Author Topic: Managing DS's 529 plan  (Read 3150 times)

lhamo

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Managing DS's 529 plan
« on: May 27, 2015, 04:01:08 PM »
I'm trying to decide what to do with DS's 529 plan.  Some key background:

1)  Money is in the NY State 529 plan, which uses Vanguard funds.

2)  Currently have just under $80k in the plan, split between the Conservative option (roughly 12k, enough for first year tuition expenses) and Aggressive Growth age-based portfolio (I think about 70% in stocks still, given he is only 14 and typically would not be headed for college for another 4 years).

3)  If things go smoothly with the program he enrolls in this fall, he will be a full-time college student starting in September 2016.  We can't start withdrawing from the 529 penalty-free until he is a regularly matriculated student (special program is based at the university, but he isn't a full-fledged student until he gets through it and is formally admitted at the BA level).

4)  Current in-state tuition rates (which we will qualify for once he is enrolled) are around 12k/year.  Probably will go up a few hundred a year, plus we can use it to cover books, etc. so estimate 14k/year or 56-70k total (he may well do a double major, and given his young age we would be willing to cover 5 years).

5)  Currently I am NOT planning to use 529 funds to cover his living expenses at home, even though this is allowed.  But that may change depending on how our overall financial picture is looking after I stop working. 

6)  We are no longer contributing significant new amounts to the plans.  DD's is also at around $80k, and with a similar split across conservative and aggressive portfolios. 

Main issue I am wrestling with at the moment is whether/how much to move out of the aggressive portfolio and into the conservative option.  On the one hand, it would be great to lock in the money to cover the full cost of tuition for his BA/BS level studies.  On the other hand, keeping it in stocks may provide some excellent returns over the next 4-5 years, leaving more for him to use for grad school (or money that could be moved to DD's plan). 

Thoughts?  Advice? 

I'm kind of leaning toward moving another year's worth of tuition now, and letting the rest ride for a bit longer.  If the overall economic forecast starts looking grim, I can move another year or two later.  I think.  I need to check and see how many times I am allowed to move things around (there may be annual limits).


beltim

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Re: Managing DS's 529 plan
« Reply #1 on: May 27, 2015, 04:19:36 PM »
This is a classic risk/reward scenario.  On the one hand, you've already won the game (having enough in the 529 to fund college), so why keep playing if there's a chance you could lose?

On the other hand, on average stocks return ~10% annually and over the next 4-7 years that could add up to a lot of gains you could lose out on.

Historically stocks have positive returns ~87% of all 5-year periods.  http://awealthofcommonsense.com/u-s-stock-investors-doomed-high-returns/

Are those good enough odds for you?  It's a personal question.

mxt0133

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Re: Managing DS's 529 plan
« Reply #2 on: May 27, 2015, 05:23:59 PM »
I think the saying on Wall Street applies to your situation, "bulls make money, bears make money, but pigs get slaughtered."  It seems like you have enough funds to cover your DS's undergrad so why take the risk?  It's like working when you are already FI.

Go through a few scenarios and see how you feel.  How you would you feel if you lost 10% vs gaining 10%?  Lost 20% vs gaining 20%?  Lost 30% vs gaining 30%?  Can you cover college costs if there are losses in 4 years when he will need the funds?


brooklynguy

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Re: Managing DS's 529 plan
« Reply #3 on: May 27, 2015, 06:39:34 PM »
Historically stocks have positive returns ~87% of all 5-year periods.

This statistic appears to be based on nominal returns.  It would be lower (maybe much lower?) using real returns.  Personally, with only a 4-5 year time horizon, I'd lock in more of the already-realized gains (i.e., stop playing) now.

beltim

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Re: Managing DS's 529 plan
« Reply #4 on: May 27, 2015, 06:42:19 PM »
Historically stocks have positive returns ~87% of all 5-year periods.

This statistic appears to be based on nominal returns.  It would be lower (maybe much lower?) using real returns.  Personally, with only a 4-5 year time horizon, I'd lock in more of the already-realized gains (i.e., stop playing) now.

It is based on nominal returns.  If you don't have access to TIPS, though or some other inflation-adjusted asset, in a 529 then comparing it to inflation is only an academic exercise.

brooklynguy

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Re: Managing DS's 529 plan
« Reply #5 on: May 27, 2015, 06:49:27 PM »
It is based on nominal returns.  If you don't have access to TIPS, though or some other inflation-adjusted asset, in a 529 then comparing it to inflation is only an academic exercise.

NY's 529 plan does have Vanguard's Inflation-Protected Securities Fund, but even if it didn't it would be worth considering moving to a money market fund or similar option if you've already won the game with only four years to go.

beltim

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Re: Managing DS's 529 plan
« Reply #6 on: May 27, 2015, 06:54:50 PM »
It is based on nominal returns.  If you don't have access to TIPS, though or some other inflation-adjusted asset, in a 529 then comparing it to inflation is only an academic exercise.

NY's 529 plan does have Vanguard's Inflation-Protected Securities Fund,
Cool.  That might be a good option if the OP decides to play it safe.

Quote
but even if it didn't it would be worth considering moving to a money market fund or similar option if you've already won the game with only four years to go.
This is just part of the risk/reward balancing I referenced in my first post.  You could find statistics for the likelihood of stocks outperforming whatever the alternative investment is over the next 5 years.  I just gave relative to baseline because that's easier to find.

brooklynguy

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Re: Managing DS's 529 plan
« Reply #7 on: May 27, 2015, 07:02:25 PM »
This is just part of the risk/reward balancing I referenced in my first post.  You could find statistics for the likelihood of stocks outperforming whatever the alternative investment is over the next 5 years.  I just gave relative to baseline because that's easier to find.

Yep.  I'm agreeing with your first post, and just saying that personally I'd give serious consideration to playing it safe if I were in the OP's shoes (and I'd handicap the odds of coming out ahead by not playing it safe somewhere below ~87%).

beltim

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Re: Managing DS's 529 plan
« Reply #8 on: May 27, 2015, 07:31:56 PM »
This is just part of the risk/reward balancing I referenced in my first post.  You could find statistics for the likelihood of stocks outperforming whatever the alternative investment is over the next 5 years.  I just gave relative to baseline because that's easier to find.

Yep.  I'm agreeing with your first post, and just saying that personally I'd give serious consideration to playing it safe if I were in the OP's shoes (and I'd handicap the odds of coming out ahead by not playing it safe somewhere below ~87%).

Fair enough.  This is clearly in the region of interest where there's no 100% right answer.  I agree with your inclination, too - I think I would play it safer than the OP currently is -- probably no more than 50% stocks overall.

lhamo

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Re: Managing DS's 529 plan
« Reply #9 on: May 28, 2015, 06:20:47 AM »
Thanks for all the feedback -- very helpful as I think through this decision.

So I actually went and looked up the allocations of the current investments.  It turns out that at his age, the "aggressive age based option" has already dialed back the risk considerably and is actually invested 50%  in VITPX (US stock index) and 50% in VTBIX (US bond index).  I didn't realize they dialed back the risk level that early.  About 85% of our overall investment for him is in this option, so that's about 42.5% in stocks and 42.5% in bonds to start with.

The remaining 15% is in the "income portfolio option", which is split 50% in VTBIX, 25% in VIPSX (TIPS), and 25% in "Vanguard Short Term Reserves Account (guessing this is a money market option, or something similar. 

So all together we have:

42.5% in US stocks
50% in US bonds
3.75% in TIPS
3.75% in Money Market and similar

I can only exchange funds twice in a calendar year.

I'm going to have to think about this a bit more.  At the moment I am leaning toward moving 50k into the most conservative option (interest portfolio, not currently in my mix -- basically a mixture of money market and CD investments) to cover tuition for four years, and letting the other 30k continue to ride for awhile.  If it doesn't do well, we don't necessarily have to pull it out immediately -  we could keep it in there and later transfer to DD's account.  I'd probably wait and see if it goes up to 100k, and move it over to more conservative options at that point.