advisor:

continued from page 2

Understandably, you’re not just saving for education – you likely have many goals you’re trying to achieve, including retirement. And with many families having children later in life, children are reaching college at the same time their parents are thinking about retirement. The question becomes how to balance these important goals with limited resources.

Balancing Your Goals – Retirement and Education

View Your Goals TogetherAs the example illustrates, there may be trade-offs, such as saving more, retiring later or providing less for education. You may choose any of these options based on how you prioritize your goals. One strategy to avoid, however, is delaying saving for retirement in favor of education, which could affect your retirement goal. Time is a very valuable asset, so don’t delay saving for one goal over the other – view them together. By understanding how your goals interact, you can work to make sure you don’t inadvertently derail one when saving for another.

To cover both goals, the Thompsons would need to save over $1,100 per month. However, they determine they can save only $900 per month, so they’re discussing their options and trade-offs.

Assumptions: Retirement portfolio must provide $50,000 in income using a 4% initial withdrawal rate. Retirement savings assume 7% annual return. Education savings assume 7% annual return to age 10, 6% to age 16 and 3% to age 18. Past performance is not a guarantee of future results. Graphic is for illustrative purposes only and does not reflect any currently available investments. Results do not take into account taxes or transaction fees. Results rounded to the nearest $5,000.

5

60 61 62 63 64 65 66 67 68 69 70 $40,000 $80,000 $120,000(Meet 1/3 of goal)(Meet goal)

RETIREMENT AGE EDUCATION SAVINGS ACHIEVED

EDUCATION IS A PRIORITYMeet the education goal by saving $325 a month. The remaining $575 is saved for retirement.

60 61 62 63 64 65 66 67 68 69 70 $40,000 $80,000 $120,000(Meet goal)(Retire five years later)

RETIREMENT AGE EDUCATION SAVINGS ACHIEVED

BALANCE BOTH GOALSThe Thompsons adjust for both goals, saving $675 a month for retirement and $225 a month for education.

60 61 62 63 64 65 66 67 68 69 70 $40,000 $80,000 $120,000(Meet 2/3 of goal)(Retire three years later)

RETIREMENT AGE EDUCATION SAVINGS ACHIEVED

SAVING vs. BORROWINGIt’s true that students can borrow to pay for college, but parents can’t borrow to fund their retirement. It’s also important to remem-ber that it’s less expensive to try to save for education now than it is to borrow later. For example, it takes $200 per month to save $35,000 over 10 years with an average 7% return. However, it costs $400 per month – twice as much – to borrow $35,000 and pay it back over 10 years, assuming a 7% interest rate. Student loan rates can fluc-tuate each year, so borrow-ing could get more expen-sive if interest rates rise.

$100 $800

Total Savings$900

$325

$575

Total Savings$900

$225 $675

Total Savings$900

Retirement Goal: Retire at age 65 with $50,000 in annual income from the portfolio.

Required Monthly Savings: $800

Education Goal: Provide $120,000 toward Lillian’s education (estimate to cover approximately two years of community college and two years at a public university).

Required Monthly Savings: $325

6

Incorporating Financial Aid into Your StrategyLike many families, you may plan on receiving some form of financial aid. And while scholarships may be the most appealing option, only one student in 300 will receive a full scholarship to college.3

The term “financial aid” involves much more than just scholarships; most aid comes in the form of student loans or grants. Federal grants don’t need to be repaid but are typically designed for low-income families, so many students don’t qualify. Student loans, which are much more common, have to be repaid within a certain time frame and incur interest – with interest rates that are reset each year according to Treasury rates.

Financial aid can have a meaningful impact on how much you pay out-of-pocket for college. In 2018, the average list price4 for an in-state public university was about $21,400, but the average net cost per student was closer to $14,900.5 Still, while you can’t control how much financial aid your child may be awarded or what the interest rate on a student loan will be, you are in control of how much you contrib-ute to your education savings strategy. It’s important to remember that actively saving in a tax-advantaged plan doesn’t necessarily negatively affect your eligibility for financial aid. In fact, 529 plan funds are considered assets of the account owner (i.e., par-ent), and a smaller portion of a parent’s assets are counted for financial aid than the student’s assets.

3 Secrets to Winning a Scholarship. Mark Kantrowitz, 20134 List price includes total tuition, fees and room and board charges. 5 collegeboard.org: Trends in College Pricing 2018. Costs rounded to

nearest $100.

Edward Jones does not employ financial aid experts or give tax or financial aid advice. Specific questions should be directed to a qualified financial aid expert.

HOW TO SAVE SMARTER

Saving more for your child’s education

doesn’t have to be a daunting task.

Here are a few ways to ramp up your

savings strategy:

■ In lieu of toys as birthday or holiday

presents, ask relatives (such as

grandparents) to contribute directly

to a child’s college savings plan

■ After a child reaches school age, shift

money used to pay for day care to

college savings

■ Use your annual tax refund or a

bonus as an additional contribution

to a college savings plan

THE BENEFITS OF ADMISSIONWhile higher education costs seem to make all the headlines, the benefits can’t be understated:

Employment While the unemployment rate averaged 3.9% in 2018, it averaged close to half that rate (2.1%) for those with a bachelor’s degree or higher.1

Salary The median earnings for those older than 25 with a bachelor’s degree was $61,400 compared with $36,800 for individuals with a high school diploma.2

1 Bureau of Labor Statistics, 2018 2 collegeboard.org: Education Pays 2016 (covers 2015 data, most recent available)

IPC-6986L-A EXP 31 MAR 2021 © 2019 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.

edwardjones.com

SALARY COMPARISON

National Average

Over 25with aHigh

SchoolDiploma

Bachelor'sDegree

or Higher

Over 25with a

Bachelor'sDegree

3.9%

2.1%

$36,8

00

$61,4

00

THE THREE R’S: REVIEW, REVIEW, REVIEWBetween kindergarten and college, so many things can change: education costs, investment performance, your child’s college choices, financial aid options – even the number of children you’re providing for. That’s why it’s important to discuss your education savings strategy with your financial advisor to make any adjustments necessary to help ensure your strategy stays on track.

Member SIPC