for a 529 college savings, when they say you get a 6-10% return, how do u do the math for that?

Question

i know that whatever you have in it say 20,000, do you times that by 6 or 10%? or does it work different?

is the 6-10% a apy interest rate?

Answer 1

I'm not familiar with 529 college funds because I am from Australia, however, I can tell you how to estimate interest.

Over a single year = interest rate multiplied by amount
= 6% x $20,000
= $1,200

So the value of the fund after 1 year, with an interest rate of 6%, could be estimated to be $21,200.

Over a longer period = Amount multiplied by (interest rate plus one) to the power of the number of years in the period
= $20,000 x (6% + 1) ^ 10 years
= $35,816.95

So after a 10 year period, at a constant rate of 6% p.a., the value of the fund would be $35,816.95.

Of course these are only estimate formula's. Since the interest rate is a range of between 6% and 10% its impossible to calculate an exact figure as we do not the interest rate each year.

I've also assumed interest is compounded annually as per what genereally happens here in Australia.

You should also note that while $35,000 seems like a lot of money in todays terms, you need to consider the effects of inflation. In ten years time, $35,000 will buy less goods and services than it wouild today.

If you wanted to understand the estimated value in todays terms, use the same formula above ($20,000 x (6% + 1) ^ 10 years) but reduce the 6% interest rate by the predicted rate of annual inflation. This new percentage is known as the real rate of return.


Cheers

P.S. I see that another answer has told you to contact your adviser for a history of past performance. As any good financial planner knows, past performance is not necccessarily an indicator of future returns. In fact, it is impossible to calculate an accurate future rate of return without a large degree of luck (due to the enormous number of factors which can affect returns - for all we know, a market crash is just around the corner). As far as the rate of return goes, you can only really rely on what the providing institute has advised, in this case 6-10%. The financial institute providing this account will no doubt employ Actuaries who calculate estimated returns using complex probability mathematics. You may find that if returns on the underlying investment are higher or lower than the given rates, the providing institute will accept the extra losses or gains themselves in order to provide you with a more constant level of returns on the account over the period of the investment. This does not limit your returns on your investment over the long term, it only reduces the risk on your behalf.

Answer 2

you cant just multiply it by 6 or 10%. The rates are compounded. So the $20,000 you put in there keeps growing and growing and you keep earning 6 to 10% on the growing amount in the 529. In order to calculate you would make over a certain period of time you need to search the internet for a financial calculator and you can estimate about what you would make over time.

Answer 3

It's irrelevant. They're giving you hypothetical returns. Assuming your 529 invests in mutual funds, as most do, your returns are based on the portfolio. Your advisor or the fund company can give you historical performance data.


Addendum regarding Richard's post: I have sold many 529 plans, sponsored by several states and offered through various companies. You assume all of the risk of your investment choices. No company offering a 529 will assume any of your losses. Again, only a proper analysis of the underlying investments is relevant here. Many, if not most, advisors who offer 529s will provide this at no cost.