Author Topic: Taking conservative approach with 529 for older child?  (Read 1299 times)

Nick_Miller

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Taking conservative approach with 529 for older child?
« on: May 24, 2019, 10:53:28 AM »
So I have a 13 y/o kiddo who will start college in 5 years. She currently has $9500 in her 529 and we are automatically contributing $100/month. We hope to be able to crank that up in the near future, but let's assume for the sake of this question that it stays at $100/month.

Question: Would you keep the funds in a "target date" sort of account or put them in a FDIC account? I know most will want to say, "Invest!" immediately, and I did put them there, BUT I ran a 5 year calculator, and even assuming 7% annual returns for the next five years (which may be a bit optimistic), it doesn't beat the guaranteed/FDIC option by much, only a few thousand dollars. And of course there is the risk of a downturn right in the middle the window.

OPTION 1: Target Date Fund: Calculator says $20,444 in five years when she starts school.
OPTION 2: Guaranteed Return/FDIC Fund: Calculator says $17,060 in five years.

So do you think the potential upside of $3300 or so justifies the potential of a down market, considering we're in a pretty small window?

I know this sounds like a market timing question, and I guess it is, but again with only a 5-year window, I wonder if it might be wiser to just take the guaranteed 2.4% return (the FDIC rate) and know that she'll have $17K when she starts college.

Edited to add: I just ran the numbers again with the 2.4% return and contributing $150 per month and it hits $20,000 almost exactly ($20,242), which has sorta been our goal. I have a feeling my wife will lean toward the "safe" option once we talk about this again.

Laserjet3051

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Re: Taking conservative approach with 529 for older child?
« Reply #1 on: May 24, 2019, 11:27:08 AM »
I disagree that there really isnt much difference in return between the two approaches. As your numbers demonstrate, on a % basis, the final values are very different and reflect the equity risk premium. Have you studied the glide path for this account? In my daughters 529, they really dial down risk progressively in the last 5 years. Money from automated sale of equities goes right into FDIC-insured products. You may be overestimating the risk you think the $ might be subjected to. For comparison, my younger daughter has 8 years until college, that is, if she even goes and her 529 is 100% equities. In the next few years, I will probably transition her funds into an (aggressive) age-based target fund.

Even if the market is down in her freshman year, there are several effective ways to balance/juggle all of this without having to resort to selling equities on the low.

ZMonet

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Re: Taking conservative approach with 529 for older child?
« Reply #2 on: May 24, 2019, 11:35:45 AM »
I'm guessing that the target date fund you're looking at has a glide path to zero equities?  I just pulled up a random 2024 college fund and it looks to be made up of only 25% equities.  This particular fund says it has a yield of 2.7% yield.   So, I think the 7% return in part of your calculation would be way overly optimistic as I don't think you'd make up the 4.3%differential through equity growth in 25% of your investment. 

Overall, I don't think it is going to make that big a difference which way you go as the risk makeup between a target date fund starting at around 75% non-equities and gliding towards 100% bonds/cash versus a guaranteed 2.4%.  Given that, I'd take the guaranteed 2.4%.  If you're wrong, you'll be making so much more in your other investments that you could potentially help out from there.

For what it is worth, I like the idea of at least getting to $20k as it seems more substantial.

Nick_Miller

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Re: Taking conservative approach with 529 for older child?
« Reply #3 on: May 24, 2019, 01:00:35 PM »
Right now, its about 40% equities but yes that will glide down.

Gin1984

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Re: Taking conservative approach with 529 for older child?
« Reply #4 on: May 24, 2019, 01:34:17 PM »
Right now, its about 40% equities but yes that will glide down.
I would do neither, lol.  She starts college in five years but would graduate in nine.  Separate out those time frames.  Put all freshman and sophomore in FDIC, then put about 25% of Junior and Senior in a higher risk stocks, 25% in bonds and 25% in FDIC as college is increasing beyond 2% every year (close to 4-6%).

secondcor521

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Re: Taking conservative approach with 529 for older child?
« Reply #5 on: May 24, 2019, 04:56:03 PM »
Right now, its about 40% equities but yes that will glide down.
I would do neither, lol.  She starts college in five years but would graduate in nine.  Separate out those time frames.  Put all freshman and sophomore in FDIC, then put about 25% of Junior and Senior in a higher risk stocks, 25% in bonds and 25% in FDIC as college is increasing beyond 2% every year (close to 4-6%).

I do something like this.  I have a spreadsheet that projects college costs by year and by child.  I put the next 3 to 3.5 years worth of college expenses (I have a variable in my spreadsheet for this and don't recall what I have it set to at the moment - it's either 3 or 3.5) in bond funds and the remainder in stocks.

I then can total up how much I need to have in stocks vs. bonds and then make sure that the overall aggregate AA across all of their college funds matches that target AA.  In other words, even though I have discrete college funds for my three kids, I don't need to make sure that each kids' accounts are allocated correctly because I can treat it as one big bucket.  I can do this because their money is all in ESAs and 529s and I can transfer money around as needed.

As time passes and college expenses happen and changes occur and investments either gain or lose, I continually review and adjust.  So far it is working well but I still have 21 semesters of college left to go between the three of them.

reeshau

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Re: Taking conservative approach with 529 for older child?
« Reply #6 on: May 27, 2019, 03:52:08 AM »
@Nick_Miller , what is your strategy to fund the rest of college?  Is $100 / month what you are budgeting while your DD is actually in school, or will your budget change?

I agree with @Laserjet3051 that the difference isn't minimal.  I also worry that you were picking a 7% return out of the air, which doesn't reflect the funds you will actually choose. (i.e. a target date fund)  I also agree that, with this kind of time frame, looking at the full range of college years (5 - 9 years) is more instructive than thinking you have crossed the finish line at 5:  a common mistake made with retirement investing.

But whether that means something to you or not depends on what you are going to do with the difference.  If all the rest goes into student loans, then you might want to be more conservative, and know what you and your DD are getting into.  If you are going to cash flow it anyway, then maybe you could open it up a little.  (or, just the opposite, depending on your risk tolerance)

If it were me, I agree @Gin1984 's approach to separate the early years from the later years.  The reason the numbers don't vary much in your calculated options is that your contributions are still relatively large compared to the account balance.  Give at least some of the money a chance to run: perhaps even put them in separate target funds, to quantify what that difference means.  The investments are already fairly conservative, but yes the market is probably closer to its cyclical high right now, than its low--it is a game of chicken.  If it would kill you to have less than $9,500 when her freshman bill comes due, then just bank it--literally--and don't worry about the growth.

Nick_Miller

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Re: Taking conservative approach with 529 for older child?
« Reply #7 on: May 28, 2019, 10:16:19 AM »
Well, this thread has caused me to research 529s more.

So I already knew this, but I reminded myself that one of the resident benefits of our 529 plan is that the funds don't count against the student when state schools calculate need-based financial aid, so that's a big one, as normally I think 529 balances count like 5% against aid calculations when the funds are withdrawn for the student.

As our kids will likely go to state schools, this is a small bonus.

I also confirmed (from discussing 529s on another thread), that it appears even though 529 contributions are always tax/penalty free, that you can't just pull them out by themselves like you can with something like Roth IRA contributions. I dug deeper and found these articles by what appear to be experts all saying the same thing, that withdraws are treated as pro rata between contributions and earnings. This contradicts several articles that I read that simply said "you can withdraw contributions for any reason at any time" and didn't warn about the pro rata aspect.

https://www.quora.com/Can-I-remove-my-contributions-not-earnings-from-a-529-plan-for-any-reason-without-penalty

http://www.theinvestorscenter.com/withdrawing-from-your-529-plans-2/

https://www.vintagefs.com/irs-audits-529-plans/


So this is not a huge deal, as we don't plan to touch the 529 funds, but it does put a crimp in any plan to view 529 funds as potential sources of emergency cash. I'm just trying to educate myself and see all the angles here.
« Last Edit: May 28, 2019, 10:19:50 AM by Nick_Miller »

Nick_Miller

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Re: Taking conservative approach with 529 for older child?
« Reply #8 on: June 07, 2019, 11:28:40 AM »
@Nick_Miller , what is your strategy to fund the rest of college?  Is $100 / month what you are budgeting while your DD is actually in school, or will your budget change?

I agree with @Laserjet3051 that the difference isn't minimal.  I also worry that you were picking a 7% return out of the air, which doesn't reflect the funds you will actually choose. (i.e. a target date fund)  I also agree that, with this kind of time frame, looking at the full range of college years (5 - 9 years) is more instructive than thinking you have crossed the finish line at 5:  a common mistake made with retirement investing.

But whether that means something to you or not depends on what you are going to do with the difference.  If all the rest goes into student loans, then you might want to be more conservative, and know what you and your DD are getting into.  If you are going to cash flow it anyway, then maybe you could open it up a little.  (or, just the opposite, depending on your risk tolerance)

If it were me, I agree @Gin1984 's approach to separate the early years from the later years.  The reason the numbers don't vary much in your calculated options is that your contributions are still relatively large compared to the account balance.  Give at least some of the money a chance to run: perhaps even put them in separate target funds, to quantify what that difference means.  The investments are already fairly conservative, but yes the market is probably closer to its cyclical high right now, than its low--it is a game of chicken.  If it would kill you to have less than $9,500 when her freshman bill comes due, then just bank it--literally--and don't worry about the growth.

Well, I just decided to do the last thing you mentioned.

I moved all assets to the FDIC accounts that are paying 2.4% (with .20 fee unfortunately), ran some numbers, and upped monthly contributions to $150/month per kiddo. So Older Kiddo is guaranteed to have $20K when she graduates HS, and Younger Kiddo (three years behind) is guaranteed to have $25K when she graduates HS. This is our only hedge against potentially a crazy market these next few years with Trump around. (We're continuing to invest heavily with our retirement accounts and are being pretty aggressive with those) But psychologically, when it comes to the kiddos' school, it will help us plan knowing the exact amounts that will be available. And I also hope it will (stay with me here) help motivate my kiddos even more.

If Older Kiddo scores a full tuition scholarship to an in-state school, we can always decide to use the 529 money towards room/board(and a new laptop, if the school lists that as a requirement) for a couple of years. I know it wouldn't pay for four years' worth, but it could cover Fresh/Soph years. If she continues to work hard, I really want her to have the "four year experience" but that will only be possible with a full tuition ride at an in-state public school. I will let this be known to her very soon, as she's entering 8th grade this fall. If she continues to score mostly As and kills her ACT/SAT, gets a full tuition ride, etc., I'm sure my wife and I would considering cash flowing Junior and Senior years of room/board. (My wife is pretty risk adverse by nature, and it's to her credit that she has loosened up a little when it comes to investing more and more in retirement, but it appeals to her conservative outlook to have the kiddos' funds locked in, and it will likely encourage her to want to put more $ in)

Again, we are fine with being pretty aggressive with retirement funds, but I like having this certainty with the kiddos.
« Last Edit: June 07, 2019, 11:38:01 AM by Nick_Miller »