Departments: Money
Find the Right Funds for Your Kids' College

Q: My husband and I had our children late. By the time they're in college, we'll be 60 years old. What should we do for college savings?

A: You must be part of the baby boom generation--and you're not alone.

The obvious answer is to start early. Just aim to invest a little bit regularly every month. Company dividend reinvestment plans, or DRIPs, that allow you to buy small amounts of stock directly from the company are one option. You can find out about them online. Other good alternatives are Web services like www.sharebuilder.com and www.buyandhold.com, where you can buy small amounts of stock with no minimum investment required.

If your child is young, invest aggressively. Consider health care or technology, if you can handle the volatility in these sectors.

You can buy into technology by buying a broad technology index like the NASDAQ 100 Trust, which invests in the 100 largest non-financial stocks on the NASDAQ. Or you can buy a managed technology fund.

Avoid custodial accounts if you plan to apply for financial aid. A custodial account, set up under your state's Uniform Gift to Minor's Act, allows you to tuck away money in your child's name.

Once in the account, the money belongs to the child. When he reaches the age of majority, he can do whatever he likes with it. Some parents see that as a negative. But a bigger negative is that the money in this account makes it virtually certain that your child will not receive financial aid. That's because the financial aid formula assumes that the money in this account is available for college. So saving for college in your child's name counts heavily against you for financial aid.

A more promising option is the state tuition program called a 529 plan. These programs allow you to save pre-tax money for college and keep it in your own name. The money is taxed at your child's rate when he takes it out to pay for college.

Although the plans have been around for years, they were once so unappealing that they weren't worth writing about. Today, though, they're hot.

Many states have introduced new programs in the past several months, usually linking up with a mutual fund company as a vendor. The plan does not limit your child's choice of colleges.

Although you need not use your own state's program, you may get a tax deduction if you do. The Web is also a good place to do research on these programs. I found a good deal of information on them by going to www.google.com.

Q: How many stocks do you need to make up a portfolio?

A: I've heard an argument made for as few as seven, providing one of them was a company like General Electric, which is a big conglomerate that owns all kinds of things--including broadcasting companies and credit companies--under the GE name. The idea is that a stock like GE gives you diversification within a single company. But I still think seven is too few.

If you plan to hold only individual stocks, I think you need 30 or 35. But if you're willing to use a mutual fund as a core for your portfolio and then add individual stocks to it, you can get by with fewer.

Suppose you bought a fund like the Standard & Poor's 500 Stock Index, which gives you 500 stocks across all market sectors. Then you have instant diversification and you could do with fewer individual stocks, say 15 or so.

Still, you'll have to expect more volatility from your portfolio than if you owned broadly diversified mutual funds.

Q: Is a 403(b) plan an annuity?

A: It might well be. Section 403(b) was added to the Internal Revenue Code in 1958 to permit employees at nonprofits and government agencies to set aside pre-tax money in an annuity contract offered by an insurance company. These 403(b) plans are often referred to as tax-deferred annuities, or TDAs for short.

In 1974, Congress added paragraph 7 to section 403(b), which allowed employees to set up the same type of plan with a mutual fund company rather than an insurance company.

Both the annuity product and the mutual fund product can contain mutual funds as investment options. It can be difficult to tell one product from the other. And one is not necessarily better than the other. But, as with any investment product, it's important to review your options and make certain you've made the choices that are best for you.

-Mary Rowland
Rowland is a contributor
to several financial publications.

Thrifty Educator

This month's tips come from Jean Mahony, a third grade teacher from Westbrook School in Glenview, Illinois, and Debbie Bohn, a fifth grade teacher at Aldrin School in Schaumburg, Illinois.

Mahony: "The January issue of NEA Today carried brief tips from two teachers about how they use photographs and postcards for classroom projects. I teach third grade, and my idea combines their tips. Every summer I take a big vacation trip and I have doubles made of my photos. Two weeks before school starts I use the photos as postcards and send them to my incoming students, telling them where I went and explaining how excited I am about the upcoming school year. Some of the photos stay on their refrigerators for a whole year!"

Bohn: "When our student teachers complete their time with us, we fill a bag full of goodies: stickers, E-Z grader, bulletin board stuff. We each give a teaching tip that is fun, easy, and appropriate for just about any age. It is a great send-off for student teachers and allows them to spend their precious few dollars for real teaching materials."

If you have a favorite money-saving tip that you apply in your workplace, please send your idea along to neatoday@nea.org.

Heads Up from NEA Member Benefits

Compare for yourself! The newly named NEA Preferred Term Life Insurance Plan is now offering new features at exclusive NEA member-only rates.

This level premium, level benefit 10-year term life insurance plan is underwritten by Minnesota Life.

There are no policy fees, no first-year "introductory" rates--just a level rate that you can count on year after year.

Coverage ranges from $100,000 to $250,000.

For more information call 877/814-4350, Monday-Friday from 7 a.m. to 8 p.m. CST. Or visit the NEA Member Benefits Web site at www.neamb.com. Click on "Insurance Programs."

There are new advantages for NEA-Retired members participating in the NEA MemberCare Medicare Supplement Program.

Available to retired members aged 65 and older, the program recently introduced a national electronic-claims filing process for all doctor bills. Physicians will submit their claims to Medicare. Then Medicare will automatically send the balance to the NEA Medicare Supplement Program, with no additional paperwork.

This new feature--coupled with the free discount program and low prices--makes the NEA MemberCare Supplement Program one of the best reasons to keep your NEA-Retired membership active when you leave full-time work.

For more information, call NEA Member Benefits 800/637-4636, Monday-Friday, 8 a.m. to 8 p.m. (or Saturday, 9 a.m. to 1 p.m.) ET.