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Aim to save to cover half the cost of college

Q. I am saving for college for my 4-year-old daughter and 2-year-old son. So far I have mutual fund accounts of $2,631 for my daughter and $2,200 for my son and $15,000 (face value) in savings bonds. If we don't add any funds, will there be enough money in these accounts by the time they start college? If not, how much should we be saving?

A. Wouldn't it be great if it were that easy? I'm sorry to report that you have not saved nearly enough to pay for your children's college educations. Projections of future costs are guesstimates, since we don't know what inflation will be, but one chart I have says you can expect to pay $99,408 for four years of public college for your daughter and $113,812 for four years for your son. Double those numbers for private colleges.

If your mutual fund produces an 8 percent after-tax return, your money will triple in 14 years. If you bought your savings bonds when they guaranteed a 6 percent return, it could take as long as 12 years for them to double and reach their face value. At today's 4 percent minimum guaranteed rate, it could take up to 18 years. (Bonds held at least five years pay a market-based interest rate or the guaranteed rate, whichever is more.) The result is that your investments will fall considerably short of what you need.

One consolation I can offer is that few people save the full cost of their children's educations in advance. My suggestion is that you aim to save half the cost for each child.

How much you need to save depends on what kind of a return you are able to earn on your investments. If you can earn 6 to 8 percent after tax, saving $1,500 per year per child in addition to your existing investments should allow you to accumulate about $50,000 to $60,000 for each child. Naturally, the higher the return you earn, the less you will have to set aside. Unfortunately, the reverse is also true.

You might want to look into the Florida Prepaid College Program if you are sure that your children will attend college in Florida. Just keep in mind that the program does not cover all expenses.

I also want to caution you not to scrimp on your retirement savings in order to build big college savings accounts for your children. There are many possible sources of college money, including scholarships, loans and after-class jobs, but you can't look to anybody else to help with your retirement.

Q. I own shares in the AARP Insured Tax Free General Bond Fund, which received 7.64 percent of its income from Florida bonds, according to the information the fund sent me. Does this mean that 7.64 percent of my holdings in this fund would be exempt from the Florida intangible tax? I do my own tax returns and have no one to advise me.

A. Unfortunately, your entire account is subject to the intangible tax. As you know, the intangible tax applies to your investment assets, not to your investment income. However, even if you knew the percentage of this fund that was invested in Florida bonds, it would make no difference. A fund must be 100 percent invested in Florida bonds to be exempt from the intangible tax.

Q. Can you explain what account rebalancing is, and should I be doing that with my thrift savings plan at work? If you have a portfolio strategy, should you also have account rebalancing?

A. Rebalancing is a method for maintaining your portfolio strategy. Suppose that you have decided that you want to have 60 percent of your retirement savings in stocks and 40 percent in bonds. If the stock market goes up more than the bond market, then your investments will be out of whack with your strategy. To rebalance, you would transfer some of the money from stocks to bonds so that you once again had your 60-40 ratio.

I think once a quarter is often enough to rebalance, and many people find once a year sufficient. I favor looking at how your money is allocated across all your investments rather than focusing solely on your thrift account. However, if your thrift plan is your largest single investment or if it offers automatic rebalancing, you might want to sign up.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Questions should be sent to Helen Huntley, Times, P.O. Box 1121, St. Petersburg 33731.