Author Topic: Should we lower the risk on our "college" chunk?  (Read 4457 times)

begood

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Should we lower the risk on our "college" chunk?
« on: October 13, 2015, 11:13:02 AM »
I'm 51, DH is 50. We have an only child in 8th grade. She's got four years of private high school, then four (we hope!) years of college to go after that. We've got the high school years covered, and we have a taxable account that we plan to pillage for college costs.

We have about $36K in 529/Coverdell funds that we can use - I figure that will cover her freshman year, if we're lucky!

Since we're now looking at a time frame of less than 5 years, should we consider protecting some designated chunk of money for college? My husband reminds me that we've still got a looooong time frame to go, regardless of when we retire, and therefore, keeping our 70/25/5 asset allocation is the right thing to do.

I just wonder, given the market's bumpiness recently, if there's any benefit to shielding some portion - say $150K - to be less jostled around between now and when we need those funds.

Or am I a scaredy, cat, my husband's right, and we just stay the course and roll with it?

[Edited because apparently I don't know how old we are!]
« Last Edit: October 13, 2015, 01:05:15 PM by begood »

Retire-Canada

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Re: Should we lower the risk on our "college" chunk?
« Reply #1 on: October 13, 2015, 11:27:19 AM »
$36K for 1 year of school??? Holy crap.

If you guys are still in the accumulation phase you can redirect savings to pay for her school costs so it shouldn't matter what the market does and I would leave your money invested accordingly to your investment plan.

If you don't save enough in a year to cover her school costs it's time to re-evaluate the need to spend $36K/yr on college.

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #2 on: October 13, 2015, 11:39:13 AM »
$36K for 1 year of school??? Holy crap.

If you guys are still in the accumulation phase you can redirect savings to pay for her school costs so it shouldn't matter what the market does and I would leave your money invested accordingly to your investment plan.

If you don't save enough in a year to cover her school costs it's time to re-evaluate the need to spend $36K/yr on college.

I do consider us still in the accumulating stage. Something I hadn't considered, Vikb, is that we could reduce the HSA/403(b) funding for those four years. That could be as much as $30K, though we'd never leave the employer match on the table, so we'd still be saving something in the 403(b).

Where we live now, the state university system is... not great. In other states where we've lived, sure, I could happily send my kid to the flagship state school. This time, that school is Penn State, and just... no. Nope.  Not the right fit for this particular kid, for a variety of reasons.

The only thing I'm positive about is that we will not qualify for any kind of need-based financial aid. I ran the EFC calculator for "fun" one day, and our expected family contribution came out at a whopping $115K/year. So... she may be able to get a merit scholarship; we might be able to swing a legacy thing at the college her dad and I both went to; she might choose a state school out of state that would still be WAY less than private liberal arts colleges.

It's gonna be a chunk of change. The question is, how do we make sure it's there to be coughed up?
« Last Edit: October 13, 2015, 11:47:07 AM by begood »

Financial.Velociraptor

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Re: Should we lower the risk on our "college" chunk?
« Reply #3 on: October 13, 2015, 12:10:19 PM »
I completed 4 years plus a year of grad school living expenses, books, and tuition all included for about 36k total. 

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #4 on: October 13, 2015, 12:24:45 PM »
I completed 4 years plus a year of grad school living expenses, books, and tuition all included for about 36k total.

Good for you, Financial.Velociraptor! I graduated in 4 years from a private liberal arts college for less than $20K, then got a master's degree at the flagship state school for less than $5K total, including living expenses. Tuition for my grad program was $192/semester. In 1986.

College costs have skyrocketed since I was a college student (and maybe since you were too?). The college I attended cost $5K my freshman year. That increased to $10K by my senior year, and is now... ~$44K per year. PER YEAR. And we're not talking Harvard, Dartmouth, or Brown, here.

If we hadn't been saving money hand over fist for twenty years, we'd probably default to state school, regardless of quality, or community college + state school. But we have been saving money hand over fist for twenty years. We took all of the appreciation from our first home sale and invested it, earmarked for college, when our kid was 14 months old.

I'm not looking for the cheapest way for my kid to get a degree. I'm trying to find out whether there's consensus on whether we should start shifting those designated college funds to a less aggressive, more balanced allocation since we've just hit that mythic "less-than-5-year" mark.
« Last Edit: October 13, 2015, 01:04:54 PM by begood »

Scandium

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Re: Should we lower the risk on our "college" chunk?
« Reply #5 on: October 13, 2015, 01:02:04 PM »
I completed 4 years plus a year of grad school living expenses, books, and tuition all included for about 36k total.

If "age=43" in your profile is accurate you started college in 1989? Then well no shit your school was cheaper! It's been going up by 6%+ per year for a long time. I believe even many state schools are in the $40k/year range.

Now I don't see a huge problem paying that if it's "wort it" (obviously somewhat subjective). I doubt it'd agree to pay $30k/year for my kid to go to a liberal arts school though. Baristas don't really have the best earnings potential.. On the other hand, if he wants to go to a prestigious engineering school I'd have no problem paying that kind of money. If the product is worth it.. Studies have found even today's college costs to be a good investment (~10% return) for certain educations, in terms of increased lifetime earnings.

As for your question; it not sure I'd be comfortable with 100% equities with <5 years to go for money that will be used in 4 years. With retirement savings I can see how 100% stocks can work, as the withdrawal is long so it has time to recover, but this money will be needed in no more than 4 years. With many downturns lasting 2-3 years there could be a problem.
« Last Edit: October 13, 2015, 01:03:52 PM by Scandium »

Retire-Canada

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Re: Should we lower the risk on our "college" chunk?
« Reply #6 on: October 13, 2015, 01:34:46 PM »
I do consider us still in the accumulating stage. Something I hadn't considered, Vikb, is that we could reduce the HSA/403(b) funding for those four years. That could be as much as $30K, though we'd never leave the employer match on the table, so we'd still be saving something in the 403(b)

That sounds like a reasonable plan. I find it mentally easier to divert savings than to sell investments anyways.

Maybe there is a way to reduce the costs down to the $30K you can save in a year?

I was looking to hack my engineering degree and went through a number of options until I settled on the best one for me:

1. parents funding 100% of my out of town degree
2. scholarships 30%/parents 70%
3. coop program where I would earn enough to cover my tuition/books each year through work placements
4. army paying me to get an engineering degree and giving me a job afterwards

Not saying your kid wants to join the army, but the more I dug around the more options I found instead of paying full pop to go to school.

Ultimately it cost my parents nothing and I came out of school with no debt, savings and an immediate job.

Gin1984

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Re: Should we lower the risk on our "college" chunk?
« Reply #7 on: October 13, 2015, 01:45:57 PM »
Since you are five years out, I personally would reduce some of what is in the 529 because given your income I would not want to give up the pre-tax space.  However, I would not plan to spend the whole amount her freshman year so that should give you some flexibility and allow for a bit more risky investing.  Keep in mind that if you pull money from her 529, you cannot get the tax credits for paying her college costs (this may not be applicable right now based on your income).  I would do a few things, use the money in the Coverdell funds to pay for high school (and therefore turn that into cash if it will not be a loss) and use the money you would be spending on private school into your 529.  Then use the 529 only for living expenses and books and cash flow her tuition to take advantage of the tax credits.
For the taxable account, stay the course or maybe move just 5% extra into bonds. 

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #8 on: October 13, 2015, 01:58:45 PM »


Maybe there is a way to reduce the costs down to the $30K you can save in a year?

...

Not saying your kid wants to join the army, but the more I dug around the more options I found instead of paying full pop to go to school.

Ultimately it cost my parents nothing and I came out of school with no debt, savings and an immediate job.

I think the military can be a great choice for some folks; my dad benefited from his military benefits his whole life. He was active military for 4 years, then served in the Air Force Reserves for twenty years. Tricare is a blessing!

Back in 2003, when we socked away the $50K appreciation with the intention of it having 18 years to grow, we couldn't imagine that it wouldn't be "enough" when the time came. In fact, my mister thought it was overkill at the time. My thinking at the time was that we didn't need that money right then, so why not put it to work? The exponential increase in the cost of higher education was something we couldn't have predicted, and there's probably not enough time to "fix" it to benefit us. We started our married life with no debts, and we want to do the same for our daughter. It set us up for a strong financial life right out the gate.

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #9 on: October 13, 2015, 02:01:36 PM »
Since you are five years out, I personally would reduce some of what is in the 529 because given your income I would not want to give up the pre-tax space.  However, I would not plan to spend the whole amount her freshman year so that should give you some flexibility and allow for a bit more risky investing.  Keep in mind that if you pull money from her 529, you cannot get the tax credits for paying her college costs (this may not be applicable right now based on your income).  I would do a few things, use the money in the Coverdell funds to pay for high school (and therefore turn that into cash if it will not be a loss) and use the money you would be spending on private school into your 529.  Then use the 529 only for living expenses and books and cash flow her tuition to take advantage of the tax credits.
For the taxable account, stay the course or maybe move just 5% extra into bonds.

We are looking into using the Coverdell funds (~$15K) toward her high school costs. I like the idea of siphoning some of that freed-up money into the 529, which has 5-9 years to grow. We have not contributed to either the Coverdell or the 529 for quite a few years now; I'm not sure why. I'll ask my mister.

forestj

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Re: Should we lower the risk on our "college" chunk?
« Reply #10 on: October 13, 2015, 07:33:41 PM »
You could inform your daughter that she will have limited assistance from you and her father when it's time to foot the college bill, and show her the numbers. When she is about to leave for school, if you have done your job right, she will be in the middle of learning skills like long term planning, number crunching, and financial know-how.

This is what my parents did for me. Bless them, they spend like mustacians most of the time, but they've hoarded 100% cash on one teacher's income for their entire adult lives. As a result, they were willing/able to offer my brother and I each around $3000 per year in assistance while we were in school. When I was going to school, the EFC was about $20,000 / year.

Obviously you are much wealthier than my parents, but that doesn't mean you have to foot 100% of your daughter's bill for her experiences in college, regardless of where she chooses to apply and where she's accepted.

If you make it abundantly clear what she can expect from your contribution, no matter the circumstances, and that SHE is responsible for choosing the school (or no school), I think she will make a smart choice.

This is what my brother and I had to do. We were told to investigate the options on our own, and investigate we did, ferociously. My brother, the academic superstar, did it his way: high marks, lots of scholarships, and a school that specialized in his field with good financial aid, where he further advanced himself academically. He paid his ~$7000 / year expected student contribution through workstudy, summer minimum wage jobs, and minimum wage jobs for a year after graduation to pay off his ~$10,000 debt. He is now getting paid to attend grad school for his phd, and getting grants to travel and conduct research.

I, the introvert and school-fearing, did it my way; I made friends online, attaining a good social standing online among professionals in a lucrative industry while other kids my age were attending high school. I even got internships at a tech startup that would later flourish to a global success. Since I worked in tech already and I had a good reputation, I was able to get good paying jobs every summer during school. I chose not to work during the semester, I thought it was antithetical.

I was personally responsible for paying about $17,000 per year, much more than my brother, because I had no academic standing out of highschool, I was the last child to attend school, and the school I chose (Beloit College) jacked up their tuition a lot while my financial aid stayed the same. However, I only wound up with $20,000 of debt at the end, and I paid it off in one year after I spent 6 months searching for the right job and the right place to live. Now I have a good paying job and I am well on my way to FI by the time I'm 35, barring any "Thousand Year Flood" style depressions.

The knowledge that I would be responsible for paying that much (as well as my parents promise to charge me rent if I lived in their house after I was 18) instilled an empowering fear and sense of urgency in me that I learned to tame and channel through the years. I became exponentially better at making friends, I learned how to think like a business and get a good paying job, and best and most of all, I had to learn to be self sufficient and define my own standards of what was "adequate", "good", "too expensive", or even "disgusting". For me, that's what being mustacian is all about: choosing how you live knowing that you are responsible for the consequences no matter what happens.

I don't know your daughter, but I think that her choice is more important than your plans. What I mean is, that she is responsible for how her college years and her life turn out, not you, and not your money, so it might benefit her if you present the choice to her early on. As early as possible.

« Last Edit: October 13, 2015, 07:37:34 PM by forestj »

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #11 on: October 14, 2015, 07:01:19 AM »
You could inform your daughter that she will have limited assistance from you and her father when it's time to foot the college bill, and show her the numbers. When she is about to leave for school, if you have done your job right, she will be in the middle of learning skills like long term planning, number crunching, and financial know-how.

This is what my parents did for me. Bless them, they spend like mustacians most of the time, but they've hoarded 100% cash on one teacher's income for their entire adult lives. As a result, they were willing/able to offer my brother and I each around $3000 per year in assistance while we were in school. When I was going to school, the EFC was about $20,000 / year.

Obviously you are much wealthier than my parents, but that doesn't mean you have to foot 100% of your daughter's bill for her experiences in college, regardless of where she chooses to apply and where she's accepted.

If you make it abundantly clear what she can expect from your contribution, no matter the circumstances, and that SHE is responsible for choosing the school (or no school), I think she will make a smart choice.

This is what my brother and I had to do. We were told to investigate the options on our own, and investigate we did, ferociously. My brother, the academic superstar, did it his way: high marks, lots of scholarships, and a school that specialized in his field with good financial aid, where he further advanced himself academically. He paid his ~$7000 / year expected student contribution through workstudy, summer minimum wage jobs, and minimum wage jobs for a year after graduation to pay off his ~$10,000 debt. He is now getting paid to attend grad school for his phd, and getting grants to travel and conduct research.

I, the introvert and school-fearing, did it my way; I made friends online, attaining a good social standing online among professionals in a lucrative industry while other kids my age were attending high school. I even got internships at a tech startup that would later flourish to a global success. Since I worked in tech already and I had a good reputation, I was able to get good paying jobs every summer during school. I chose not to work during the semester, I thought it was antithetical.

I was personally responsible for paying about $17,000 per year, much more than my brother, because I had no academic standing out of highschool, I was the last child to attend school, and the school I chose (Beloit College) jacked up their tuition a lot while my financial aid stayed the same. However, I only wound up with $20,000 of debt at the end, and I paid it off in one year after I spent 6 months searching for the right job and the right place to live. Now I have a good paying job and I am well on my way to FI by the time I'm 35, barring any "Thousand Year Flood" style depressions.

The knowledge that I would be responsible for paying that much (as well as my parents promise to charge me rent if I lived in their house after I was 18) instilled an empowering fear and sense of urgency in me that I learned to tame and channel through the years. I became exponentially better at making friends, I learned how to think like a business and get a good paying job, and best and most of all, I had to learn to be self sufficient and define my own standards of what was "adequate", "good", "too expensive", or even "disgusting". For me, that's what being mustacian is all about: choosing how you live knowing that you are responsible for the consequences no matter what happens.

I don't know your daughter, but I think that her choice is more important than your plans. What I mean is, that she is responsible for how her college years and her life turn out, not you, and not your money, so it might benefit her if you present the choice to her early on. As early as possible.

Thank you for sharing your story, forestj! My husband and I both worked part-time jobs during our teen years and college, and I'm sure our daughter will do the same. It's true that she will be responsible for how her college years and life turn out, but we do want to give her the same advantages both of our parents gave us: a debt-free start and a beater car. ;)

FrugalFan

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Re: Should we lower the risk on our "college" chunk?
« Reply #12 on: October 19, 2015, 01:08:36 PM »
Was looking into this for our Canadian RESP savings plan, and I found this suggested allocation, which I like. Our kids are both very young now so we have 25% in bonds, but will likely adjust in a similar fashion when the kids get older.

     
Your             Maximum %  Minimum %
child’s age    equities    fixed income

8 or younger    100%    0%
9                     90%    10%
10                     80%    20%
11                     70%    30%
12                     60%    40%
13                     50%    50%
14                     40%    60%
15                     30%    70%
16                     20%    80%
17                     10%    90%
18 or older       0%    100%

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #13 on: October 19, 2015, 01:13:50 PM »
Was looking into this for our Canadian RESP savings plan, and I found this suggested allocation, which I like. Our kids are both very young now so we have 25% in bonds, but will likely adjust in a similar fashion when the kids get older.

     
Your             Maximum %  Minimum %
child’s age    equities    fixed income

8 or younger    100%    0%
9                     90%    10%
10                     80%    20%
11                     70%    30%
12                     60%    40%
13                     50%    50%
14                     40%    60%
15                     30%    70%
16                     20%    80%
17                     10%    90%
18 or older       0%    100%

Interesting! Thank you, Travelling Biologist!

Tyler

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Re: Should we lower the risk on our "college" chunk?
« Reply #14 on: October 19, 2015, 01:26:21 PM »
I just wonder, given the market's bumpiness recently, if there's any benefit to shielding some portion - say $150K - to be less jostled around between now and when we need those funds.

Or am I a scaredy, cat, my husband's right, and we just stay the course and roll with it?

That's a great question, and I personally think you've got the right idea.  IMHO, it's not so much about being a scaredy cat as it is about being realistic about uncertainty and risk.

You might find this article helpful as it addresses this exact issue.  http://portfoliocharts.com/2015/08/12/risk-in-the-real-world/  While it specifically talks about starting a college fund many years out, the same logic applies the closer you get to the end goal.  You can also use the referenced calculator to test how lowering your stock allocation would have worked out over a variety of historical timeframes.

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #15 on: December 04, 2015, 08:01:32 AM »
UPDATE: We ended up adjusting the allocation on the Coverdell and 529 funds to 60/40 (from 80/20). But that's only $40K. I am still debating whether I want to move some of our taxable funds to a more conservative position in order to protect the full amount we anticipate needing to spend for college, starting in 4.5 years. That feels right around the corner!

begood

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Re: Should we lower the risk on our "college" chunk?
« Reply #16 on: December 04, 2015, 08:30:43 AM »
Wow, lhamo, your son must be super bright! My daughter is the same age as your son, but she'll just be heading to 9th grade next year. :)

For the first year, those dedicated college funds should cover most of the cost, and sitting-around cash should painlessly make up any difference.

We could choose to stop funding retirement during the last three college years and divert around $25K toward college expenses, which would then be supplemented as necessary by, in order of preference: sitting-around cash, investment income, or selling off some of our taxable account.

Just seeing a potential path makes me feel better about it. We did not work those dedicated college funds to the best of their ability; I'm still not sure why. My husband doesn't remember, either!