Glide Path Computations for College Savings

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Glide Path Computations for College Savings

Post by CrazyTexan » Sat Feb 09, 2019 1:36 pm

I have a number of kids, each with a different distance left to go to college.

Let's assume that I want to save 150k for each (assuming public, in-state university - I went to private - and it paid off - but it's just TOO expensive).

Assuming that a given AA yields 6% annually - is it reasonable to do the math on how much I need to save now for each as follows:

Final Amount = Principal * (1.06)^t?

So - for kid #1 (who goes to college in 2022), t = 3

150000 = P (1.06)^3 = P * 1.19
150000/1.19 = P
P = $126,050.42

For kid #2 (who goes to college in 2030), t = 11

150000 = P*(1.06)^11
150000= 1.89 * P
P = 150000/1.89
P = $79,365

Now, I think I've got a handle on the computation so far...

But - how do I model this computation if I imagine adjusting the asset allocation in a given kids pool of money as we get closer and closer?

Do I get a table of
[Years Left to College, AA[s/b], Average Annual Return]
1, 20/80, 1%
2, 21/79, 1.3%

And so on, and then compute it backwards?

At one year away, I need:
$150,000 = P (1 + 01)^1
P = $150000/1.01 = 148, 514

So at two years away, I need
$148,514 = P (1 + 0.013)^2
$148,514 = P(1.026)
P = $144,750

And until I'm all the way back to birth?

If that's true, I can do that math, but - I already know that
(a) It's somewhat simplistic, as I'm onlytalking about recomputing the AA every year.
(b) It assumes that I'm going to have a pre-built static mapping of

[Years Left, AA, Average Annual Return for AA] - and I know selecting an AA for a given year is ALSO a variable to be solved for...
I can eyeball it based on my risk tolerance, I *think*, so I can mostly ignore it for the purposes of this post.

- #1) Can someone help me find a good table of [Asset Allocation => (Average Last Annualized Return Rate)]?
- #2) Is there a good table for [Years away from Goal => AA] that's commonly used by folks?
- #3) How do others approach this? Surely I'm not the first one in the forum to go down this road :)

Editorial: I tell you, this prospect makes me seriously consider leaving my money in Betterment, just because their robot does some of the math for me, but -
- They don't offer a robot that's smart enough to divide my money for me based on my goals - instead they make me do the subdivision - and the math above no matter what. No free lunch, indeed!
- I've just discovered this forum. I'm determined to "stay woke" financially...

Thanks in advance

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Re: Glide Path Computations for College Savings

Post by delamer » Sat Feb 09, 2019 4:00 pm

In your initial formula, you are assuming that you are putting all the principal in savings on Day 1.

Is that what you will be doing?

Plus you don’t need, using your example, $150,000 in 3 years. You need inflation-adjusted $37,500 in 3 years, another $37,500 in 4 years, etc.

I wouldn’t assume a 6% return for money that I need in 3 to 7 years, because that would require you to be in stocks which is too risky for your time frame.

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Re: Glide Path Computations for College Savings

Post by birnhamwood » Sat Feb 09, 2019 5:05 pm

" . . . assume that I want to save 150k for each [child]"

Are you starting with $Zero? You actually need to "save" that much?

Do you really need $150K per child? According to the College Board, annual in-state Texas tuition and fees are only about $10K, and if you throw in room and board, books, transportation, supplies and other expenses, about $25K. Four years, $100,000, not $150K.

You don't mention the 529s, but for child 2, $100,000 is close to doable over 11 years with a TIAA 529 Georgia

My three grandchildren have averaged 6% there over the last 15 years.

Good luck.

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Re: Glide Path Computations for College Savings

Post by CrazyTexan » Sat Feb 09, 2019 7:06 pm

Well, in practice, I have a few hundred thousand dollars saved in taxable accounts, in addition to some savings in my 401k. I also have four kids, of various ages (3,7,13,15), and not just two.

Thus, to your question: I'm not starting from $Zero, but I have more that I need to save, before I can cover the kids' college, let alone my retirement, where I'm WAY behind.

But that leaves me with 5 distinct AAs to blend [4 kids + retirement]

My goal is to figure out a mathematical approach to the pool of money -
1) Compute an AA for each target/date
2) "Assign" a pool of money to each AA - so that each kid + the retirement pool gets their own stock/bond mix
3) Add up the total dollar figures for each of stock + bond, to result in the global mix/ratio.
4) Maintain that ration with all new contributions.

But - #2 is the genesis of my question. I want to assign as much as I need to each kid, and no more, so that I can funnel the rest into my (generally more aggressive) retirement AA...

Am I on-track with the math I originally posted? Or does someone have a better way?

P.S. On the cost of college in Texas - While I *am* a crazy Texan, I've been lured out to an expensive area of California by both love and work. I'll likely end up living here for the foreseeable future. And "even the air is more expensive out here", as they say.

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Re: Glide Path Computations for College Savings

Post by ram » Sat Feb 09, 2019 7:43 pm

My thinking was I take the investment risk not the child. I promised each child "X" and I will give them the X even if the allocated money turned out to be 0.9 X or 1.1 X depending on market conditions.

With that approach all four college accounts for you and the retirement account can be considered one big account with a single AA for the whole that you are comfortable with. That will save you a lot of calculations.

I took the path of 100% equity in the 529 accounts. As a balancing act I had more of bonds in the 401K.

Equity grew faster in the 529 accounts and the gains had no tax as they were used for education. Most of my kids college is done so my 529 accounts have dwindled considerably. As the all equity accounts dwindled I adjusted the stock: bond ratio of the new money going into 401K to maintain my desired AA.

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Re: Glide Path Computations for College Savings

Post by camillus » Sun Feb 10, 2019 4:49 am

CrazyTexan wrote:
Sat Feb 09, 2019 7:06 pm
But that leaves me with 5 distinct AAs to blend
The reality is that you have a single asset allocation. Realizing this allows you to place the components of your portfolio in the correct spot. As said above, bonds in deferred, equities in 529. For this reason, managing a single asset allocation provides superior returns.

Why does it have to be so complicated?

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Re: Glide Path Computations for College Savings

Post by KlangFool » Sun Feb 10, 2019 5:22 am

CrazyTexan wrote:
Sat Feb 09, 2019 7:06 pm
Well, in practice, I have a few hundred thousand dollars saved in taxable accounts, in addition to some savings in my 401k. I also have four kids, of various ages (3,7,13,15), and not just two.

Why do you need to save for your kids' college education?

The 150K is spread across 4 years. It is 37.5K per year. You have a few hundred thousand in your taxable account. Even if it is 100% stock, you have at least 2% dividend/distribution per year. Then, you can sell 10K to 20K of stock to cover the rest.

The ages between your kids are spread widely. They do not overlap each other when they go to college. So, you do not need to pay 2 kids' college education at the same year. It is not a big cash flow problem.

I have 500K in my taxable account. It is 100% stock. I do not need to save for my kid's college education. And, I have one AA (60/40) across my one portfolio. It is simple and not complicated.

You do not need 529 either. It may or may not be useful to you depending on your marginal tax rate.


P.S.: If you can afford to pay 600K for 4 kids' college education, your annual income and saving should be high enough for you to max out all tax-advantaged accounts plus investing in the taxable account. And, your annual taxable saving/investment should be around or more than 37.5K per year. Then, why do you need to save for college education?

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Re: Glide Path Computations for College Savings

Post by polyphasic9 » Sun Feb 10, 2019 8:00 am

I'll respond to the math portion of the question. I think your basic logic is correct for the first year, and I'd suggest simply applying it in a four-column spreadsheet like this:
Years Until College Amount Needed AA AA Return
0 150,000 AA1
1 148,515 AA2 0.010
2 146,609 AA3 0.013
3 144,300 AA4 0.016
4 141,610 AA5 0.019
5 137,485 AA5 0.030
6 133,481 AA5 0.030
....and so on

So, starting by plugging in a constant of $150,000 needed at year zero into cell B2, and constants for everything else. Enter =B2/(1+D3) into B3, and then just drag this formula down to the starting year ( ~ 18 minus child's age). You already had this formula right, though it looks like you might have been misapplying beyond the first period.
-Note also that 133,481 = 150,000 / (1.01*1.013*1.016*1.019*1.03*1.03). You could do the entire 18-year calculation this way, but yuck.
-In reality you might just use 3-4 AA's over the years, so we could discuss calculating these as sequential annuities, but 18 simple calculations work just as well.
-I'd suggesting setting up one set of calculations per child. They'll have different year 0 amounts anyway, as college costs certainly aren't flat.
-As has been mentioned, you could discount the 4 year expected college cost rather than using a single figure of 150,000. I don't think this would make a material difference considering a conservative AA, though.

For each of my three kids, I established both a 529 account and a taxable investment account (the latter in my name).
-In each 529, my target sum was the forecasted four year resident cost at a lower-cost public university.
-In each taxable account, my target sum was the forecasted four year non-resident cost at higher-cost public university, LESS the amount in the 529.
-My logic for segregating accounts by child was that it's easier -- especially over time -- to track how much "belongs" to each kid. If I had just one account, this would be very complex giving the variance in investment returns and gradual withdrawals.
-My logic for having both a 529 and taxable account per child was that even if I could predict exactly how much college would cost N years out, I still can't predict which type of college my kids might attend, how many years they'd attend, and what scholarships etc they might receive. So I'm hedging a bit to try to achieve some amount of tax savings via the 529, while not taking too much risk of the mild 529 penalty by over-saving there. And, if child 1 doesn't consume the entire amount in his 529, I can transfer that balance to child #2's 529.
-So, there are indeed six accounts where other folks might use just one. But I don't find this onerous to manage.

You seem to be very thoughtful in your planning, so I'm sure things will work out great for your children!

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Re: Glide Path Computations for College Savings

Post by marcopolo » Sun Feb 10, 2019 9:22 am

Treating your entire portfolio as single asset allocation is probably the right answer.

But, I have to admit, I segregated the 529 plans for my kids. I did this because the time horizon is different for that money. That is likely a form of mental accounting, but it worked for us.

I did not go as far as you are suggesting. I simply used a low-cost, age-based portfolio approach, and let the fund custodian adjust AA as kids approached college age.

If you wan to do that yourself, you could look at a few of them and see the type of glide path they use. Most publish their AA adjustments.

Can we PLEASE not turn this into another discussion on the merits of saving for college (there is an ongoing thread for that), and focus on the question that was actually asked.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Glide Path Computations for College Savings

Post by ND Fan 1 » Sun Feb 10, 2019 10:03 am

This is an interesting topic and something i have dived into recently. I have 3 kids, 5,4,2 and 1 on the way. Right now I only have 2 529 accounts, but will open 2 more for the younger ones. What complicates mine is that I plan on using 529 funds for k-12 due to the recent law change. So I'm trying to figure out how to create "buckets" for grades k-8, k-12, and then college. I can cashflow grade school now pretty easily, so I'm trying to hold off tapping into these accounts for as long as possible to maximize the tax free growth. However, I don't want to put have too much risk, where I lose the principle. I may just wait till use the 529s for high school as that is 8 years away for my oldest.

I'm going to take a look at some of the math and see if I can create a glide path for my situtation as well.

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