Asset Allocation for College Savings

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btax80
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Asset Allocation for College Savings

Post by btax80 »

Friends,
For retirement savings, I have a Personal Investment Plan (PIP) in place that I am comfortable with.

Separate from my PIP, I also plan to pay for college tuition for my two kids (currently 4 and 6). For this money that I intend to start using in approximately 12 years I am struggling to decide what I want the asset allocation to be. I'm thinking of using I-Bonds and TIPS, with perhaps a small allocation to stocks.

A penny for your thoughts.
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KlangFool
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Re: Asset Allocation for College Savings

Post by KlangFool »

OP,

Why do you need to save for college education?

A) How do you know that in 10+ years, you can afford to pay for the college education?

B) If your saving rate is low, you cannot afford to pay for the college education anyhow.

C) If your saving rate is high, why do you need to save for the college education? You do not need to pay for the college education in one lump sum. Your annual savings is big enough to pay for the college education every year.

D) Many of my income peers assume that they can pay for the college education. Then, they are permanently unemployed or under-employed in their 40s and 50s.

E) Your kids can borrow money for their college education. You cannot borrow for your retirement. It does not make sense to pay for your kids' college education and then burden your kids with your retirement.

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KlangFool
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Re: Asset Allocation for College Savings

Post by KlangFool »

OP,

A) I was unemployed for more than 1 year when my son started college.

B) My daughter started college the following year.

C) And, me and my spouse had 4 cataract eye surgeries.

D) I paid for my son and my daughter college education because

i) My portfolio was 1 million.

ii) My unemployment only lasted 1 year and I was not forced to retire early.

KlangFool
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surtu
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Re: Asset Allocation for College Savings

Post by surtu »

OP, have a look at the wiki description of glide paths for 529 plans. Even if you choose not to use a 529 plan, the recommended asset allocations are a good starting point. Something in the ball park of 75% equities for the ages of your kids.
MDivision
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Re: Asset Allocation for College Savings

Post by MDivision »

100% total stock in a 529.

OP it matters what the goals are. Do you need all the money at age 18? What about grad school? What about yourself or spouse or grandkids?

This not like retirement money so we feel we can afford to be aggressive. If the market tanks, we will cash flow. If money is left unspent then worst case we withdraw with a penalty.

An ibond is a relatively terrible use of funds at this age, in our opinion, because it doesn’t protect you from college cost inflation.
Pdxnative
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Re: Asset Allocation for College Savings

Post by Pdxnative »

You’ll get a range of answers here. You need to consider the differing circumstances of those offering advice. Some can afford to cash flow college without the savings. Some are using college savings vehicles for future generations. Those people can afford to lose big.

Others save because they won’t be able to cash flow college. Those people can’t afford to take big risks because it will limit the choices or ability of their kids to attend college.

If you’re in the latter group, I’d do as suggested above: look at the allocations and glide paths used by various 529 plans that correspond to expected enrollment dates. You can simulate those in your own college savings. If you want to replace the bond component with I bonds that’s fine.

I know people who had kids in or entering college in 2008 and in March 2020. I can tell you from experience those who were more conservative as college approached, as most glide paths are, were sleeping better at night.
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Re: Asset Allocation for College Savings

Post by KlangFool »

Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

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Re: Asset Allocation for College Savings

Post by Pdxnative »

KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
There are plenty of people who are on track with their retirement savings, are able to save for college, and don’t expect to be able to cash flow the full cost of college. That’s why they save.
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vineviz
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Re: Asset Allocation for College Savings

Post by vineviz »

surtu wrote: Sun Aug 14, 2022 12:24 pm OP, have a look at the wiki description of glide paths for 529 plans. Even if you choose not to use a 529 plan, the recommended asset allocations are a good starting point. Something in the ball park of 75% equities for the ages of your kids.
+1

An alternative for the bond component would be Invesco Bulletshares or iShares iBonds target maturity ETFs, either investment grade or high-yield.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
KlangFool
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Re: Asset Allocation for College Savings

Post by KlangFool »

Pdxnative wrote: Sun Aug 14, 2022 2:18 pm
KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
There are plenty of people who are on track with their retirement savings, are able to save for college, and don’t expect to be able to cash flow the full cost of college. That’s why they save.
Pdxnative,

Those are the folks that assume they can be fully employed continuously until retirement age. For many of them, that assumption turned out to be false.

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the_wiki
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Re: Asset Allocation for College Savings

Post by the_wiki »

If you aren't sure where to start, you can look at the 529 target date funds and see what they are doing.

https://www.blackrock.com/us/individual ... nt-options

BlackRock does 82% stock for a 2035 date

https://investor.vanguard.com/accounts- ... portfolios

Vanguard does 75% stock for 2034

https://www.capitalgroup.com/advisor/in ... fund/ccfax

American Funds does about 70% Stock for 2036


You can also take a look at all the dates to get an idea of how they glide to higher bond allocations as you approach enrollment time.
Pdxnative
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Re: Asset Allocation for College Savings

Post by Pdxnative »

KlangFool wrote: Sun Aug 14, 2022 2:45 pm
Pdxnative wrote: Sun Aug 14, 2022 2:18 pm
KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
There are plenty of people who are on track with their retirement savings, are able to save for college, and don’t expect to be able to cash flow the full cost of college. That’s why they save.
Pdxnative,

Those are the folks that assume they can be fully employed continuously until retirement age. For many of them, that assumption turned out to be false.

KlangFool
I have seen your argument many times here that people should be financially independent before saving or paying for college. I disagree. Most people save for college and pay for college before they are FI.

But the OP’s question wasn’t whether they should save for college.
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Re: Asset Allocation for College Savings

Post by KlangFool »

Pdxnative wrote: Sun Aug 14, 2022 3:00 pm
KlangFool wrote: Sun Aug 14, 2022 2:45 pm
Pdxnative wrote: Sun Aug 14, 2022 2:18 pm
KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
There are plenty of people who are on track with their retirement savings, are able to save for college, and don’t expect to be able to cash flow the full cost of college. That’s why they save.
Pdxnative,

Those are the folks that assume they can be fully employed continuously until retirement age. For many of them, that assumption turned out to be false.

KlangFool
I have seen your argument many times here that people should be financially independent before saving or paying for college. I disagree. Most people save for college and pay for college before they are FI.

But the OP’s question wasn’t whether they should save for college.
Pdxnative,

"I have seen your argument many times here that people should be financially independent before saving or paying for college. I disagree. "

You can disagree. But, it does not change the fact that if someone pays for the college education before they are financially independent, they run the risk of burdening their kids with their retirement.

The kids can borrow for the college education. The parent cannot borrow for their retirement.

"Most people save for college and pay for college before they are FI."

Isn't that a clear indication that it is the wrong thing to do? Most people are in financial trouble and they tend to make the wrong financial decision.

"But the OP’s question wasn’t whether they should save for college."

If OP cannot afford to pay for the college education, there is no reason to save for the college education. OP needs to make sure that first.

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Zeno
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Re: Asset Allocation for College Savings

Post by Zeno »

the_wiki wrote: Sun Aug 14, 2022 2:56 pm If you aren't sure where to start, you can look at the 529 target date funds and see what they are doing.

https://www.blackrock.com/us/individual ... nt-options

BlackRock does 82% stock for a 2035 date

https://investor.vanguard.com/accounts- ... portfolios

Vanguard does 75% stock for 2034

https://www.capitalgroup.com/advisor/in ... fund/ccfax

American Funds does about 70% Stock for 2036


You can also take a look at all the dates to get an idea of how they glide to higher bond allocations as you approach enrollment time.
+1
Last edited by Zeno on Sun Aug 14, 2022 5:41 pm, edited 1 time in total.
ShadowCat
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Re: Asset Allocation for College Savings

Post by ShadowCat »

I have a 1.5 year old, we are 100% equities in the 529 for now. My plan was to sometime between age 10 and 15 switch from 100% equities to a target date fund within his 529 account.

I say "sometime between age 10 and 15" because my plan will be to switch at the earliest possible moment between those ages, provided that the account has not lost value. I figure if I give myself five years then even if the market tanked right at age 10 then I will still have multiple years to recover before having to switch away from 100% equities.
ShadowCat
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Re: Asset Allocation for College Savings

Post by ShadowCat »

KlangFool wrote: Sun Aug 14, 2022 2:45 pm
Pdxnative wrote: Sun Aug 14, 2022 2:18 pm
KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
There are plenty of people who are on track with their retirement savings, are able to save for college, and don’t expect to be able to cash flow the full cost of college. That’s why they save.
Pdxnative,

Those are the folks that assume they can be fully employed continuously until retirement age. For many of them, that assumption turned out to be false.

KlangFool
I won't disagree with you, but in certain cultures (such as mine) the children are expected to assist their parents with retirement. Ensuring that your children don't graduate with debt by saving more in a 529 account then becomes beneficial for you as your children will be better able to assist your retirement expenditures.

I know that line of thinking is extremely bizarre to western investors who don't want to "burden" their children like that, and I don't want to derail the topic into culture. Just pointing out for your argument that for some cultures/investors saving for college will indeed help with retirement and thus it is extremely logical to split your savings into both retirement and college savings even if not financially independent.
KlangFool
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Re: Asset Allocation for College Savings

Post by KlangFool »

ShadowCat wrote: Sun Aug 14, 2022 5:14 pm
I won't disagree with you, but in certain cultures (such as mine) the children are expected to assist their parents with retirement. Ensuring that your children don't graduate with debt by saving more in a 529 account then becomes beneficial for you as your children will be better able to assist your retirement expenditures.
ShadowCat,

Even in that culture, making sure that the parent does not overspend on college education is very important. Given that most folks do not max up their tax-advantaged accounts, they would be making after-tax contribution to the 529.

"Ensuring that your children don't graduate with debt by saving more in a 529 account"

That works a lot better by contributing to the tax-advantaged account. It keeps more money in the parent's pocket. Hence, ensuring the parents are more likely to have the money to pay for the college education.

KlangFool

P.S.: Many of my children's college mates are either unemployed or under-employed after graduation.
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Flyer24
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Re: Asset Allocation for College Savings

Post by Flyer24 »

The points have been made about who is paying for college. The thread is getting derailed. Let’s focus on the OP’s questions. The member intends to save for college.
Invictus002
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Re: Asset Allocation for College Savings

Post by Invictus002 »

btax80 wrote: Sun Aug 14, 2022 12:00 pm Friends,
For retirement savings, I have a Personal Investment Plan (PIP) in place that I am comfortable with.

Separate from my PIP, I also plan to pay for college tuition for my two kids (currently 4 and 6). For this money that I intend to start using in approximately 12 years I am struggling to decide what I want the asset allocation to be. I'm thinking of using I-Bonds and TIPS, with perhaps a small allocation to stocks.

A penny for your thoughts.
Also look into prepaid tuition plans, if your kids are very young as diversification.

Keep in the back of your mind, with the way some things are, in 10-15 years, there is a chance that college might be free or reduced!
PersonalFinanceJam
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Re: Asset Allocation for College Savings

Post by PersonalFinanceJam »

btax80 wrote: Sun Aug 14, 2022 12:00 pm Friends,
For retirement savings, I have a Personal Investment Plan (PIP) in place that I am comfortable with.

Separate from my PIP, I also plan to pay for college tuition for my two kids (currently 4 and 6). For this money that I intend to start using in approximately 12 years I am struggling to decide what I want the asset allocation to be. I'm thinking of using I-Bonds and TIPS, with perhaps a small allocation to stocks.

A penny for your thoughts.
My $0.02 - twice what you asked for, for free!

I will admit my situation is not 100% typical because I didn't find my partner until later in life and my son will be born in a few months. I will be almost 60 by the time he enters college (should that be what he chooses) and retired for some time before then. Depending on how things play out that may be almost 10 years or it might only be a few years before.

Fortunately both myself and my spouse were diligent savers before we met. Our current plan is to mostly forgo a separate 529. We currently fund 2 back door Roth's, 1 mega backdoor Roth fully, 1 mega back door Roth partially, 10K/year in Series I bonds, about 10K/year in taxable (VTI/VXUS). All of this is managed as 1 portfolio with a single asset allocation. Given I will have unrestricted access to all of my retirement accounts by the time college rolls around we will have a lot of flexibility in this setup for withdrawals.

When my BIL and I sat down to look at his portfolio and college for his 2 kids (3 and new born) we came to a similar conclusion as above. Both he and his wife work in education with access to 403b/457 (Roth available for both) plus Roth IRA and well funded pensions. As such it didn't seem to make sense to fund a 529 for education.

It sounds like you may have done some of your own research so I encourage you to look at all of the account types you have available to you and the rules around them, plus the rules around other options such as the deductibility of savings bond interest or college. I'm a big fan of thinking about Roth IRA's as part of the college funding options. I'm also of the opinion when determining that a separate 529 may not be warranted to run everything as 1 portfolio and determining which account makes the most sense to pull from.

Good luck!
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btax80
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Re: Asset Allocation for College Savings

Post by btax80 »

Thanks to all for the wide range of opinions for me to consider. I enjoyed the discussions and appreciate the suggestions!
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HappyPappy
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Re: Asset Allocation for College Savings

Post by HappyPappy »

KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
You’re going to have to explain that statement in a way that doesn’t resemble something the Delphic oracle might say.


OP, our kids are about the same age. Retirement is on track. We started 529 plans when the kids were babies and our asset allocations mimic those in the glide path accounts.

First we decided what percentage of in-state, in dorm tuition we wanted to pay. Then we made the usual assumptions about inflation and investment returns, and lastly we figured out what lump sum we needed to dump into the 529 plan at the establishment of the plan in order for it to grow enough to meet our need. It’s a fairly conservative allocation overall. There’s just not a lot of time for to ride out bad market performance.
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Re: Asset Allocation for College Savings

Post by KlangFool »

HappyPappy wrote: Mon Aug 15, 2022 8:14 pm
KlangFool wrote: Sun Aug 14, 2022 2:11 pm
Pdxnative wrote: Sun Aug 14, 2022 1:58 pm
Others save because they won’t be able to cash flow college.
Pdxnative,

For those people, unless they have a vested pension, they cannot afford to pay for college education anyhow.

KlangFool
You’re going to have to explain that statement in a way that doesn’t resemble something the Delphic oracle might say.


OP, our kids are about the same age. Retirement is on track. We started 529 plans when the kids were babies and our asset allocations mimic those in the glide path accounts.

First we decided what percentage of in-state, in dorm tuition we wanted to pay. Then we made the usual assumptions about inflation and investment returns, and lastly we figured out what lump sum we needed to dump into the 529 plan at the establishment of the plan in order for it to grow enough to meet our need. It’s a fairly conservative allocation overall. There’s just not a lot of time for to ride out bad market performance.
HappyPappy,

1) What is your annual savings/investment?

"Retirement is on track. "

2) If you are forced to retire early in your 50s, is your retirement still on track?

"First we decided what percentage of in-state, in dorm tuition we wanted to pay."

3) What is the exact amount each year?

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bernie5151
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Re: Asset Allocation for College Savings

Post by bernie5151 »

I'm curious why more posters are not recommending using a target date 529 plan? I opened a Fidelity 529 today and am planning on a target date approach, so curious for thoughts.
Nohbdy
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Re: Asset Allocation for College Savings

Post by Nohbdy »

bernie5151 wrote: Mon Aug 15, 2022 9:12 pm I'm curious why more posters are not recommending using a target date 529 plan? I opened a Fidelity 529 today and am planning on a target date approach, so curious for thoughts.
Target date funds are great for a hands off approach.

Mirroring the approximate allocation of the target date fund using low cost index funds might be a little cheaper & slightly more complicated.
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Re: Asset Allocation for College Savings

Post by vineviz »

bernie5151 wrote: Mon Aug 15, 2022 9:12 pm I'm curious why more posters are not recommending using a target date 529 plan? I opened a Fidelity 529 today and am planning on a target date approach, so curious for thoughts.
I’m not sure. A desire to pursue excess complication in exchange for marginal cost savings?

Some 529 plans lack low cost target enrollment options, but there it’s true, but most plans have them. And DIY allotters typically cost themselves a lot more than the expenses of a target fund.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Asset Allocation for College Savings

Post by Wiggums »

btax80 wrote: Mon Aug 15, 2022 11:10 am Thanks to all for the wide range of opinions for me to consider. I enjoyed the discussions and appreciate the suggestions!
Our AA for college savings was 70/30. You have 12 years for child #1 plus 4 years (or more) in college. I feel like that’s a long enough timeframe to start with stocks at this point.
"I started with nothing and I still have most of it left."
Gauntlet
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Re: Asset Allocation for College Savings

Post by Gauntlet »

OP, I suggest incorporating college savings into your overall portfolio. This is what I have done. I have a 60/40 portfolio. The portfolio includes 401ks, IRAs, taxable, and 529s. It is all one big pot of money. When it comes time to pay for college I plan to use the money in the 529 first, then taxable account if needed.
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Re: Asset Allocation for College Savings

Post by HappyPappy »

bernie5151 wrote: Mon Aug 15, 2022 9:12 pm I'm curious why more posters are not recommending using a target date 529 plan? I opened a Fidelity 529 today and am planning on a target date approach, so curious for thoughts.
That’s what we do, but we do the allocations ourselves. The expense ratios on our 529 plan’s target date funds are high relative to the fees for the other funds that track a couple popular ETFs.

I’ll have to double check that statement’s accuracy about the fees and post back with specific dollar amounts and assumptions of market performance and inflation.
solarcub
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Re: Asset Allocation for College Savings

Post by solarcub »

The question is, what happens if you lose a chunk of the money in the 529? If you would just pull money from other sources, and you are ok with that, then you should have a high amount of stocks. If this would totally devastate you, then you should not. But with your kids as young as they are, you will probably miss a lot of gains if you don't put it in stocks, so it will be that much harder to save enough for college.

Odds are, 100% stocks will be the best choice, but most people won't do that, and I'm not doing that either. I'm at 50/50, but my kids are in high school.
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