What should be the desired college annual rate of return?

Question

My Son is 7, so I'm thinking about college for him. I have no idea on what to start doing now to prepare for college. Should the desired rate of return be lower than 6% or higher? And what does that mean actually?

Answer 1

Your desired rate of return should be higher, but for calculations purposes it should be lower. You should desire the best rate you can get, but you should be conservative and presume you will not get it. So 6% is actually a little low, but it is reasonable. You have eleven years until college starts and fifteen until it finishes so you can absorb more risk due to the long time horizon. A seven or eight percent return in a stock/bond mix is reasonable.