Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

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npboglehead
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Joined: Mon Oct 19, 2020 10:59 am

Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by npboglehead »

Ho Bogleheads,

The general strategy for financial planning is to have separate goal-oriented “accounts” with its own asset allocation. But I have been using one big Vanguard brokerage account for my taxable retirement as well as kids’s college education contributions (kids 8 and 10 years away from entering college). The reason I am doing this is to retain flexibility regarding how to use the money (retirement or college education). Note that I am not considering College Savings 529 plan because I don’t want to restrict that money for college-only use. There are few scenarios if I stay this route:
  • Happy path: If we are able to fund the college with cash flow or the child gets a scholarship, then we can use the common account and accumulated capital for our own retirement. This helps me avoid a separate account with its own asset allocation that glides down to very conservative ratio that will not be used for college at all. I would rather keep that money for our retirement at a right asset allocation.
  • Not-So-Happy path: If we can’t fund the college using cash flow then we can take it out from the common account. By the time my kids enter college our asset allocation will be around 60% Stocks and 40% Bonds. We can have two situations in this case:
    • Not-So-Happy but still a better path: If the economy is up then we can sell the stocks and fund the college.
    • Worst case scenario: If the economy is down then we can use the bonds portion to fund the college for initial years and then dig into the stock portion. Hopefully, market starts to recover by then.
Do you see any issue with this approach? Do you have better approaches? Appreciate any help with this.

Best,
np
HomeStretch
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by HomeStretch »

Your approach is fine. Does your state offer a tax deduction for 529 contributions? If yes, it might be worthwhile to contribute enough to the plan to receive the state benefit if the plan has good low-cost fund choices.

I cash flowed college expenses but did contribute $10k some years to the state 529 plan to receive a tax benefit of ~$650-$700/year plus a couple 529 plan bonuses along the way (i.e., receive $50 when contributing $100 to the plan).
lazynovice
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by lazynovice »

I think the plan is good.

One behavioral “error” I see frequently on Bogleheads and one I have made and am about to make again is that having left over money in a 529 leads a parent to say “Sure I can help with graduate school” and “Do I want to pay taxes on the leftover money or should I just leave it there for my future grandkids?” If I had not had the separate 529, I am not sure whether those decisions would have been made the same way. Not truly an error but a way that bucketing leads to different decisions.

I have also mentioned before, I invested 529s more conservatively than I would have invested the money in a general account. I definitely left money on the table doing that.

But there are great benefits to a 529 that should not be ignored. There are many here who have done very well using the accounts as intended.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
pwrdwnsys
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Location: Ohio

Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by pwrdwnsys »

If your bond allocation is large enough, you could do both.

Say you expect Junior to matriculate in 2030 and estimate $20k/year tuition, half due in August and half in December. As you add bonds, fill up a bucket with 10-year Treasuries maturing in August 2030. Once you get $10k (par) of those, move on to November 2030's, etc.
Sandwich
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by Sandwich »

npboglehead wrote: Mon Jun 14, 2021 11:44 am .... I have been using one big Vanguard brokerage account for my taxable retirement as well as kids’s college education contributions (kids 8 and 10 years away from entering college). The reason I am doing this is to retain flexibility regarding how to use the money (retirement or college education). Note that I am not considering College Savings 529 plan because I don’t want to restrict that money for college-only use....

Do you see any issue with this approach? Do you have better approaches? Appreciate any help with this.
My impression is that retirement savings such as IRAs, 401Ks may not be included in some financial aid calculations (depending on college) whereas 529 accounts maybe considered a countable asset ... so in this case $ 50,000 in a 401K would be better than $ 50,000 in a 529. Also, as you mentioned, better to have the flexibility with how funds can be used.

Does your state have a 529 contribution benefit ?

Do other family members have 529 accounts established for your children ?

If I could revisit the decision my family members made back decades ago, I would encourage placing funds in ROTH IRAs or converting to ROTH IRAs to retain the flexibility. We live in a state that does not have a 529 contribution benefit.

Good luck !
runner540
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by runner540 »

On behalf of other taxpayers, thank you for exposing all those gains to taxes! :sharebeer

The issue I see is tracking appropriate asset allocation for different time frames.

I do not understand why so many on this site will dance on a pinhead to get a $200 credit card bonus, but won’t use 529s after maxing other tax-advantaged accounts.
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vanbogle59
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by vanbogle59 »

Sandwich wrote: Mon Jun 14, 2021 12:12 pm My impression is that retirement savings such as IRAs, 401Ks may not be included in some financial aid calculations (depending on college) whereas 529 accounts maybe considered a countable asset ... so in this case $ 50,000 in a 401K would be better than $ 50,000 in a 529. Also, as you mentioned, better to have the flexibility with how funds can be used.
It's been quite a few years since I made this decision, but mine was to keep all savings in 401K/IRA, for precisely these reasons.

We were very lucky.
All 3 kids chose state schools, did well academically, got scholarships and worked.
It wasn't that terribly expensive. Mostly room and board. In fact, if they had chosen to live at home, they literally would have made money during their undergrad years.

I have friends who lived through VERY different experiences. One has a 34 yr old child, married with 2 kids, still carrying 70K in student loans.

Caveat emptor and good luck.
delamer
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings

Post by delamer »

The separate accounts really aren’t relevant.

You are willing to take the risk of a more stock-heavy overall portfolio, because you are betting that you’ll be able to cash flow college (or your kids will get scholarships). Since you understand the risk of that approach, it’s fine.

Whether it’s in one account or multiple accounts doesn’t matter.

529 plans may provide a state tax deduction for contributions and you don’t pay taxes on withdrawals of account earnings for education purposes. And there are provisions for penalty-free (although not tax free) withdrawals if your kids receive scholarships. They should be part of any college savings plan for almost all families, especially if there are multiple children.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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vanbogle59
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings

Post by vanbogle59 »

delamer wrote: Mon Jun 14, 2021 1:04 pm The separate accounts really aren’t relevant.

You are willing to take the risk of a more stock-heavy overall portfolio, because you are betting that you’ll be able to cash flow college (or your kids will get scholarships). Since you understand the risk of that approach, it’s fine.

Whether it’s in one account or multiple accounts doesn’t matter.

529 plans may provide a state tax deduction for contributions and you don’t pay taxes on withdrawals of account earnings for education purposes. And there are provisions for penalty-free (although not tax free) withdrawals if your kids receive scholarships. They should be part of any college savings plan for almost all families, especially if there are multiple children.
"the risk of a more stock-heavy overall portfolio" - that seems completely irrelevant to choice of 529 or not
"529 plans may provide a state tax deduction" - not in FL
"there are provisions for penalty-free (although not tax free) withdrawals if your kids receive scholarships" - all of which are worse than just never having put that money in there in the first place.

Don't get me wrong. I think these things can be great. My sister used them to great advantage for her children.
But, they have drawbacks.

"They should be part of any college savings plan for almost all families, especially if there are multiple children." - We will just have to agree to disagree.
alex_686
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by alex_686 »

npboglehead wrote: Mon Jun 14, 2021 11:44 am The general strategy for financial planning is to have separate goal-oriented “accounts” with its own asset allocation. But I have been using one big Vanguard brokerage account for my taxable retirement as well as kids’s college education contributions (kids 8 and 10 years away from entering college). The reason I am doing this is to retain flexibility regarding how to use the money (retirement or college education).
I see no problem with this.

In fact, one should be discouraged from using separate goal-oriented accounts. This cognitive error is called "mental accounting". You can always create a better portfolio - higher return or lower risk - by integrating your goals. You only have one portfolio. Money is fungible.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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vanbogle59
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Re: Separate goal-oriented “accounts” vs one combined Vanguard account for both retirement & college savings.

Post by vanbogle59 »

alex_686 wrote: Mon Jun 14, 2021 1:24 pm
npboglehead wrote: Mon Jun 14, 2021 11:44 am The general strategy for financial planning is to have separate goal-oriented “accounts” with its own asset allocation. But I have been using one big Vanguard brokerage account for my taxable retirement as well as kids’s college education contributions (kids 8 and 10 years away from entering college). The reason I am doing this is to retain flexibility regarding how to use the money (retirement or college education).
I see no problem with this.

In fact, one should be discouraged from using separate goal-oriented accounts. This cognitive error is called "mental accounting". You can always create a better portfolio - higher return or lower risk - by integrating your goals. You only have one portfolio. Money is fungible.
This is a good point for those with options. I was lucky to fall into that category. So, I agree. This applied to me.
But, if the mental accounting becomes real, IOW, you have to pay the tuition, then I could see how the separate accounts might be a big help in the real world.
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