Child is HS senior: Should college fund have any equities?

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LMK5
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Child is HS senior: Should college fund have any equities?

Post by LMK5 » Mon Oct 08, 2018 2:14 pm

In my college fund, I've got enough in Vanguard Total Bond and Prime MM to send my child to a state university for 4 years. Fortunately (or unfortunately?), she may gain entry into a top private college at 2.5 times the cost. With college only a year away, should I be selling equities in the college fund and putting the money into fixed income and cash in order to plan for the possibility of paying for private school? What would a smart AA be at this point and should any of her college money be in equities at this time?

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Re: Child is HS senior: Should college fund have any equities?

Post by vineviz » Mon Oct 08, 2018 2:23 pm

LMK5 wrote:
Mon Oct 08, 2018 2:14 pm
In my college fund, I've got enough in Vanguard Total Bond and Prime MM to send my child to a state university for 4 years. Fortunately (or unfortunately?), she may gain entry into a top private college at 2.5 times the cost. With college only a year away, should I be selling equities in the college fund and putting the money into fixed income and cash in order to plan for the possibility of paying for private school? What would a smart AA be at this point and should any of her college money be in equities at this time?
I think I'd aim to have no more than 20% in equities for a high school senior. Most age-based options seem to be somewhere between 0% stocks and 20% stocks.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Elysium
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Re: Child is HS senior: Should college fund have any equities?

Post by Elysium » Mon Oct 08, 2018 2:25 pm

I would sell equities and move to cash. In fact, I just did last month as posted about it here, and my child is only a sophomore in HS. The question I asked myself is which one I would regret more, giving up potential gains if market keeps going up or losing money saved for college and not having it recovered on time for college expenses. In my case the answer was in favor of not losing what I already made.

delamer
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Re: Child is HS senior: Should college fund have any equities?

Post by delamer » Mon Oct 08, 2018 2:25 pm

We were totally out of stocks in our kids’ college fund by the time they were seniors in high school.

Just not worth the risk.

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Re: Child is HS senior: Should college fund have any equities?

Post by livesoft » Mon Oct 08, 2018 2:29 pm

You won't spend all the 529 plan the first year and college should take at least 4 to 5 years. I see no reason not to have equities in the 529 plan.

As for private college, maybe you are going to pay for it and just cash flow it or you have a taxable account already stuffed with equities. That worked for us because the stock market took off while we were paying for private college. There were a few years in a row where the unrealized capital gains were enough to pay the entire 4-year cost. Equities can do that for you if you give them time.
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LMK5
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Re: Child is HS senior: Should college fund have any equities?

Post by LMK5 » Mon Oct 08, 2018 2:50 pm

Elysium wrote:
Mon Oct 08, 2018 2:25 pm
I would sell equities and move to cash. In fact, I just did last month as posted about it here, and my child is only a sophomore in HS. The question I asked myself is which one I would regret more, giving up potential gains if market keeps going up or losing money saved for college and not having it recovered on time for college expenses. In my case the answer was in favor of not losing what I already made.
What I forgot to mention is that the equity positions are in a taxable account and have unrealized long term capital gains. Importantly, about 60% of the value of the equity positions are unrealized gains. In other words, a 25k exchange from equities to fixed income or cash would result in a tax bill of about 3k. Does this change anyone's take on the situation?

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Re: Child is HS senior: Should college fund have any equities?

Post by delamer » Mon Oct 08, 2018 2:55 pm

LMK5 wrote:
Mon Oct 08, 2018 2:50 pm
Elysium wrote:
Mon Oct 08, 2018 2:25 pm
I would sell equities and move to cash. In fact, I just did last month as posted about it here, and my child is only a sophomore in HS. The question I asked myself is which one I would regret more, giving up potential gains if market keeps going up or losing money saved for college and not having it recovered on time for college expenses. In my case the answer was in favor of not losing what I already made.
What I forgot to mention is that the equity positions are in a taxable account and have unrealized long term capital gains. Importantly, about 60% of the value of the equity positions are unrealized gains. In other words, a 25k exchange from equities to fixed income or cash would result in a tax bill of about 3k. Does this change anyone's take on the situation?
There will be tax consequences no matter when you sell.

With good luck, the positions will go up in value and the gains will be even larger if you sell later.

With bad luck, the positions would fall in value and the gains will be lower. But surely that is not what you want.

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Re: Child is HS senior: Should college fund have any equities?

Post by an_asker » Mon Oct 08, 2018 3:06 pm

LMK5 wrote:
Mon Oct 08, 2018 2:50 pm
Elysium wrote:
Mon Oct 08, 2018 2:25 pm
I would sell equities and move to cash. In fact, I just did last month as posted about it here, and my child is only a sophomore in HS. The question I asked myself is which one I would regret more, giving up potential gains if market keeps going up or losing money saved for college and not having it recovered on time for college expenses. In my case the answer was in favor of not losing what I already made.
What I forgot to mention is that the equity positions are in a taxable account and have unrealized long term capital gains. Importantly, about 60% of the value of the equity positions are unrealized gains. In other words, a 25k exchange from equities to fixed income or cash would result in a tax bill of about 3k. Does this change anyone's take on the situation?
I agree with the poster who responded saying at most 20% in equities. Look at it this way: would you rather sell 25k and pay taxes of 3k or sell for 15k and pay taxes of 2K?

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Re: Child is HS senior: Should college fund have any equities?

Post by Elysium » Mon Oct 08, 2018 5:26 pm

Here is how I would look at it.

We have two examples in the last 20 years of severe drawndowns for equities. 2000-02 and 2008-09.

In the first example it took 6 years for US TSM to recover to break even, in other words from 2000-06 you were underwater on your original principal.

See here: https://www.portfoliovisualizer.com/bac ... arket1=100

In the second example it took 4 years to recover to break even, from 2008-12 you were underwater.

See here: https://www.portfoliovisualizer.com/bac ... arket1=100

We have a problem with recency here even on the Bogleheads. People look at last reccession and think history will repeat, but it seldom does exactly same way. 2000-02 recession was longer and it took longer to recover, 2008-09 recovery was swift and upside was strong. We have 1971-74 recession before that which we tend to forget. That lasted longer.

Yes, it is true college will last 4 years or more. If there is a recession when your child starts college, are you sure you will recover the money in 4 years? Based on what we know it is unlikely.

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Re: Child is HS senior: Should college fund have any equities?

Post by sometimesinvestor » Mon Oct 08, 2018 8:53 pm

My advice4 would be different if it were 2010 but the current market has been up for 8 years so not having much in stocks seems prudent. I agree with 20% or even less. a sMALL % (I.E NOT 0)IS is probably not awful since if you have amassed enough too pay for 4 years of a state school you will probably have good enough credit to borrow if the stock market plunges.,

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Re: Child is HS senior: Should college fund have any equities?

Post by goodenyou » Mon Oct 08, 2018 9:03 pm

I watched one of my employees panic in 2008-2009 when her son entered college and they had to draw on their 529. That made a significant impact on me. When I exceeded the funds needed for all 4 years, I converted all to FDIC. I sleep well. I have left some in equities for my hs sophomore since there is extra in the accounts of the 2 older college-aged children.
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delamer
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Re: Child is HS senior: Should college fund have any equities?

Post by delamer » Mon Oct 08, 2018 9:06 pm

goodenyou wrote:
Mon Oct 08, 2018 9:03 pm
I watched one of my employees panic in 2008-2009 when their son entered college and they had to draw on their 529. That made a significant impact on me. When I exceeded the funds needed for all 4 years, I converted all to FDIC. I sleep well. I have left some in equities for my hs sophomore since there is extra in the accounts of the 2 older college-aged children.
Yup.

Our oldest started college in 2009.

If you were counting on your stocks or a home equity loan to pay for college back then, you had a rude awakening.

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Re: Child is HS senior: Should college fund have any equities?

Post by LMK5 » Tue Oct 09, 2018 7:57 am

Thanks for all the replies. It looks like I should be more conservative. After all, I've heard the adage that "any monies needed in the next 5 years should not be in stocks." Now, does Total Bond's duration make it a less-than-desirable holding tank, or should the money go to a short term bond fund or money market fund?

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Re: Child is HS senior: Should college fund have any equities?

Post by vineviz » Tue Oct 09, 2018 8:29 am

LMK5 wrote:
Tue Oct 09, 2018 7:57 am
Thanks for all the replies. It looks like I should be more conservative. After all, I've heard the adage that "any monies needed in the next 5 years should not be in stocks." Now, does Total Bond's duration make it a less-than-desirable holding tank, or should the money go to a short term bond fund or money market fund?

Personally, I'd probably put half in total bond and half in short term bonds (possibly even a money market fund) then sell from total bond first as payments come due.

That would gradually shorten the duration of the portfolio as Child moves through the college years.
"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: Child is HS senior: Should college fund have any equities?

Post by goodenyou » Tue Oct 09, 2018 8:31 am

LMK5 wrote:
Tue Oct 09, 2018 7:57 am
Thanks for all the replies. It looks like I should be more conservative. After all, I've heard the adage that "any monies needed in the next 5 years should not be in stocks." Now, does Total Bond's duration make it a less-than-desirable holding tank, or should the money go to a short term bond fund or money market fund?
Bond funds go down too. I am watching that right before me on a daily basis. Bonds are not a no-risk asset class. The minimal benefits of a bond fund in the short investment horizon is not worth the declining NAV in a rising interest rate in my opinion.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: Child is HS senior: Should college fund have any equities?

Post by tenkuky » Tue Oct 09, 2018 9:00 am

So helpful and timely.
Will also start rotating out even though we have a couple of years to go.
Better safe than sorry.

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Re: Child is HS senior: Should college fund have any equities?

Post by MathWizard » Tue Oct 09, 2018 11:53 am

LMK5 wrote:
Mon Oct 08, 2018 2:14 pm
In my college fund, I've got enough in Vanguard Total Bond and Prime MM to send my child to a state university for 4 years. Fortunately (or unfortunately?), she may gain entry into a top private college at 2.5 times the cost. With college only a year away, should I be selling equities in the college fund and putting the money into fixed income and cash in order to plan for the possibility of paying for private school? What would a smart AA be at this point and should any of her college money be in equities at this time?
Move out of equities.

I put about 3K into a 529 in Dec 2007 for my son entering college in fall 2008 mainly for the state income tax break.
100% equities. Not my best move.

I also had $20K that I had cashed out of stocks in 2006 sitting in savings for college.
Much better move. (So really I was only about 15% equities 85% cash).

I cash-flowed college for both my sons, letting the 529 ride until my the last semester for my youngest, using it in Jan 2017.
It had about $200 in gains over about 9 years, so not a loss, but nothing to write home about.

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Re: Child is HS senior: Should college fund have any equities?

Post by inbox788 » Tue Oct 09, 2018 1:40 pm

I'm 100% equities. My plan is to hedge using my taxable and tax-deferred retirement plans, so I intend to be almost 100% in equities in the 529, except for about half a year's tuition and expenses. In later high school, I will be shifting the equivalent of 50-75% of the 529 to bonds in my tIRA/401k. If the market rises, more to spend from the 529. If it falls, I will make it up with taxable and use the bonds to buy back the equities in tax-deferred, but I'm hoping that won't be necessary. There may be TLH opportunity here. In either case, as the 529 funds are consumed, I will shift back to equities in the tax-deferred. I'm not sure it makes a big difference, but it seems to make sense to me (until someone winds up showing me it turns out the same and there is a simpler way).

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Re: Child is HS senior: Should college fund have any equities?

Post by balbrec2 » Tue Oct 09, 2018 1:53 pm

I've always subscribed to the theory that any money you know you'll
need with the next 5 years should not be in equities or even long term bonds.
Especially in today's environment, I would stick to short bonds, money market
or CD's. Also as an aside, never sacrifice your retirement money in favor of college
funding. You can borrow for college if you have to. You can't borrow your way through retirement.

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Re: Child is HS senior: Should college fund have any equities?

Post by dm200 » Tue Oct 09, 2018 2:09 pm

balbrec2 wrote:
Tue Oct 09, 2018 1:53 pm
I've always subscribed to the theory that any money you know you'll
need with the next 5 years should not be in equities or even long term bonds.
Especially in today's environment, I would stick to short bonds, money market
or CD's. Also as an aside, never sacrifice your retirement money in favor of college
funding
. You can borrow for college if you have to. You can't borrow your way through retirement.
Yes - I agree...

Also, there are "scholarships" for college - but not for your retirement ;)

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Re: Child is HS senior: Should college fund have any equities?

Post by Glockenspiel » Tue Oct 09, 2018 2:09 pm

I'd probably have half of what you would have if you retired. If your retirement plan is to have 50% stocks, I'd probably have 25% for a high school senior. They won't spend all the money right away, so if the market downturns tomorrow, you'd still have 4 years for it to rebound.

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Re: Child is HS senior: Should college fund have any equities?

Post by feh » Tue Oct 09, 2018 4:08 pm

vineviz wrote:
Mon Oct 08, 2018 2:23 pm
LMK5 wrote:
Mon Oct 08, 2018 2:14 pm
In my college fund, I've got enough in Vanguard Total Bond and Prime MM to send my child to a state university for 4 years. Fortunately (or unfortunately?), she may gain entry into a top private college at 2.5 times the cost. With college only a year away, should I be selling equities in the college fund and putting the money into fixed income and cash in order to plan for the possibility of paying for private school? What would a smart AA be at this point and should any of her college money be in equities at this time?
I think I'd aim to have no more than 20% in equities for a high school senior. Most age-based options seem to be somewhere between 0% stocks and 20% stocks.
+1

And I don't see why private vs public is a consideration. All that matters is when you need the money.

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Re: Child is HS senior: Should college fund have any equities?

Post by downshiftme » Tue Oct 09, 2018 5:58 pm

Conventional advice here is that the 4 years a HS Senior will have to draw college funds is too short to take much (or even any) equity risk.

My personal experience is leaving it all in equity funds was a lifesaver when college tuition rose very significantly between freshman and senior year. Had I gone all to cash equivalent I would have run out of funds in the college accounts. Instead I've got a little left over. Now, this was only a possible plan for me because I'm dead set on funding college and would have covered any shortfall from other assets. This meant I could consider the entire portfolio invested for a longer time horizon than just college and would have re-purposed funds as needed, including delaying retirement if necessary.

I like considering college funding as a component of a larger plan, not as a separate portfolio that must stand on its own.

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Re: Child is HS senior: Should college fund have any equities?

Post by ram » Tue Oct 09, 2018 7:06 pm

I have always kept 100% equities in 529 plans.
My daughter graduated from HS in 2010 ....and.....continues to be in "college" (med school). All money was 50:50 domestic: Intt going in. Coming out I withdrew whatever component was ahead in the stock market (mostly domestic stocks).

Obviously I have been lucky with the returns of the last 8-9 yrs.

The adverse effects were:
1. I am over funded in 529.
2. I got a letter from IRS apparently because I had a significant component of gains in my withdrawal. An explanation settled the issue.

If stocks had tanked I would have cash flowed the deficit. I would have bought an equivalent amount of stocks in my 401K as I sold the stocks in 529 accounts. I knew ahead of time that I had the ability to do so.

The balance will stay in 100% stocks in the future. It has an investment time frame of 20-30 yrs. If I run out of 401K money it will support me for a couple of years near the end of my lifespan. If I end up with too much in the retirement accounts it will fund college for the as yet not born next generation.
Ram

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Re: Child is HS senior: Should college fund have any equities?

Post by LMK5 » Tue Oct 09, 2018 7:26 pm

feh wrote:
Tue Oct 09, 2018 4:08 pm
vineviz wrote:
Mon Oct 08, 2018 2:23 pm
LMK5 wrote:
Mon Oct 08, 2018 2:14 pm
In my college fund, I've got enough in Vanguard Total Bond and Prime MM to send my child to a state university for 4 years. Fortunately (or unfortunately?), she may gain entry into a top private college at 2.5 times the cost. With college only a year away, should I be selling equities in the college fund and putting the money into fixed income and cash in order to plan for the possibility of paying for private school? What would a smart AA be at this point and should any of her college money be in equities at this time?
I think I'd aim to have no more than 20% in equities for a high school senior. Most age-based options seem to be somewhere between 0% stocks and 20% stocks.
+1

And I don't see why private vs public is a consideration. All that matters is when you need the money.
The reason why private vs. public school is a consideration is because I have enough to fund public school right now with low risk assets, but if my child goes to private school I don't have nearly enough in the low risk funds. I won't know whether she goes to public or private school until March, so I'm wondering if I should shift more from equities into low risk funds now in order to cover the possibility of having to pay for private school starting 9/2019.

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Re: Child is HS senior: Should college fund have any equities?

Post by Finridge » Tue Oct 09, 2018 7:53 pm

ram wrote:
Tue Oct 09, 2018 7:06 pm
I have always kept 100% equities in 529 plans.
My daughter graduated from HS in 2010 ....and.....continues to be in "college" (med school). All money was 50:50 domestic: Intt going in. Coming out I withdrew whatever component was ahead in the stock market (mostly domestic stocks).

Obviously I have been lucky with the returns of the last 8-9 yrs.

The adverse effects were:
1. I am over funded in 529.
2. I got a letter from IRS apparently because I had a significant component of gains in my withdrawal. An explanation settled the issue.

If stocks had tanked I would have cash flowed the deficit. I would have bought an equivalent amount of stocks in my 401K as I sold the stocks in 529 accounts. I knew ahead of time that I had the ability to do so.

The balance will stay in 100% stocks in the future. It has an investment time frame of 20-30 yrs. If I run out of 401K money it will support me for a couple of years near the end of my lifespan. If I end up with too much in the retirement accounts it will fund college for the as yet not born next generation.
This is the direction I am going in. All equity. But with a 70/30 split between domestic and international.

I don't view and manage the 529 as a separate portfolio, but just consider it part of my overall portfolio. If equities crash hard enough, I'll have to draw down from taxable, possibly at the bottom of a dip--that is the risk I"m taking and I'm going into this with my eyes open. At least, if I have to do this, I won't have to worry about a capital gains tax. If the market crashes, I'll be able to tax loss harvest on the sale...

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Re: Child is HS senior: Should college fund have any equities?

Post by feh » Tue Oct 09, 2018 9:32 pm

LMK5 wrote:
Tue Oct 09, 2018 7:26 pm
The reason why private vs. public school is a consideration is because I have enough to fund public school right now with low risk assets, but if my child goes to private school I don't have nearly enough in the low risk funds. I won't know whether she goes to public or private school until March, so I'm wondering if I should shift more from equities into low risk funds now in order to cover the possibility of having to pay for private school starting 9/2019.
Unfortunately, nobody knows what equities will do the next 5 months. Whether you want to take that risk or not is completely up to you.

Personally, given the tax hit, I wouldn't sell until I knew I had to.

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Re: Child is HS senior: Should college fund have any equities?

Post by goodenyou » Wed Oct 10, 2018 6:25 pm

Today is a reminder of why I went from equities to FDIC in my 529 for my college-aged students. This decline may not be a trend, but I am glad I locked in those gains with no risk of dipping below the requirement to fund all 4 years. It will probably go up, but I won't have regrets that I may have missed out on potential gains.
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Re: Child is HS senior: Should college fund have any equities?

Post by Elysium » Wed Oct 10, 2018 6:40 pm

goodenyou wrote:
Wed Oct 10, 2018 6:25 pm
Today is a reminder of why I went from equities to FDIC in my 529 for my college-aged students. This decline may not be a trend, but I am glad I locked in those gains with no risk of dipping below the requirement to fund all 4 years. It will probably go up, but I won't have regrets that I may have missed out on potential gains.
+1 I sold a month back and moved to FDIC cash even though I have another 3 years before needing the money. I'd rather give up the potential gains than get stuck in a trend like today that takes more than 3 years to recover back to the high point.

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