Help with 529 plan for the next 6-10 years

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aida2003
Posts: 298
Joined: Mon Feb 25, 2008 1:44 pm

Help with 529 plan for the next 6-10 years

Post by aida2003 » Mon Dec 25, 2017 9:57 pm

Hello and happy holidays to y'all ;-).

Today I sat down to record the track record of our 529 plan in an Excel file. I never really looked at the statements and it was time to save them for my files after 8.5 years of investing in it. Talk about the negligence LOL and also talk about the luck considering that I opened this account as soon as the market bottomed out. Had I known the market would be THAT strong, I would have invested much more (OTOH, we invested in taxable accounts too). We didn't invest a lot in it because we've always been 'on the fence' about the 529 plans. We think that some of college education will be paid for from the available cash flow (if we work) and/or from taxable accounts if the kids go to college. At this point, we do not think about grand children or great-grand children who might inherit this 529 account. Our goal is to launch our children first.
Right now the account is in our 9 year old's name, but it can easily switched to the oldest (12 y.o.).

Looking at the current balance today I noticed that for the first time the earnings exceeded our total contributions ($33.5k vs. $33k = $66.5k in total), so I think it would be a shame to lose all of those earnings to the meltdown whenever it comes.

Moreover, I've never pondered our risk profile for this account or what it should be going forward. I recall that after reading opinions/advice about 529 plans on the internet at the time I set our contributions to be allocated as follows:
- 60% Vanguard Total Stock Inst'l Index Fund,
- 25% Vanguard Total Int'l Stock Index Fund,
- 15% Vanguard Total Bond Index Fund.

Today its AA is:
- 74% in total stock
- 17% in int'l stocks
- 9% in bonds.

Given that I'm allowed to reallocate twice a year, I think it would be time to do that, but that's the thing: How or how much to allocate and to where?

Note: we have only been adding $300/year for the last 3-4 years, so I would not count on contributions to 'fix' the AA.
Another note: NC 529 plan offers an FDIC insured MMA or a CD, but it's only 1.51% today so I'm not positive if I should allocate some of the current balance to it or if it's too conservative. Thoughts?

How would you approach to solve this situation?
I honestly don't know what an AA glide-path I should consider knowing that we'll start withdrawing from the plan within 6-10 years.

If the rest of our financial situation has any impact on the above, I would mention that we're doing fine (fingers crossed that it continues this way). Quite a few personal finance bloggers would retire having the size of our portfolios but we we won't plan to do it for a few years at least due to the healthcare situation in this country plus we are not against an extra cushion because the market will drop one day.

Thank you in advance.

Grt2bOutdoors
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Location: New York

Re: Help with 529 plan for the next 6-10 years

Post by Grt2bOutdoors » Mon Dec 25, 2017 10:24 pm

Consider what an age based allocation plan may use at age 9 or 12. It would not be unreasonable to be allocated 70/30 or 60/40 at age 9-12. So, to answer your question, trimming back on equity would be considered to be prudent.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

letsgobobby
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Re: Help with 529 plan for the next 6-10 years

Post by letsgobobby » Tue Dec 26, 2017 12:44 am

It’s a very tough question. Our 529 AA is 100% stocks and our kids are 8 and 10, just a shade younger than yours. I was tentatively planning to drop to 60/40 around 4 years out (age 14) but haven’t decided what to do in the interim. Maybe drop 10% per year?

The obvious problem is the rate of tuition inflation is higher than the rate of overall inflation; and bond yields are very low. Colorado has a stable value fund which pays around 2.29%, and you could transfer some of your assets there.

Grt2bOutdoors
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Location: New York

Re: Help with 529 plan for the next 6-10 years

Post by Grt2bOutdoors » Tue Dec 26, 2017 5:00 am

letsgobobby wrote:
Tue Dec 26, 2017 12:44 am
It’s a very tough question. Our 529 AA is 100% stocks and our kids are 8 and 10, just a shade younger than yours. I was tentatively planning to drop to 60/40 around 4 years out (age 14) but haven’t decided what to do in the interim. Maybe drop 10% per year?

The obvious problem is the rate of tuition inflation is higher than the rate of overall inflation; and bond yields are very low. Colorado has a stable value fund which pays around 2.29%, and you could transfer some of your assets there.
Such a broad stroke about tuition inflation- depends on the school cost starting point and what school the child will ultimately attend. It’s been rehashed here a thousand times, but all trees are not going to grow to sky forever nor will all schools survive. Ultimately at some point they will need to rationalize or face extinction.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

SCV_Lawyer
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Joined: Sun Nov 20, 2016 3:24 pm

Re: Help with 529 plan for the next 6-10 years

Post by SCV_Lawyer » Tue Dec 26, 2017 1:38 pm

We also have to kids at 9 and 12. Our 529 plans are at Utah ESP. FWIW, I designed the custom glidepath below:

Image

aida2003
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Joined: Mon Feb 25, 2008 1:44 pm

Re: Help with 529 plan for the next 6-10 years

Post by aida2003 » Fri Jan 12, 2018 1:54 pm

Thank you for the responses. I like your, SCV-Lawyer, glide path...a very cool graph. I'll printed out to start planning.

I agree with Grt2bOutdoors that the costs at colleges will need to normalize in the future somehow. But OTOH, I don't think they plan to do anytime soon especially considering that the stock market keeps growing to the sky and I'm sure they assume that parents are invested in it. E.g. while I was busy at work and had no time to revisit our 529 plan, it grew another $2k...isn't it insane!? I could wait another year and have $24-30K extra but that's unreasonable to expect (or is it? Bitcoin has done even better!)

flybynite
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Re: Help with 529 plan for the next 6-10 years

Post by flybynite » Fri Jan 12, 2018 7:46 pm

aida2003 wrote:
Fri Jan 12, 2018 1:54 pm
Thank you for the responses. I like your, SCV-Lawyer, glide path...a very cool graph. I'll printed out to start planning.

I agree with Grt2bOutdoors that the costs at colleges will need to normalize in the future somehow. But OTOH, I don't think they plan to do anytime soon especially considering that the stock market keeps growing to the sky and I'm sure they assume that parents are invested in it. E.g. while I was busy at work and had no time to revisit our 529 plan, it grew another $2k...isn't it insane!? I could wait another year and have $24-30K extra but that's unreasonable to expect (or is it? Bitcoin has done even better!)
FYI - we had a friend whose daughter started college in 2009. Stock market had been going great through early 2000's, they never paid much attention to how the 529 money was invested. Ended up taking out a lot of loans due to large stock allocation. This will happen to someone again, don't let it be you! Costs at colleges are only growing slightly higher than inflation, don't chase them with an unsafe asset allocation as unlike retirement, it's a specific 4 (if you're lucky) years and out typically (not a lot of time for recovery from large market drops).

Generally for my kids at 4 years out I'm moved to mostly bonds (14 year old is 10% stocks). 9 year old is 50% stocks, 6 year old is 100% equity, somewhat similar to the other glide path posted. Good luck!

inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Help with 529 plan for the next 6-10 years

Post by inbox788 » Sun Jan 14, 2018 2:10 am

I've taken a different tact, with 529 being a tax-advantaged account where post tax dollars are put in, but earnings are tax-free, I wanted higher potential earning working for me, so I chose 100% equities. I have sufficient flexibility in 401k/tIRA, Roth and taxable accounts so I can increase my bond allocation to compensate for being overweight equities in 529. In a way, Roth is equivalent, so whether you have 50/50 in both accounts (Roth/529) or 100 equities in one and 100 bonds in another is not really different, except if you face losses. Shifting between tax deferred and taxable does require different adjustments. My plan has been to keep 100% equities in 529, but add bonds into one of the other accounts. I just haven't figured out which one makes the most sense yet, but was leaning towards tax efficient placement of bonds in tax deferred.

I hadn't thought about the consequences of having a very high capital gains growth and low percentage cost basis with the potential for a crash. I don't know if there's some mitigation to a major correction and giving back some of those gains. If it's so much loss that you have losses, you may not want to cash out, since there's no or limited tax benefit. I'll have to contemplate the best course if that's a concern a couple of years before kids start college, or simply play the odds, let it ride and not worry about it. Chances are overall good, especially if kept long enough to even out.

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