College tuition- DIY or pay a professional?

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guavapure
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College tuition- DIY or pay a professional?

Post by guavapure » Wed May 27, 2020 7:38 pm

Maybe the answer is obvious based on the forum I’m in, but curious to opinions. I’m trying to decide on an investment strategy for some inherited funds. We have $250,000 in cash and I can’t decide if I should invest it myself or hire a professional to help me manage it. I have 20 years experience managing my own 401k and IRA monies (about $350,000 total) where the time horizon is 15-18 years out and I’m heavily weighted in stocks over bonds. This $250,000 will be for college tuition and expenses needed in 6 years for a duration of 5 years (back to back tuitions). I of course want to grow the money as much as possible, but the priority is capital preservation. I was thinking of doing a lazy man’s strategy of starting out with 50% BND and 50% VTI (it’s a Vanguard account) and rebalancing each year more towards bonds. You think that would do the trick, or would I be better served paying for a professional strategy? Ideally I’d be happy to gain around 5% per year (who wouldn’t - ha ha). I’m not sure how much an advisor would cost, but I’d be open to doing it if the thinking was that the expense would more than pay for itself.

Thanks for any insight you can provide!

mortfree
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Re: College tuition- DIY or pay a professional?

Post by mortfree » Wed May 27, 2020 7:42 pm

In most cases if you hire a professional to manage this money... the only managing they might be doing is taking your money and finding ways to make money off of you and take away from your growth potential.

Be careful

Pdxnative
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Re: College tuition- DIY or pay a professional?

Post by Pdxnative » Wed May 27, 2020 8:34 pm

You can do this yourself. Take a look at some of the 529 age-based funds that match up with your kids’ ages. You can get a sense of the approach to allocation and glide path based on those, then simplify it for yourself using VTI, BND, and probably a money market fund or CD/bank account. Adjust allocation for your risk tolerance keeping in mind, as you correctly mention, that your time horizon for this is limited. Lots of parents with kids in HS were happily overweighted in stocks 4 months ago. 2 months ago they weren’t so happy.

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Soul.in.Progress
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Re: College tuition- DIY or pay a professional?

Post by Soul.in.Progress » Wed May 27, 2020 8:43 pm

I recommend that you invest it yourself. From your post it seems you’re not a newbie to investing. Your approach seems reasonable to me. You can also use a target date fund or a Vanguard 529 glide path fund as others have mentioned. We’ve been very happy with the gains in our 529s, and no taxes on withdrawals.

If you use an advisor, then you’d very likely be helping to pay for his or her child’s college tuition in addition to your own. Do you want that?
Start by doing what is necessary; | then do what is possible; | and suddenly you are doing the impossible. | -- Francis of Assisi

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FiveK
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Re: College tuition- DIY or pay a professional?

Post by FiveK » Thu May 28, 2020 12:49 am

guavapure wrote:
Wed May 27, 2020 7:38 pm
I was thinking of doing a lazy man’s strategy of starting out with 50% BND and 50% VTI (it’s a Vanguard account) and rebalancing each year more towards bonds. You think that would do the trick, or would I be better served paying for a professional strategy?
Your strategy is reasonable. No way to know it will perform until after the fact.

If you can find an advisor willing to give you a money-back guarantee if the advisor's portfolio does not outperform your strategy, then going with that advisor is worth considering.

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guavapure
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Re: College tuition- DIY or pay a professional?

Post by guavapure » Thu May 28, 2020 7:51 am

Thanks all for the advice and encouragement!

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Ben Mathew
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Re: College tuition- DIY or pay a professional?

Post by Ben Mathew » Thu May 28, 2020 6:35 pm

You can manage the money yourself. Not sure how much a professional would bring to it.

WHERE TO PLACE IT

If you are maxing out your retirement accounts, you might want to move the money into a 529 plan if it isn't in one already. This allows the money to grow tax free and it can be withdrawn tax free as long as it's used for educational expenses. So it's similar to a Roth account when it comes to taxes (contributions are not tax deductible, but growth and withdrawal is tax free). You are not restricted to using your own state's plan. Another state may offer lower cost investment options. Many people choose out-of-state plans for that reason. But if your state offers a state income tax break on contributions you'll have to weigh that against investment costs.

If you are not maxing out your retirement accounts, but do expect to max out in the future, you might want to use some of this money to max out retirement accounts now because any retirement space not used today is gone forever. You then redirect future excess savings (beyond the max that would have gone unshielded) towards college. However, based on your circumstances you describe, I would guess that you are unlikely to be in this situation.

Contributions to a 529 are considered gifts. The annual gift tax exclusion is $15,000, but you can contribute up to 5 years contributions in one shot (google "superfund 529"). So that's $15,000*5=$75,000 per parent per child. With 2 parents and 2 children, you can shield up to $75,000*4=$300,000 in one go (but no more for the next 4 years if you want to stay under the exclusion limit). So your current inheritance can go in.

If your children might be eligible for financial aid, you'll have to do some planning to optimize for that. You might want to pay off your mortgage, for example, instead of contributing to a 529.

savingforcollege.com is a good resource.

HOW TO INVEST IT

A downward gliding path is appropriate when more money is going to be contributed towards college. If there's no more money going in, stick with a fixed allocation which spreads risk out evenly across all years. Whether that fixed allocation should feature more stocks or bonds depends on how willing you are to adjust your college expenses in the face of market losses. If you know you will spend $X regardless of what happens to the market, then you should be mostly in bonds. If you are willing to be flexible and send your children to a cheaper school (or have the child take on more loans) if the market does poorly, then you can choose a higher stock percentage.

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guavapure
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Re: College tuition- DIY or pay a professional?

Post by guavapure » Sat May 30, 2020 1:57 pm

Ben Mathew - thanks so much

Yes - already maxing our 401k

I never thought of moving it to 529 - we have 529s already that are funded ok but not great 20k in one, 15k in another). We want to do cheap but good state schools (think penn state or Purdue). Am nervous that if we don’t use all the money you have to pay 10% penalty and/or taxes on it, right?

Great tips all - thanks!

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Ben Mathew
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Re: College tuition- DIY or pay a professional?

Post by Ben Mathew » Sun May 31, 2020 12:21 pm

guavapure wrote:
Sat May 30, 2020 1:57 pm
Yes - already maxing our 401k
IRAs too, if you aren't already.
guavapure wrote:
Sat May 30, 2020 1:57 pm
I never thought of moving it to 529 - we have 529s already that are funded ok but not great 20k in one, 15k in another). We want to do cheap but good state schools (think penn state or Purdue). Am nervous that if we don’t use all the money you have to pay 10% penalty and/or taxes on it, right?
Yes, there's a 10% penalty + ordinary income tax, so you don't want to overfund the 529. Any excess left over from your kids' education can be redirected to other beneficiaries. So it could be used for nieces, nephews, grandkids, etc for their education, if that's something you'd be interested in. But yes, the full $250K would be too much for only your kids' education at state schools.

bryansmile
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Re: College tuition- DIY or pay a professional?

Post by bryansmile » Sun May 31, 2020 1:43 pm

OP,
I'd max the retirement accounts first. Roth IRA contributions can be withdrawn tax free after 5 years, and its earnings tax free in several situations such as for educational purpose. I view my Roth as both a retirement account and 529 backup in case our 529 balances are not enough. Here's a more detailed explanation: https://www.schwab.com/ira/roth-ira/withdrawal-rules

Also very important, Roth IRA does not get counted in your FAFSA as assets while 529s do.

Pdxnative
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Re: College tuition- DIY or pay a professional?

Post by Pdxnative » Sun May 31, 2020 2:29 pm

bryansmile wrote:
Sun May 31, 2020 1:43 pm
...

Also very important, Roth IRA does not get counted in your FAFSA as assets while 529s do.
However, those who will need the money to pay for college, and who think they will qualify for need based aid, need to be careful here. Financial aid formulas “tax” savings at 5-6% and income as high as 40+%. By hiding savings in retirement funds, and then converting that savings into income during the first few years of college, aid-eligible parents will be reducing their financial aid significantly.

bryansmile
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Re: College tuition- DIY or pay a professional?

Post by bryansmile » Sun May 31, 2020 3:31 pm

Pdxnative wrote:
Sun May 31, 2020 2:29 pm
bryansmile wrote:
Sun May 31, 2020 1:43 pm
...

Also very important, Roth IRA does not get counted in your FAFSA as assets while 529s do.
However, those who will need the money to pay for college, and who think they will qualify for need based aid, need to be careful here. Financial aid formulas “tax” savings at 5-6% and income as high as 40+%. By hiding savings in retirement funds, and then converting that savings into income during the first few years of college, aid-eligible parents will be reducing their financial aid significantly.
Be smart, use Roth in your last year of college.

Valuethinker
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Re: College tuition- DIY or pay a professional?

Post by Valuethinker » Mon Jun 01, 2020 4:25 am

guavapure wrote:
Wed May 27, 2020 7:38 pm
Maybe the answer is obvious based on the forum I’m in, but curious to opinions. I’m trying to decide on an investment strategy for some inherited funds. We have $250,000 in cash and I can’t decide if I should invest it myself or hire a professional to help me manage it. I have 20 years experience managing my own 401k and IRA monies (about $350,000 total) where the time horizon is 15-18 years out and I’m heavily weighted in stocks over bonds. This $250,000 will be for college tuition and expenses needed in 6 years for a duration of 5 years (back to back tuitions). I of course want to grow the money as much as possible, but the priority is capital preservation. I was thinking of doing a lazy man’s strategy of starting out with 50% BND and 50% VTI (it’s a Vanguard account) and rebalancing each year more towards bonds. You think that would do the trick, or would I be better served paying for a professional strategy? Ideally I’d be happy to gain around 5% per year (who wouldn’t - ha ha). I’m not sure how much an advisor would cost, but I’d be open to doing it if the thinking was that the expense would more than pay for itself.

Thanks for any insight you can provide!
You are on it.

No professional is going to do much better than 50/50. KISS applies. Minimize costs. Uncertainty is so great that this strategy is as good as any.

You can increase the bond percentage by say 5% every year. There is a case for an Intermediate Term US Treasury bond fund - the duration will be close to the time you need the cash flow, so you will be matching asset and liabilities as to duration. Over time, you would then move bonds into a short term US Treasury bond fund (say 10% each year).

My only other wrinkle would be you could put half the bonds in a TIPS fund (so 25%). Likely to be more volatile, but if inflation is higher than the market expects (having been lower than the market expected for most of the past 30 years) then you will be protected.

But overall these are wrinkles. Your original suggestion is as good as any.

jj45
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Re: College tuition- DIY or pay a professional?

Post by jj45 » Mon Jun 01, 2020 10:03 am

Whether or not you actually put the money in a 529, you could follow one of the 529 investment plans. That way you get professional advice for free. We invested in the Colorado 529 age-based plan, which has aggressive, moderate, and conservative flavors, and invests in Vanguard Funds. The allocations are here https://www.collegeinvest.org/529-savin ... t-options/. Clicking on the portfolio name/description under the circle brings up detailed info on the portfolio including the allocation to specific Vanguard funds. It would be easy to just follow these portfolios or tweak to your liking, and then follow their glide path as the years go by. For example, at 6 years out, I would use the age 12 moderate portfolio which consists of
  • Vanguard Total Bond Market II Index Fund 43.75%
  • Vanguard Total International Bond Index Fund 18.75%
  • Vanguard Institutional Total Stock Market Index Fund 22.50%
  • Vanguard Total International Stock Index Fund 15%
Overall, the moderate option at age 12 is 37.5/62.5 Stock/Bond, while the conservative option is 12.5/87.5, and the aggressive option is 62.5/37.5. Quite a range. Presumably after 20 years of experience you have some idea of your risk tolerance to help you choose. Also interesting are the different glide paths, for ages 19+, the conservative portfolio is all money market, while the aggressive is 12.5/87.5, keeping 12.5% in stocks forever.

If you looked at a handful of states' 529 investment strategies you would have a good idea of the kind of things institutional professionals recommend. I doubt anyone you hire would suggest something outside this range, and if they did I'm not sure I would trust them. Given your investment experience, I am confident you could choose among the strategies to meet your needs.

wfrobinette
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Re: College tuition- DIY or pay a professional?

Post by wfrobinette » Mon Jun 01, 2020 10:44 am

guavapure wrote:
Wed May 27, 2020 7:38 pm
Maybe the answer is obvious based on the forum I’m in, but curious to opinions. I’m trying to decide on an investment strategy for some inherited funds. We have $250,000 in cash and I can’t decide if I should invest it myself or hire a professional to help me manage it. I have 20 years experience managing my own 401k and IRA monies (about $350,000 total) where the time horizon is 15-18 years out and I’m heavily weighted in stocks over bonds. This $250,000 will be for college tuition and expenses needed in 6 years for a duration of 5 years (back to back tuitions). I of course want to grow the money as much as possible, but the priority is capital preservation. I was thinking of doing a lazy man’s strategy of starting out with 50% BND and 50% VTI (it’s a Vanguard account) and rebalancing each year more towards bonds. You think that would do the trick, or would I be better served paying for a professional strategy? Ideally I’d be happy to gain around 5% per year (who wouldn’t - ha ha). I’m not sure how much an advisor would cost, but I’d be open to doing it if the thinking was that the expense would more than pay for itself.

Thanks for any insight you can provide!
Do it yourself. You have 6 year until 1st withdrawal and 11 until the last. I have 4 and 9 and am 100% in age based conservative which has zero stock.

Your lazy man 50/50 is actually quite aggressive with this short of duration. If capital preservation is key you should follow the conservative approach and adjust by age.

https://investor.vanguard.com/529-plan/ ... ed-options

NotWhoYouThink
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Re: College tuition- DIY or pay a professional?

Post by NotWhoYouThink » Mon Jun 01, 2020 10:56 am

The advantage of doing it yourself is lower investment costs. The advantage of paying a professional is having someone to blame if the account value drops.

My oldest graduated from high school in 2008. Fun times.

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