What contributions % to 529s for four children of different ages for optimal growth

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masrepus
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What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

What is the optimal percentage to contribute to 529s for four different children to maximize the growth? Is it better to allocate the most money to the younger children thinking that there is more time for compounding as well as more in stocks compared to bonds? And lean more to cash flow for the older children or beef up the taxable?

I fully max my 401k, mega backdoor Roth, mine and wife's backdoor Roth (she is home maker), and HSA. Yearly is around 250k depending on bonus, with 50-200k in RSUs each year. Only recently did I hit this point, where the RSUs are leaving me extra that I can split between the 529's and small taxable at 40k. Paying on a 250k mortgage at 2.99% 30 year, just refi'd, paying extra to match a 15 year payoff, so I could divert the extra payments to 529s if needed. I could pull from the Roth contributions if needed also. It is difficult for me to estimate the cash I would have to contribute since this is mostly from RSU's which could change in value. For more details on portfolio, I have a portfolio review at viewtopic.php?f=1&t=319920#p5364892.

Between the four kids so far I have just over 100k divided as below. All are in the NY 529 Saves plan in age-based vanguard portfolios, that are the typical four fund (Total US Stock and Bond, International Stock and Bond). ER is 0.13%. The plans are a little conservative, but I am fine with them since this is for the education. I am assuming I need 100k per kid if they attend in-state public schools - though no idea if I will even come close to that value, likely 50k per kid. I assume I will not be receiving any financial assistance unless the kids earn some scholarships. There is no tax-deduction for the 529 in the state I live, I chose NY529 for the low ER and Vanguard choices.

* 15 years old, 60k, 37.5% Stock / 62.5% Bonds
* 13, 25k, 50% / 50%
* 10, 12k, 75% / 25%
* 8, 12K, 87.5% / 12.5%

When I first funded the 529s I was thinking the oldest would be going to school first so I put a larger percentage there. I didn't really think of the tax-free growth being better for the younger children.

Thanks in advance, Mas
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FiveK
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by FiveK »

masrepus wrote: Sat Aug 01, 2020 1:32 pm When I first funded the 529s I was thinking the oldest would be going to school first so I put a larger percentage there. I didn't really think of the tax-free growth being better for the younger children.
Unless you put everything into fixed return investments, anything you choose now will likely have a different result than you project.

Are you looking to have the same amount in today's dollars for each child's 529 when that child goes through college, or something different?
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masrepus
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

FiveK wrote: Sat Aug 01, 2020 3:57 pm
masrepus wrote: Sat Aug 01, 2020 1:32 pm When I first funded the 529s I was thinking the oldest would be going to school first so I put a larger percentage there. I didn't really think of the tax-free growth being better for the younger children.
Unless you put everything into fixed return investments, anything you choose now will likely have a different result than you project.

Are you looking to have the same amount in today's dollars for each child's 529 when that child goes through college, or something different?
The best use of the money to get the best growth. Equal amounts in each account isn't the most important. Let's assume I have 50k to invest. I have the choice between four 529s and a taxable account. This is for college so it seems right to use the 529s to get the tax deferred growth and tax savings. That leads me to think I would want it invested longer to be more advantageous. More risk, but hopefully the most growth.

But in the short-term I need to fund the first kids college. Seems like taxable and fixed would be the best here since the money in the 529 is in bonds.

At the end of it all, I have to pay for four kid's college fees. The question is how to make the best use of the money I have along the way. Does that mean invested in a longer-term 529? That's what I am wrestling with - the best way to get the most out of the money I have, given it is for college, and I have 529s available at different durations.
Broken Man 1999
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by Broken Man 1999 »

When I first started our four grandchildrens 529plans at Vanguard I chose the aggressive age based option.

When Mr Market went south, I added some TSM in addition to their age based
contributions option. Now that Mr Market has calmed down, I cut out the extra TSM contributions.

I figured throwing in some !ower priced TSM would pay off long term.

Long story short, Vanguard will continue to invest the same way as was my original selection, with their eye on the plans.

Since the children all faced different start times, and different investments time, I can true the 529 plans up if there is great difference in the accounts when they are college age.

I will not intentionally allow the plans to become unfair to any of the four.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
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masrepus
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

Broken Man 1999 wrote: Sat Aug 01, 2020 5:29 pm I will not intentionally allow the plans to become unfair to any of the four.

Broken Man 1999
I don't think unfair comes into this question. Each kid will have their college paid for as best as possible. At least hopefully. I think I am thinking I am going to have to true up the first kids fees no matter what. In three years I don't see much growth happening in the 529. So I cash flow the first kids college and invest today in the younger kids 529s. Hopefully that gets more money in those 529s. But at the end they are all still paid off.

Unless I have no clue with this thinking, which is totally valid.
gowest
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by gowest »

masrepus wrote: Sat Aug 01, 2020 1:32 pm What is the optimal percentage to contribute to 529s for four different children to maximize the growth? Is it better to allocate the most money to the younger children thinking that there is more time for compounding as well as more in stocks compared to bonds? And lean more to cash flow for the older children or beef up the taxable?

...

When I first funded the 529s I was thinking the oldest would be going to school first so I put a larger percentage there. I didn't really think of the tax-free growth being better for the younger children.
Because there is no state tax deduction (as you noted), we can remove that from the equation. Also, you're allowed to shift the funds among your kids' various 529 plans, so no worries there.

So the remaining trigger point is the core benefit of 529 plans: the tax-free growth and tax-free withdrawals for qualified expenses. Because of that, I'd lean toward funding the youngest child's 529 plan, who has the longest time horizon and thus the greatest chance of growth and thus the greatest chance of reaping the tax benefits of 529 plans.

But that may not be the best route in your circumstances. Your youngest child's 529 plan has the greatest chance for growth because the asset allocation (AA) is 87.5% stocks / 12/5% bonds. But that plan also has the greatest risk (because of the stock-heavy AA), which means it could bomb rather than grow. Or it could end up somewhere in the middle.

So at the end of the day, when you're deciding which 529 plan(s) to fund, it seems to me that the real question is "what do I want the AA to be" for the newly contributed money?

If you'll need access to the money sooner rather than later (say, for college expenses for your 15 year old), you'd want to put the money in the oldest child's 529 plan--the one with the lowest risk. But if that's what's best for you, I wouldn't put it in a 529 at all. The reason: the oldest child's 529 plan has the shortest time horizon, and thus has the lowest chance of giving you the core benefit of 529 plans (the tax advantages), but it has all the burden of a 529 plan (requiring that the withdrawals be for qualified expenses).

If you're not sure what to do, I don't think it's a bad idea at all to just split it equally among all the plans and call it a day. As time goes by and you see how things are working out, you can always shift the money among the various 529 plans, thus shifting the AA.

There are lots of opinions and good advice here about 529 plans, and there are a variety of approaches people take. This is just my input, and I hope it's helpful.

-gowest
Broken Man 1999
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by Broken Man 1999 »

masrepus wrote: Sat Aug 01, 2020 5:48 pm
Broken Man 1999 wrote: Sat Aug 01, 2020 5:29 pm I will not intentionally allow the plans to become unfair to any of the four.

Broken Man 1999
I don't think unfair comes into this question. Each kid will have their college paid for as best as possible. At least hopefully. I think I am thinking I am going to have to true up the first kids fees no matter what. In three years I don't see much growth happening in the 529. So I cash flow the first kids college and invest today in the younger kids 529s. Hopefully that gets more money in those 529s. But at the end they are all still paid off.

Unless I have no clue with this thinking, which is totally valid.
That will work fine. My desire to address the plans as I do is because I might not be around to cash flow the younger two grandchildrens plans. So I want to be proactive whilst I'm alive.

In my case, the grandchildren 529 plans were started at the same age for each. But, there will be differences because of length of time and differences in returns.

DDs will have funds to true up, if I am not around. It is the best I can do.

Each grandchild prepaid tuition plans give them the same number of credit hours, all different amounts paid.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
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dogagility
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by dogagility »

masrepus wrote: Sat Aug 01, 2020 1:32 pm Thanks in advance, Mas
Hi Mas,
Good on you for investing in their future!

You didn't ask this or mention it in your post, but the first parameter I would try to estimate is the expected cost of attendance. There are many variables in play here, but suffice it to say that a common metric is to expect to pay the cost of attendance at the in-state flagship university. Each college/university has a Net Price Calculator on their website (google it). Doesn't take long and is fairly accurate for most situations. Then add say 4% inflation/year.

FYI, a typical in-state flagship cost of attendance is around 100K. This can range from about 70 - 140K depending upon the state.

With those numbers in hand, I suggest you mirror the age-based fund asset allocation suggestions by Vanguard. If you can cash-flow expenses, then you could be more aggressive with your investments to capture tax free growth... especially for the younger kiddos.
:beer
DA
All children spill milk. Learn to smile and wipe it up. -- A Farmer's Wife
aristotelian
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by aristotelian »

It really doesn't matter since you can move money back and forth between beneficiaries.
Topic Author
masrepus
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

gowest wrote: Sat Aug 01, 2020 5:50 pm If you're not sure what to do, I don't think it's a bad idea at all to just split it equally among all the plans and call it a day. As time goes by and you see how things are working out, you can always shift the money among the various 529 plans, thus shifting the AA.

There are lots of opinions and good advice here about 529 plans, and there are a variety of approaches people take. This is just my input, and I hope it's helpful.

-gowest
Thanks gowest. Agreed, I am starting to think I am overthinking this. HaHa. You have listed many of the progressions I went through. There is still some flexibility since the 529s are transferrable as well as splitting the difference between the 529s and taxable.
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masrepus
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

dogagility wrote: Sun Aug 02, 2020 6:09 am
masrepus wrote: Sat Aug 01, 2020 1:32 pm Thanks in advance, Mas
Hi Mas,
Good on you for investing in their future!

You didn't ask this or mention it in your post, but the first parameter I would try to estimate is the expected cost of attendance. There are many variables in play here, but suffice it to say that a common metric is to expect to pay the cost of attendance at the in-state flagship university. Each college/university has a Net Price Calculator on their website (google it). Doesn't take long and is fairly accurate for most situations. Then add say 4% inflation/year.

FYI, a typical in-state flagship cost of attendance is around 100K. This can range from about 70 - 140K depending upon the state.

With those numbers in hand, I suggest you mirror the age-based fund asset allocation suggestions by Vanguard. If you can cash-flow expenses, then you could be more aggressive with your investments to capture tax free growth... especially for the younger kiddos.
:beer
DA
Thank you dogagility. I like the name! Yes, I threw a ballpark 100k as the costs. It is a really about 96k, but the 100k gets a start on the inflation increase and an easier number to remember. They are currently invested in the aggressive age-based options. In the NY 529 the ER is 0.13% for these. There are also individual options where I could build the same 4 fund portfolio and it comes around to the same ER.
Topic Author
masrepus
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by masrepus »

aristotelian wrote: Sun Aug 02, 2020 8:08 am It really doesn't matter since you can move money back and forth between beneficiaries.
Thanks aristotelian. Agreed. Same as the other posts from others. There is more flexibility here than I thought, so I can continue on the path I am on.
catchup
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Re: What contributions % to 529s for four children of different ages for optimal growth

Post by catchup »

Here’s how I have done it. It may help you as well.

Think of your 529s as one bucket.
Dont use age based portfolios.

Money that you will need in less than 2 years should be in cash, short term bonds. Cash like instruments.

Money that you will need in greater than 10 years should be invested according to your preferred investment allocations, such as 70% equities/ 30% bonds, broadly diversified.

Money needed in 6 years: 50 % cash/ 50 % diversified investment allocation.

4 years: 75% cash, 25% investment portfolio.

8 years: 75% investment portfolio, 25% cash.

This is what David Swensen recommends with respect to general investment strategy, approaching retirement age, etc. we have applied it to 529s as well.

I assume 0% growth and 0% tuition inflation for simplicity.

Each year (2x per year, actually) I reassess according to children’s age (distance from each year of college) current tuition, and portfolio value. I rebalance or contribute accordingly. Doesn’t matter whose account you put it in since it is fungible and transferable.

If you get State tax advantage, you need to maximize tax savings by distributing contributions.

Sounds complicated, but just takes a little calculation a couple times per year.
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