Now, I want to put my pro forma 2020 financials to the test of Expected Family Contribution (EFC), and see if, and how, I can use the "hints" I received in the analysis in Part 3 to change my behavior.

(Before I get into the details, let me first say from this point on, the analysis becomes very specific to my family's status, and my conclusions may or may not apply to you. Nevertheless, I would like to document my line of thinking as much as possible and hope it will be more meaningful for whoever is reading.)

First, I will assume I will hit my goal of $1,000,000 net worth by 2016 -- this is a reasonable target assuming I keep working, my wife will be working on and off, and we keep saving at the current rate. I will also assume from now to 2016, we will contribute to the maximum in 401(k), and fully fund our Roth IRAs every year. Factoring in some reasonable investment returns, my back-of-envelope calculation in Excel reveals I will end up with this asset mix:

- $450,000 in 401(k)
- $180,000 in Roth IRA
- $230,000 in home equity (house value - outstanding mortgage balance)
- $180,000 in after-tax saving and retirement account

Between 2016 and 2020, I probably will not work on a full-time basis, so my after-tax account balance will decline but my retirement account balance will continue to rise, so the balance will more look like this:

- $550,000 in 401(k)
- $250,000 in Roth IRA
- $300,000 in home equity (house value - outstanding mortgage balance)
- $100,000 in after-tax saving and retirement account

Eonough on the background, let me put the numbers to work at the EFC calculator at finaid.org.

The key inputs include:

- Adjusted Gross Income: $40,000
- Federal Tax Paid: $3,000
- Earned Income: $20,000
- Worksheet A: $4,000
- Liquid Assets: $20,000
- Net Home Equity: $300,000
- Other Investments: $80,000
- No student income

The result:

- Using Federal Methodology (FM), the expected family contribution is $8,695 based on $29,128 of adjusted available income. $29,128 includes parents' available income of $21,760 based on the tax form, and $7,368, or 12% from the discretionary net worth ($20,000 + $80,000 - $38,600 asset protection allowance), from the assets.

- Using Institutional Methodology (IM), the expected family contribution is $25,615 based on $65,128 of adjusted available income. $29,128 includes parents' available income of $21,760 based on the tax form, and $42,368, or 12% from the discretionary net worth ($20,000 + $80,000 + $300,000 - $38,600 asset protection allowance), from the assets. Student is expected to kick in another $1,000.

- The different results between FM and IM is caused by the different treatment of home equity.

Some of the findings:

- FM leaves the loophole for home equity treatment. Conceptually, you can always shift assets between your liquid account and home equity by refinancing, which creates more opportunity for financial aids.

- Having more assets in retirement accounts will make your kids more eiligible for financial aids. Quantitatively, in my case, every $10,000 more in the after-tax account will add about $500 to EFC in Im calculation (again, this is specific to my case). 5% is not a small number; 5% for four years is 20% difference, which is huge.

Now, my approach to contribute to the max of retirement accounts (both 401(k) and Roth IRA) will definitely help financial aid eligibility, and I will continue to do that. However, it might not apply to everyone. One important factor we need to consider in this game is liquidity. Funds in 401(k) and traditional IRA have very poor liquidity; you cannot withdraw from them for educational purpose without penalty. If you can only afford to contribute to 401(k) and can save nothing else, you should hedge your bet by moving some 401(k) contributions to Roth IRA -- at least, Roth IRA contributions (not the appreciation) can be withdrawn anytime for any reason without penalty. Otherwise, you might end up with a big 401(k) balance that cannot help your kids' immediate college needs.

By now, we have a foundation to analyze different vehicles for college saving. Starting from next installment, I will look into specific tools like 529 plans, Coverdell accounts and other options.

(This article is a component of the 10-part "Saving for College" series at PFBlog. If you want to read from the start, follow the links at this Table of Contents page.)