529 Allocation

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Drew31
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529 Allocation

Post by Drew31 »

Struggling a little here so looking for others’ thoughts.

We have 2 kids, 13 & 2. 529 for the oldest with ~15k. We receive a 1k tax credit in our state up to 5k so my approach past three years has been to put in 5k per year to max the credit. Rest goes to retirement. Retirements savings right now at ~35%. No idea on college aspirations for 13yo but state public would be default. (ie no plans for private). I’m not worried about funding 100% in 529. I’d rather under than over fund and if I need to cash flow or him get a loan, that’s fine too.

Where I’m struggling is how to allocate what I am allocating, especially with a 2 yo where any unused funds would go. It’s currently at 70/30 stocks/bonds as that is what it was 10 years ago when I opened account and just put in 50 bucks to fund it.

My thought is to switch to 100% equities. Keep funding 5k per year for oldest until college. If market doesn’t cooperate I can always save those for the youngest. I’m just trying to think if this makes most sense.
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markjk
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Re: 529 Allocation

Post by markjk »

We have two 529 as well.

100% equities for a 529 could be tricky. The reason is you have a relatively short withdrawal timeframe. Assuming a 4 year degree, you'd hopefully deplete the money within 4 years. That doesn't give you a lot of time to make up for a bad year or two in equities at the wrong time. It's different from retirement where you most likely pull out a much smaller percentage annually compared to a 529 and continue pulling for possibly decades.

I understand what you are saying about moving the money around from your 13 yo to your 2 yo if it securities drop. It certainly could work but there are so many variables. I don't think I'd do it. I would just treat them as different accounts with a different timeframe and manage it that way. If you want to go 100% equities with the 2 yo account, that seems reasonable but you'll have to watch it in 10 - 12 years and hopefully move the money around at the right time to not take a hit. I'm not saying what you are proposing is wrong, I just don't think I'd personally do it. I personally like the target date funds that have a glide path towards a probable college entry date. It automates the process (gets more conservative as the date approaches) and keeps me from messing around with it.

For me, the goal with a 529 is to earn a decent return but not hit a home run. I'm not willing to risk the downside swinging for home runs with a 529. Again, this is due to the short withdrawal timeframe. I know others view it differently.
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HMSVictory
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Re: 529 Allocation

Post by HMSVictory »

There are two ways to go at this.

The first is to include the 529 in your overall allocation. The second option is to treat the 529 as its own portfolio (which is what I do).

What I have chosen to do is go with the Vanguard Growth Portfolio which is 75/25 stocks to bonds. I have 2 kids age 5 and 7. Today I have around $100k in both combined. I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table). That decision will depend on market events moving up to that time. I project my funds will pay for 100% of all in costs for a State school here in PA. If I have to wait 1-3 years to flip the allocation I can. So the bottom line is I have decided on a moderate allocation and then will flip it to very conservative (maybe cash) when the time comes.
Stay the course!
rkhusky
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Re: 529 Allocation

Post by rkhusky »

If you plan to pay for your children's college expenses no matter what happens in the market, you can just use your retirement AA for the 529.

If the children are only going to get what's in the 529, you should be more conservative as they get closer to college, similar to the age-based allocations. (Unless you've super-funded the 529 with 2x or more what you expect college to cost)
rkhusky
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Re: 529 Allocation

Post by rkhusky »

HMSVictory wrote: Wed May 18, 2022 5:48 am I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table).
Hopefully the market doesn't crash by 50%+ in their freshman year. That's why I like gradual changes, rather than step functions.
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HMSVictory
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Re: 529 Allocation

Post by HMSVictory »

rkhusky wrote: Wed May 18, 2022 7:33 am
HMSVictory wrote: Wed May 18, 2022 5:48 am I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table).
Hopefully the market doesn't crash by 50%+ in their freshman year. That's why I like gradual changes, rather than step functions.
Yes this is a low probability event... but it can happen. I would have 3 years for it to recover partially and 7 years for the youngest.

Since my AA is 75/25 I'd be looking at a 38% drawdown or around $-100k hit to the 529.

We will still be working at that point and would have to direct cash flow to offset this downturn as my investment AA is 90/10. It will be more critical when my youngest enters college and we are retired. I will have enough between the 529 plan and my bond/cash allocation to cash flow it. Like the 4% rule for retirement planning my college planning is not set in stone and I reserve the right to adjust it due to market conditions. If the 529s are fully funded and I have no need for risk I will dial them back earlier. YTD my 529 plans are -14% so its not a deal breaker if this were to happen before I adjust the AA.
Stay the course!
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Drew31
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Re: 529 Allocation

Post by Drew31 »

markjk wrote: Wed May 18, 2022 4:46 am We have two 529 as well.

100% equities for a 529 could be tricky. The reason is you have a relatively short withdrawal timeframe. Assuming a 4 year degree, you'd hopefully deplete the money within 4 years. That doesn't give you a lot of time to make up for a bad year or two in equities at the wrong time. It's different from retirement where you most likely pull out a much smaller percentage annually compared to a 529 and continue pulling for possibly decades.

I understand what you are saying about moving the money around from your 13 yo to your 2 yo if it securities drop. It certainly could work but there are so many variables. I don't think I'd do it. I would just treat them as different accounts with a different timeframe and manage it that way. If you want to go 100% equities with the 2 yo account, that seems reasonable but you'll have to watch it in 10 - 12 years and hopefully move the money around at the right time to not take a hit. I'm not saying what you are proposing is wrong, I just don't think I'd personally do it. I personally like the target date funds that have a glide path towards a probable college entry date. It automates the process (gets more conservative as the date approaches) and keeps me from messing around with it.

For me, the goal with a 529 is to earn a decent return but not hit a home run. I'm not willing to risk the downside swinging for home runs with a 529. Again, this is due to the short withdrawal timeframe. I know others view it differently.
Thanks - Agree on the window for the 100% equities if I look at the one account in isolation. Where I start getting myself in different thought streams is when I begin thinking from the perspective of the younger child and not thinking about them differently. The way my mind is approaching it is I have 1 college portfolio with a 20 horizon...yes, I may be pause or take down some of that within the 5-9 year window, but with a 20 year horizon, why wouldn't I be aggressive? Maybe not 100%...but 70/30 seems somewhat conservative. (Which is also odd since my retirement AA is 75/25 but I have a longer horizon, but that's a whole other subject)
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Drew31
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Re: 529 Allocation

Post by Drew31 »

HMSVictory wrote: Wed May 18, 2022 5:48 am There are two ways to go at this.

The first is to include the 529 in your overall allocation. The second option is to treat the 529 as its own portfolio (which is what I do).

What I have chosen to do is go with the Vanguard Growth Portfolio which is 75/25 stocks to bonds. I have 2 kids age 5 and 7. Today I have around $100k in both combined. I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table). That decision will depend on market events moving up to that time. I project my funds will pay for 100% of all in costs for a State school here in PA. If I have to wait 1-3 years to flip the allocation I can. So the bottom line is I have decided on a moderate allocation and then will flip it to very conservative (maybe cash) when the time comes.
rkhusky wrote: Wed May 18, 2022 7:31 am If you plan to pay for your children's college expenses no matter what happens in the market, you can just use your retirement AA for the 529.

If the children are only going to get what's in the 529, you should be more conservative as they get closer to college, similar to the age-based allocations. (Unless you've super-funded the 529 with 2x or more what you expect college to cost)
You both brought up the idea of including the 529 in total AA, which mentally, I struggle with. I sort of get it conceptually (I'm one who does not have a dedicated EF but includes it within the overall portfolio). So I get the idea of "1 bucket of money", but guess I'm viewing college of more so of a spending goal like saving for a new car or something where I keep it separate.

I'd love to be able to pay for 100% of their education, but (1) I'm prioritizing our retirement savings first, thus the $5k cap in the 529 to capture tax savings (2) A lot will depend on what they choose to do and how much cost sharing we decide on.
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HMSVictory
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Re: 529 Allocation

Post by HMSVictory »

Drew31 wrote: Wed May 18, 2022 9:01 am
HMSVictory wrote: Wed May 18, 2022 5:48 am There are two ways to go at this.

The first is to include the 529 in your overall allocation. The second option is to treat the 529 as its own portfolio (which is what I do).

What I have chosen to do is go with the Vanguard Growth Portfolio which is 75/25 stocks to bonds. I have 2 kids age 5 and 7. Today I have around $100k in both combined. I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table). That decision will depend on market events moving up to that time. I project my funds will pay for 100% of all in costs for a State school here in PA. If I have to wait 1-3 years to flip the allocation I can. So the bottom line is I have decided on a moderate allocation and then will flip it to very conservative (maybe cash) when the time comes.
rkhusky wrote: Wed May 18, 2022 7:31 am If you plan to pay for your children's college expenses no matter what happens in the market, you can just use your retirement AA for the 529.

If the children are only going to get what's in the 529, you should be more conservative as they get closer to college, similar to the age-based allocations. (Unless you've super-funded the 529 with 2x or more what you expect college to cost)
You both brought up the idea of including the 529 in total AA, which mentally, I struggle with. I sort of get it conceptually (I'm one who does not have a dedicated EF but includes it within the overall portfolio). So I get the idea of "1 bucket of money", but guess I'm viewing college of more so of a spending goal like saving for a new car or something where I keep it separate.

I'd love to be able to pay for 100% of their education, but (1) I'm prioritizing our retirement savings first, thus the $5k cap in the 529 to capture tax savings (2) A lot will depend on what they choose to do and how much cost sharing we decide on.
I think the one bucket of money is appropriate if you are going to use the rest of the portfolio to pay for college (then overall allocation is the key).

If the 529 plan is all you will be using to pay for college then it should stand on its own.

I will have it stand on its own and supplement with cash flow if and when necessary (so I'm going this route).
Stay the course!
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Drew31
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Re: 529 Allocation

Post by Drew31 »

HMSVictory wrote: Wed May 18, 2022 9:15 am
Drew31 wrote: Wed May 18, 2022 9:01 am
HMSVictory wrote: Wed May 18, 2022 5:48 am There are two ways to go at this.

The first is to include the 529 in your overall allocation. The second option is to treat the 529 as its own portfolio (which is what I do).

What I have chosen to do is go with the Vanguard Growth Portfolio which is 75/25 stocks to bonds. I have 2 kids age 5 and 7. Today I have around $100k in both combined. I am projecting an 8% return (who knows though) moving forward and when they each reach sophomore year in high school I will flip the investments to 25/75 or maybe even all money market (take risk off the table). That decision will depend on market events moving up to that time. I project my funds will pay for 100% of all in costs for a State school here in PA. If I have to wait 1-3 years to flip the allocation I can. So the bottom line is I have decided on a moderate allocation and then will flip it to very conservative (maybe cash) when the time comes.
rkhusky wrote: Wed May 18, 2022 7:31 am If you plan to pay for your children's college expenses no matter what happens in the market, you can just use your retirement AA for the 529.

If the children are only going to get what's in the 529, you should be more conservative as they get closer to college, similar to the age-based allocations. (Unless you've super-funded the 529 with 2x or more what you expect college to cost)
You both brought up the idea of including the 529 in total AA, which mentally, I struggle with. I sort of get it conceptually (I'm one who does not have a dedicated EF but includes it within the overall portfolio). So I get the idea of "1 bucket of money", but guess I'm viewing college of more so of a spending goal like saving for a new car or something where I keep it separate.

I'd love to be able to pay for 100% of their education, but (1) I'm prioritizing our retirement savings first, thus the $5k cap in the 529 to capture tax savings (2) A lot will depend on what they choose to do and how much cost sharing we decide on.
I think the one bucket of money is appropriate if you are going to use the rest of the portfolio to pay for college (then overall allocation is the key).

If the 529 plan is all you will be using to pay for college then it should stand on its own.

I will have it stand on its own and supplement with cash flow if and when necessary (so I'm going this route).
I don't plan to tap into the retirement portfolio for anything college related. I'd either cash flow the difference or we'd do student loans to some degree. Now - I say this with 5 years to go so who knows if I'll feel differently when the bills actually begin arriving but that is at least my approach - which seems to be the same approach you're taking as well.
dak
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Re: 529 Allocation

Post by dak »

Does the 529 plan have an age based portfolio option? I had 529s for both of my daughters and we elected to use the California ScholarShare 529 and invested all funds into the age based portfolios - these get more and more "cash like" as the kids get closer to college. This worked out well as all of the transitions happened automatically.

Probably left some money on the table when compared to a more aggressive investment strategy, but that is only known in retrospect. What I do know is that when the funds were needed they were available and funding college became a non-issue. (Unlike many of our peers that elected to cash flow college or hoped for large amounts of financial aid that did not materialize, only to end up taking out loans instead. :oops: )
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Lee_WSP
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Re: 529 Allocation

Post by Lee_WSP »

I don't have a great suggestion for a 529 because it's rather unique in that it's 1) technically someone else's money & "savings goal" and 2) there's a fairly firm end date, and 3) if it's not needed you can change beneficiaries or pay the taxes.

As such, I believe a TDF is a perfectly fine option which will remove most of the decision making on your part. It's what I would do to KISS.
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Drew31
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Re: 529 Allocation

Post by Drew31 »

dak wrote: Wed May 18, 2022 12:31 pm Does the 529 plan have an age based portfolio option? I had 529s for both of my daughters and we elected to use the California ScholarShare 529 and invested all funds into the age based portfolios - these get more and more "cash like" as the kids get closer to college. This worked out well as all of the transitions happened automatically.

Probably left some money on the table when compared to a more aggressive investment strategy, but that is only known in retrospect. What I do know is that when the funds were needed they were available and funding college became a non-issue. (Unlike many of our peers that elected to cash flow college or hoped for large amounts of financial aid that did not materialize, only to end up taking out loans instead. :oops: )
Lee_WSP wrote: Wed May 18, 2022 12:43 pm I don't have a great suggestion for a 529 because it's rather unique in that it's 1) technically someone else's money & "savings goal" and 2) there's a fairly firm end date, and 3) if it's not needed you can change beneficiaries or pay the taxes.

As such, I believe a TDF is a perfectly fine option which will remove most of the decision making on your part. It's what I would do to KISS.
They do have age based…I’m like 99% sure. But my thinking is I’d base that on age of youngest even though I may use it based on the oldest.
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