Re-evaluating 529 AA now that kids are older

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Admiral Fun
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Re-evaluating 529 AA now that kids are older

Post by Admiral Fun »

We are lucky enough to have total of $480,000 spread across two 529 accounts.

Kid 1: admitted to college, likely gap year so matriculating 2023. Out of pocket costs will be $160k over 4 years. Currently $160k of the 529 is invested in vanguard target enrollment 2022/23 and the remaining $80k in stocks.

Kid 2: entering 9th grade in the fall. 529 has $240k, currently split 60/40 stock/bonds. We think it's possible that she will be admitted to an elite private college or university, and would empty the entire account if that happened (a work benefit will cover an additional 70k over 4 years so there would be exactly enough $ to pay full cost at today's prices).

Overall split is 55/45 stocks/bonds. We are not worried about overfunding. Graduate school is reasonably likely for both kids. If there is money left over, we would save for future grandkids.

I can't decide whether we are being too conservative or too risky with these assets. Inflation and low bond yields makes me nervous, and we have the ability to take more risk, but I don't want to be foolish. Does any one have any perspecive or recommendations?

-Admiral Fun
dbr
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Re: Re-evaluating 529 AA now that kids are older

Post by dbr »

Just winging an analysis given that that you expect the funding to match the costs assuming no inflation in costs there is probably no allocation that is likely to offset inflation without carrying some risk that could materialize and leave you short. If the real yields on such assets as TIPS were not significantly negative right now the situation would be different. You could eliminate risk by buying TIPS at a premium of about 10% for a 5-10 year period. I doubt there is any particular optimum between stocks and bonds between the normal risks in stocks and the current low returns in bonds. The asset allocation problem is always a trade-off of risk in stocks vs returns on bonds.
Admiral
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Re: Re-evaluating 529 AA now that kids are older

Post by Admiral »

Nice user name. 8-)
dbr
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Re: Re-evaluating 529 AA now that kids are older

Post by dbr »

Just as an exercise a $480,000 investment spent at $41,000/year for ten years at 50/50 asset allocation has a 95% success rate in FireCalc with random inflation. At 0/100 and 100/0 the success rate falls to about 90%. Thinking that $48,000/year is inflation free spend one has saved for, inflation and risk create a premium of $7,000 out of $48,000 or 15%.

This is just an attempt to find some kind of analysis to answer your question.
rkhusky
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Re: Re-evaluating 529 AA now that kids are older

Post by rkhusky »

If you plan to fund college no matter what happens in the 529, just use your retirement AA for the 529 AA.

If the kiddos are only going to get what’s in the 529, then be more conservative, unless you have way more in there than they will ever need. In the latter case, again use your retirement AA.
pizzy
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Re: Re-evaluating 529 AA now that kids are older

Post by pizzy »

rkhusky wrote: Mon Dec 06, 2021 11:43 am If you plan to fund college no matter what happens in the 529, just use your retirement AA for the 529 AA.

If the kiddos are only going to get what’s in the 529, then be more conservative, unless you have way more in there than they will ever need. In the latter case, again use your retirement AA.
I love this idea. I've struggled to decide whether to include the 529 in our AA and this makes it clear for me. Thank you.

Since we plan to fund our child's college whether the 529 is underfunded, overfunded, or perfectly funded, it makes sense to include the account in our Asset Allocation.
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
dbr
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Re: Re-evaluating 529 AA now that kids are older

Post by dbr »

Question: Is your college financing plan based on present costs and assuming no increases in tuition, room, board, fees, etc. and designed to just meet the planned college years. If so, it would seem you would have to come up with more money to cover everything. If inflation in college costs is already planned in, then the calculation is different.
pizzy
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Re: Re-evaluating 529 AA now that kids are older

Post by pizzy »

dbr wrote: Mon Dec 06, 2021 11:52 am Question: Is your college financing plan based on present costs and assuming no increases in tuition, room, board, fees, etc. and designed to just meet the planned college years. If so, it would seem you would have to come up with more money to cover everything. If inflation in college costs is already planned in, then the calculation is different.
I've found a way to handle this is to fully fund the present value of the 4 years using today's tuition rates and a investment growth rate of your choosing.

If "College A" says $40,000/year and you have $90,000 529 balance and 10 years to college. Assuming a 5% rate of return, you need to fund $8,500 today to be "even".

Then run the calculation each time a new cost of attendance is released and fund the gap (if any).
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
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Admiral Fun
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Re: Re-evaluating 529 AA now that kids are older

Post by Admiral Fun »

Thanks all - these are all great frameworks for making the decision. I am realizing that there are so many ways to think about 529 funds that it's possible to rationalize pretty much any AA.

For simplicity, I think we would like to consider the 529 plans separate from our retirement funds (which are invested fairly aggresively). We are unlikely to contribute additional $ to college but in a pinch we could.

We'd also like to consider the two 529 accounts separate from each other (We don't want to use up kid #1's graduate school money just because kid #2 wants to go to a more expensive school).

I think we are happy with Kid #1's AA (target enrollment fund for known college expenses in the next 5 years, 100% stock for the remainder).

That just leaves Kid #2's AA. The target enrollment fund 2026/27 just seems ridiciously conservative (only 35% stock!). My gut is that the current 60/40 allocation is as good a pick as anything for balancing growth and asset preservation. Unless there is a compelling reason to change it I think we'll just "stand there"
BernardShakey
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Re: Re-evaluating 529 AA now that kids are older

Post by BernardShakey »

Admiral Fun wrote: Mon Dec 06, 2021 8:34 pm Thanks all - these are all great frameworks for making the decision. I am realizing that there are so many ways to think about 529 funds that it's possible to rationalize pretty much any AA.

For simplicity, I think we would like to consider the 529 plans separate from our retirement funds (which are invested fairly aggresively). We are unlikely to contribute additional $ to college but in a pinch we could.

We'd also like to consider the two 529 accounts separate from each other (We don't want to use up kid #1's graduate school money just because kid #2 wants to go to a more expensive school).

I think we are happy with Kid #1's AA (target enrollment fund for known college expenses in the next 5 years, 100% stock for the remainder).

That just leaves Kid #2's AA. The target enrollment fund 2026/27 just seems ridiciously conservative (only 35% stock!). My gut is that the current 60/40 allocation is as good a pick as anything for balancing growth and asset preservation. Unless there is a compelling reason to change it I think we'll just "stand there"
My 529's are good size but not as big as yours. Kids are in the middle of college / grad school years. I'm at 35% stock, 20% bonds, and 45% cash-like. But these dollars are needed for their schooling. No other sources.
An important key to investing is having a well-calibrated sense of your future regret.
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