Author Topic: Saving for college  (Read 782 times)

kms

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Saving for college
« on: July 20, 2018, 03:38:01 PM »
My wife and I are expecting our first child in January of 2019, and this might sound crazy but I'm trying to get most stuff sorted out before our daughter is born and we'll be preoccupied with other stuff.

Today's topic: saving for college. Obviously you want this to be a risk-free investment to avoid the "Sorry honey, you can't go to college because daddy thought Nokia stocks were a safe bet... who would've thought the smartphone would kill them" talk.

I want to start right at birth, so it'll basically boil down to a long-term 18-year strategy. Vanguard funds and ETFs? Mixed investment, aka savings account + stock market + funds/ETFs? Just stocks but make sure to have many different ones mixed together?

What's your personal strategy?

sokoloff

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Re: Saving for college
« Reply #1 on: July 20, 2018, 04:20:56 PM »
Obviously you want this to be a risk-free investment to avoid the "Sorry honey, you can't go to college because daddy thought Nokia stocks were a safe bet... who would've thought the smartphone would kill them" talk.

I want to start right at birth, so it'll basically boil down to a long-term 18-year strategy. Vanguard funds and ETFs? Mixed investment, aka savings account + stock market + funds/ETFs? Just stocks but make sure to have many different ones mixed together?

What's your personal strategy?
It's not at all "obvious" that you want something risk-free. In fact, you probably want to be 100% equities (or as close as you can get to that) until the kid is in middle school at least. There is a strong positive correlation between risk and return. Risk-free investments have by far the lowest typical returns, meaning for most people that they are some of the very riskiest investments (in terms of likelihood of undershooting the final value).

If you want to do a 529, pick a state with Vanguard funds and invest there. Check your home state to see if they give better tax advantages that would lead you to have an account there instead (or in addition).

reeshau

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Re: Saving for college
« Reply #2 on: July 21, 2018, 11:56:35 AM »
It's not at all "obvious" that you want something risk-free. In fact, you probably want to be 100% equities (or as close as you can get to that) until the kid is in middle school at least. There is a strong positive correlation between risk and return.

To say this a different way, if you are bound and determined to have risk-free money for college, then your financial goal is to save $150k-250k before your child turns 18.  If you utilize the stock market to grow for you, your goal is to save $40k-50k by the time they are in 3rd grade, and then manage the risk down as college approaches.  Or, you can pick any spot in between on the continuum of how much you can save, how much you need, and what your risk tolerance is.

It is not at all crazy.  In fact, you can open the 529 before he/she is born; name yourself beneficiary until your child gets here.  And don't forget that your state may have a tax incentive for investing.

Good luck!

kms

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Re: Saving for college
« Reply #3 on: July 22, 2018, 11:26:25 AM »
You're absolutely right, of course. I should have been more specific in my risk-free statement. What I meant is that the further along we get the less the risk should be. Obviously, risk would be fine at the early stages as there is much less to lose and much more to win.


I'll look into the 529 plans for Texas, thanks a lot. There seem to be some decent opportunities.

soccerluvof4

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Re: Saving for college
« Reply #4 on: July 23, 2018, 11:06:27 AM »
We used Wisconsins 529 which is good in any state they went to school for. Contributed over the years to the 4 funds (4 kids) and it was so simple and these days everything can be done right on line. You can pretty much pay too for any kid out of any other kids account. For Examply we have 2 in college now and the second one got a full ride 100% everything plus a stipen so we use theres to add to the older one who got a partial scholarship. As long as you keep documentation that the funds were used for school you wont ever have a problem and they can even sit on it if they wait a couple years and go back to say graduate school.

letsdoit

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Re: Saving for college
« Reply #5 on: July 23, 2018, 12:21:29 PM »
I would create a trust for the child.
this would allow the child to use the $ that you and others give him/her for things besides college, need be. 
e.g., if he has head on shoulders but says dad, I'm not college material.  I wanna do real estate.'
if you had it in a 529 that money would essentially be worthless

sokoloff

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Re: Saving for college
« Reply #6 on: July 23, 2018, 12:31:43 PM »
I would create a trust for the child.
this would allow the child to use the $ that you and others give him/her for things besides college, need be. 
e.g., if he has head on shoulders but says dad, I'm not college material.  I wanna do real estate.'
if you had it in a 529 that money would essentially be worthless
Money in a 529 is far from worthless in that scenario! You could withdraw the money, paying only taxes and a 10% penalty on the gains in the account. (Note that the taxes, but not the penalty, applies if the withdrawal is because the beneficiary got a full scholarship.)

formerlydivorcedmom

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Re: Saving for college
« Reply #7 on: July 23, 2018, 12:42:46 PM »
I've got Texas 529s for each of my kids.  The plans seem okay.

We also invest in Coverdell ESAs ("educational IRAs").  Like 529s, there are tax savings if the money is used for higher education.  Like IRAs, you can invest in whatever funds or stocks you want (my kids are in index funds).  There's a $2k annual contribution limit, and your earnings have to be under a certain amount.

The biggest question for you and your spouse to answer is - how much do you plan to save for them?  Our goal is to save enough for tuition/fees/books at a public university in Texas for 4 years.   For housing, they can either stay home (and attend University of Houston) or get a job or small loans.  What level of support are you planning for?

kms

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Re: Saving for college
« Reply #8 on: July 25, 2018, 12:04:20 PM »
The biggest question for you and your spouse to answer is - how much do you plan to save for them?  Our goal is to save enough for tuition/fees/books at a public university in Texas for 4 years.   For housing, they can either stay home (and attend University of Houston) or get a job or small loans.  What level of support are you planning for?
This is exactly the level of support we are planning for. Tuition and books/fees/etc. should be covered. Housing is a big unknown so we're not planning for it.

GizmoTX

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Re: Saving for college
« Reply #9 on: July 25, 2018, 12:35:18 PM »
I would create a trust for the child.
this would allow the child to use the $ that you and others give him/her for things besides college, need be. 
e.g., if he has head on shoulders but says dad, I'm not college material.  I wanna do real estate.'
if you had it in a 529 that money would essentially be worthless

We did this. Irrevocable trust, initially invested in total stock market index fund. Taxable, but the trust pays its own taxes, which was far less than the kiddie tax would have been. As trustee, we retained control. DS had 2 merit scholarships that paid 50% of his undergrad cost, he interned summers, & we cash-flowed the remainder, so we didn't tap the trust. DS did his grad year for free, thanks to his university TA job. The trust allows him to withdraw 50% of the trust upon his undergrad graduation but he's chosen to let it stay invested. The trust provides for the next 25% when he turns 30 & the remainder at age 35 -- we too were concerned that he might not want college when we set it up at age 1. At this point he can use the trust funds for a house, a business, or have his future children already set for their education. No need for a prenup to shield the funds, since the trust is a separate entity.

Cgbg

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Re: Saving for college
« Reply #10 on: July 25, 2018, 12:44:53 PM »
We told our kids wed cover the cost of the instate public universities or the equivalent amount if they chose to go out of state. We also said no loans (so they had to get merit to bridge the gap.) We set up 529 plans when they were toddlers plus assumed wed be able to cash flow any remaining costs.

Id suggest checking the room and board costs of any school you think your child might attend -at least check your in state public universities and maybe the college you attended to get a good idea of the current costs. Simply google up the name of the college and the words cost of attendance. And then remember that currently kids can only borrow $5500 their freshmen year.

Housing costs for my kids are in the $10k/year range. If you plan on having them cover that cost, have that conversation frequently as they grow up and keep an eye on the growth of those costs. Im seeing the costs go up about 3% a year. (I have a kid with a full ride and one with almost full ride. I dont regret funding their 529s. Im not draining them either- I plan to pass them down to them in a number of years.)

Colleges excpect you to cover the costs with previous income (savings, 529 plans etc), current income (your salary) and future income (take loans.) They dont have a lot of free money. Merit may be possible too, but its gotten a lot more competitive compared to my college years.