Let’s Talk More About 529s #illumedati 1


Hey guys, it’s Whatever Wednesdays again and I made a few changes to my 529s this last week. I went back through my old posts on 529s and I realized that I didn’t really get into asset allocation and rebalancing as much as I wanted to. So today Let’s Talk More About 529s.

More About 529s

Stock Photo from: Pixabay

Ok first things first…

Before you read this post, please read the prior posts:

Talking the Talk

What is a 529?

Choosing a 529

My 529 Allocation

Let’s Talk About 529s

If you’ve read all those posts, then I can jump into my post today.


Remember how I said

Do As I Say, Not As I Do?

Well, this is one of those cases. Currently, my 529s for my children are way underfunded for where I would like them to be:

Kylie (4 yo) has $2440.47 in her account.

Lucas (almost 2 yo) has $972.36 in his account.

This is nowhere near where I want them to be. However, it’s what I have managed so far. I do plan to ramp up contributions to their 529s within the next year. My goal is to be able to pay for 4 years of in-state undergraduate costs or 2 years of out-of-state / private school costs for each of them. By my rough calculations, that’s about $150,000.

Will that happen? I don’t know. However, that’s my goal, and having a goal is good.


So what did you change in your 529s?

I made a minor change.

Remember in the post My 529 Allocation, I used a customized age-based aggressive global allocation. However, I’ve opted to just use Utah’s own age-based aggressive global allocation option. The major reason for that is because there is a slightly higher expense ratio by using my own customized option. The other reason is because I’m trying to:

KISS (Keep It Simple Stupid)

I tend to tinker too much if I let myself. For this reason, just using their options will prevent me from tinkering (I hope).


That’s not too major of a change, is there another reason for this post?

Yes.

I had breakfest with a few colleagues of mine who are both radiologists and both with kids around my age. We joked a bit about being the “Rich Kids, Poor Dads” of Hawaii since it’s expensive to live and raise kids here, and yet we probably spoil our kids a little too much. All the while, us “Poor Dads” don’t spend much money, driving our Honda Fit, Toyota Rav4s, and Mazda CX-5s, certainly not the “rich doctor” cars. This was all in good fun of course because we’re certainly not poor. It was more a play on words of the popular book Rich Dad, Poor Dad by Robert Kiyosaki, which had its 20th anniversary this year.

To be honest, I’ve never read this book, but I think my dad read the original 20 years ago, and I vaguely remember him trying to get me to read it when I was 16. I do remember him talking to me about the book when we were grabbing a burger from Carl’s Jr. (I’m going to guess it was a Double Western Bacon Cheeseburger, as that was my burger of choice.) If you remember, this was back when I was working my first job. Coincidence? Probably not.

So anyways our little group talked about 529s a bit, and it was interesting to hear our different thoughts about them. One of the guys has been more aggressive with plans to cover 4 years of out-of-state or private school. He wants to make sure they are “taken care of” and don’t have to worry about college at all. The other guy is the least aggressive, wanting to cover maybe a 1 year or two or public school. He wants to make sure they have “skin in the game”. Having your own debt gives you focus right?

As for me, I’m kind of in-between the both of them, trying to cover 4 years of in-state costs or ~ 2 years of out-of-state or private school costs.


Interesting, so different strokes for different folks then?

Yes.

This brings me back to the asset allocations and rebalancing for 529s. The shorter lead time of < 18 years means that there is no real set path that everyone agrees on. There are those, who like me, try to depend on the glide path of a compressed plan which mirrors that of a normal retirement plan. It would be similar to what the Utah age-based aggressive global allocation is.

Others are more aggressive and advocate just putting it all into stocks for the majority of the time to give compound interest time to do its work. While still others advocate for being very conservative and allocating the majority into “safe” things like bonds.

I didn’t really understand why there were such different opinions when it came to 529s allocation. I mean, these are the same Bogleheads that advocate for “age in bonds”  or “age-10 in bonds”.

Shouldn’t they all agree?

You would think so. However, I think I understand why there is such disagreement. The reason for this is because when it comes to retirement, the end point is retirement at which time you want to have a certain amount of money to retire with. You understand that your lead time is usually > 30 years with plans to retire at ~ age 65 or so (normally).

However, the goal for 529s are different for different people, like I’ve illustrated above.

It has to do with mindset:

“I want to save some and give it a chance to grow.”

“I want to save approximately this much.”

“I want to save at least this much.”

Different goals means different paths.


So let’s look a little more in depth:

“I want to save some and give it a chance to grow.”

However, the other mindset of “I will put aside X amount of money a month for a 529” without a goal in mind allows you to be more aggressive. For example, your son is born and you start putting away $100 a month every month for him until he turns 18. You’ve decided to put away $100/month x 12 months x 18 years = $21,600. You’ve committed $21,600 of your money, what happens to it after that you are ok with leaving to chance. So you throw all of it into an index fund Like Vanguard Total Stock Market or whatever. Whatever it is when your son is 18 you are ok with.

The likelihood is that at 18 it will be significantly more than the $21,600.

Is it possible, that right before your son turns 18 in his senior year in high school that the stock market crashes and you lose a lot of what you gain? Of course, anything is possible, but from your standpoint the likelihood is that your benefit will outweigh that risk.

From your standpoint you’ve already put in the $21,600 and that was where your responsibility ends. You’ve left the rest of it up to the market.

“I want to save approximately this much.”

If you’re like me and you want to save an approximate amount, then using an age-based aggressive allocation probably makes sense to you. You have a general goal that you want to get to and make assumptions based on the returns you hope to get. The general goal of “4 years of in-state costs versus 2 years of out-of-state or private school costs” allows for some wiggle room.

You want to give your contribution a chance to grow, but you still believe in the “glide path” of reducing your stock/bond allocation as your child gets older.

Is it possible that the right before you change from a 100% stock to 80% stock allocation that the stock market tanks and you lose a bunch? Yes.

However, you’ve already accepted that you can’t time the market. You are ok with this risk, but not ok with the risk of keeping your money in 100% stocks until your son/daughter goes to college.

“I want to save at least this much.”

For some of you, you have a certain dollar amount in mind and you don’t want any additional risk.

Let’s say you want to save $40,000 for college, not a penny less. So you put $200 a year into your 529. $200 x 12 months x 18 years = $43,200.

You keep all of this in bonds or maybe even in an FDIC Insured Account in your 529. You want to make absolutely certain that at least $40,000 is available and prevent any and all risk.

Let’s say you instead decided to do an age-based aggressive global option. Every time the allocation changed from Stock/Bond allocations of 100/0 to 80/20 to 70/30, etc, the stock market had a downturn which occurred right before your reallocation. This would have the effect of negating any compound interest you made or potentially even make you take a loss. The possibility of a stock market downturn which mirror your changes in asset allocations making your savings disappear is too real of a risk for you.

While improbable, it’s not impossible.


So which one is the right one?

Like I said above, it depends on your goals and mindset.

In my opinion, since I place a reasonable amount of trust in the stock market, I don’t think I would ever use only bonds for my 529s. However, part of me does consider being more aggressive than the current age-based aggressive global allocation.

Maybe I should just throw it all into the Vanguard Total Stock Market Index Fund until my kids are 10, then re-allocating into an age-based aggressive option. However, once again, this is trying to time the market. See what I mean about me wanting to tinker?

I need to remember to: KISS (Keep It Simple Stupid) – as I described above.

I think I’ll just keep it in the Age-Based Aggressive Global Allocation for now.


Just remember, the most important thing is starting the 529…

Kylie and Lucas

Why I have 529s – Kylie and Lucas

 


TL;DR

There is no “agreed upon” path for 529s – even amongst Bogleheads.

The reason for this is a difference in mindset and goals.

Different strokes for different folks.

I’m sticking to Age-Based Aggressive Global Allocation because I’m trying to Keep it Simple Stupid… for now.

Whatever Wednesdays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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