529_Plan_Amount_By_Age
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to
00:00:03.720 | talk about one of my favorite favorite subjects and that's paying for our
00:00:07.880 | children's college education through a 529 plan. Now the 529 plan is an
00:00:14.520 | excellent idea because you contribute after-tax money and it gets to compound
00:00:18.360 | tax-free and when you withdraw the money for qualified educational expenses you
00:00:23.880 | don't have to pay any tax or penalty or anything whatsoever. So when you're saving
00:00:28.400 | and investing your money you might as well take advantage of every single plan
00:00:32.920 | out there that reduces your potential tax liability. 401k and IRA and Roth IRA
00:00:38.120 | for your retirement, 529 plan for your kids college education. Sounds simple
00:00:44.120 | enough. And one of the greatest things to come out of the coronavirus induced
00:00:47.560 | market meltdown is our ability to contribute more to our retirement
00:00:51.720 | accounts and to our 529 plans. So I personally was able to contribute an
00:00:57.400 | extra $30,000 in March 2020 when the market was melting down because I
00:01:02.000 | figured you know what it's gonna be for the next 18 years for my daughter so I
00:01:06.360 | have no problems investing with that real time frame. Whereas investing my
00:01:11.160 | hard-earned precious cash into a taxable account that was a much much dicier
00:01:15.960 | proposition and I still went through I still invested a decent chunk of change
00:01:21.440 | but I'm out I'm out at $2,850, $2,900, $2,930 on the S&P 500. I couldn't hold on to
00:01:30.200 | that money that I inputted into the market in March because I'm just afraid
00:01:35.040 | of a relapse. But with a 529 plan it's like 18 years come on 18 years I think
00:01:40.520 | things will be okay. But what I realized is that I ended up super funding my
00:01:45.220 | daughter's 529 plan. I didn't plan to do that before the pandemic hit. I was like
00:01:50.040 | okay I'm gonna contribute $15,000 a year and then just keep it that way because
00:01:53.800 | we have just gone through a 10-year bull market and things were dicey. So if you
00:01:57.200 | look at all my previous posts, a lot of my previous podcasts, I'm just kind of a
00:02:02.240 | more conservative guy when it comes to the stock market and I have been for the
00:02:06.160 | past couple years. Now once the markets started melting down I was like alright
00:02:11.240 | let's start contributing so I super funded it with $75,000 and that's when I
00:02:16.760 | realized hmm maybe I contributed too much to my daughter's 529 plan because
00:02:22.920 | my son is three times older than my daughter but he only has about 90% more.
00:02:28.600 | So let's talk about what is the appropriate amount to contribute to your
00:02:33.600 | 529 plan by age. And to get to this answer we need to figure out what the
00:02:39.280 | endgame is. What is the cost of college going to be like in the future? Well right
00:02:45.000 | now for the average tuition and fees for 2020, public in-state is about $10,116.
00:02:53.240 | Public out-of-state is about $22,600 and for private schools the cost is about
00:03:01.400 | $37,000. That's a lot of money folks and the one thing we should all recognize is
00:03:06.960 | that the value of a college education has taken a step down. It has devalued
00:03:13.200 | post the pandemic, post the lockdowns because everything is being done online
00:03:17.120 | right now you know through Zoom, WebEx or whatever and everything online is
00:03:23.400 | already free. So if we're doing everything online with college education
00:03:26.840 | and everything online is already free what the heck is a parent supposed to do?
00:03:30.840 | Still spend the same amount of money for that college degree? No I don't
00:03:36.000 | think so because most of college I would say 60 to 70 to 80 percent of college
00:03:41.400 | okay 80% of college is about the experience. It's about getting to know
00:03:45.480 | great connections and friends and going out to party and doing stupid things and
00:03:50.400 | learning from your mistakes. It's that whole experience that you're going to
00:03:53.920 | college for. The educational component of college is you know it's probably like
00:03:59.080 | 20%. You know you're going there to learn, listen, try to build on your degree so
00:04:04.440 | maybe you can get a master's maybe I don't know or you're just trying to
00:04:07.040 | learn on the things that you want to become an expert in so that you can get
00:04:11.040 | a better job in a relevant field in the future. Let's be frank I think most of us
00:04:16.000 | do not remember more than 10% of what we learned in college. At least I don't and
00:04:21.120 | it also doesn't make sense to still spend four or five years getting your
00:04:24.920 | college degree because hello the internet, technology, you don't have to go
00:04:29.960 | into the Dewey Decimal System and you know research books and check them out
00:04:33.560 | and spend tens of hours writing a paper. You can do things at least twice as fast
00:04:38.920 | now versus before the internet. So think about the way things are. The price of
00:04:43.680 | college should be declining but it's probably not going to be because of you
00:04:48.160 | know old inertia and greed and so forth and the duration it takes to get a
00:04:54.360 | college degree. Four to five years it's probably not going to decline either
00:04:58.120 | because it is against what colleges want and they so long as we demand going to
00:05:04.520 | college they're going to dictate terms. So I've gone ahead and created a
00:05:09.280 | recommended five to nine plan amounts by age and it's in a handy-dandy chart. Four
00:05:15.560 | columns. First column is your age. The second column is called low or alpha. The
00:05:22.240 | third column is called medium or Bravo and the fourth column is called high or
00:05:26.520 | coca. Now these columns represent how much you should save by age depending on
00:05:33.120 | your circumstances and beliefs. For the low column or alpha column, alpha sounds
00:05:38.720 | better doesn't it? Someone was saying oh I'm only in the low column I feel bad.
00:05:41.720 | Well that's just not the point. The point is if you're on any of the columns for
00:05:45.600 | sure that's pretty good because it hopefully is jiving with your beliefs
00:05:49.600 | about college education and your children. So let's look at the age 18
00:05:55.400 | amounts for each column. So at age 18 the low alpha column 95,000 to 100,000.
00:06:02.800 | Your goal is to accumulate about $100,000 by the time your son or
00:06:08.640 | daughter turns 18. In the medium column, the Bravo column, you should try to
00:06:13.720 | accumulate about $500,000 and in the high-end column or the coca column a
00:06:19.320 | million dollars. A million dollars sounds crazy. You're creating five to nine plan
00:06:24.720 | millionaires. We talked about this before but let's be frank there are parents out
00:06:29.640 | there who are willing to spend $800,000 to over a million dollars for their
00:06:34.040 | child's education. Personally I would rather just maybe I don't know but I
00:06:39.560 | think I would rather just set up a trust and create that fund for my child and
00:06:43.680 | have him or her go to public school and save a lot of money. And if I was a child
00:06:47.920 | and my parents said we will give you a million dollars if you go to public
00:06:52.000 | school for grade school and go to community college or a public school for
00:06:56.720 | college and I would say hell yeah give me the money give me the million dollars
00:07:02.080 | and I can start a business start a family do whatever I want awesome but
00:07:05.880 | you know everybody has different opinions and that's totally fine. So
00:07:09.080 | let's talk about the low column the alpha column. It assumes that you just
00:07:13.680 | contribute $5,000 per year with 0% growth to account for several bear
00:07:18.120 | markets during the initial 18 years. The goal is to have saved right $100,000 by
00:07:23.160 | 18 and I think that should be decent. Here are some bullet points for those
00:07:27.800 | who might want to follow the low column. Parents who have older children already
00:07:33.320 | you know they're 10 plus and you know you just can't save as much. Look I don't
00:07:37.360 | want to have you feel bad because you don't have the right amount based on
00:07:41.920 | what I'm recommending. I'm just saying like if you have a 15 year old and you
00:07:44.880 | didn't continuously save since he or she was zero well you're gonna be kind of
00:07:50.160 | behind. So here at the low column you have older children. To parents who don't
00:07:54.320 | strongly believe in the value of a college education you believe that the
00:07:58.240 | college education is declining in value might be free one day and you won't have
00:08:03.840 | to pay such a crazy crazy amount. Your child will go to a public university or
00:08:10.220 | community college to your college or potentially no college. Most of Americans
00:08:15.240 | don't have a college education and this is important to realize for those who
00:08:19.760 | have just been thinking about college all their lives you're not the majority.
00:08:23.960 | Fourth point maybe your child is a genius or a talented athlete and will
00:08:29.120 | get tuition subsidies from universities. The next point maybe you have a family
00:08:33.800 | business and the child likes your family business and you can just easily hire
00:08:38.640 | him or her into the family business. And then finally you as parents may have
00:08:44.280 | many children and you simply cannot fully fund all their five to nine plans
00:08:48.200 | but you want to fund them enough so that they don't graduate with massive massive
00:08:53.240 | amounts of debt and feel bitter at life. Let's move on to the next column the
00:08:58.520 | medium column or the Bravo column. The Bravo column assumes a 15,000 annual
00:09:04.440 | contribution every year until 18 with a 6.2% compound annual return. I came up
00:09:10.560 | with 15,000 because that is the gift tax exemption amount per person so hopefully
00:09:16.320 | one of you guys can give 15,000 every year. And how did I get to 6.2%?
00:09:21.240 | Well it's kind of back of the envelope calculation because I want the medium
00:09:26.040 | column to get to about 500,000 for college by the time your son or daughter
00:09:30.680 | turns 18. So to get to $500,000 with a $15,000 annual contribution you've got to
00:09:37.560 | earn 6.2% a year and that's reasonable. Think about how much stocks have
00:09:44.280 | returned since 1926 it's about 8 to 10 percent. Think about how much bonds
00:09:50.120 | returned since then it's about 4 to 6 percent and the returns are going to get
00:09:54.840 | smaller and smaller as you get to 18 hopefully because you want to spend that
00:09:59.160 | money and not lose that money. So 6.2% I think it's reasonable. It's up to you to
00:10:04.200 | make the assumptions but I think it's reasonable. So who should follow the
00:10:07.400 | Bravo column? Well parents who have a newborn or children under three seems
00:10:13.800 | decent. You've got 18 years, 15 to 18 years to save and invest. Parents who
00:10:21.280 | only plan to have one or two children so not that many children. Parents who
00:10:25.320 | believe a college education is still valuable although you know you might
00:10:28.680 | realize it's not as valuable as it once was. Your child is of average
00:10:34.040 | intelligence and average athletic ability therefore your child is probably
00:10:38.400 | not going to get any grants or scholarships. How about parents who want
00:10:43.440 | to hedge against a continued rapid increase in college tuition? College
00:10:47.480 | tuition has been rising by about say 4 to 5 percent a year. Some higher, some
00:10:53.400 | lower but around 4 to 5 percent. You would think that the majority of schools
00:10:57.960 | would freeze their tuition for the 2021 school year but so far I've only heard
00:11:04.440 | my alma mater the College of William & Mary freeze their tuition. Good for them
00:11:08.280 | and I hope other colleges and universities do the same especially
00:11:12.280 | those with massive massive endowments. Next, parents also have a family
00:11:17.440 | business. Why not hire your kid especially if he or she likes the family
00:11:21.080 | business? And finally parents who tend to be more financially conservative. In
00:11:26.160 | general it's a good idea to end up with a little bit too much money rather than
00:11:30.040 | a little bit too little but either way a little bit a little bit on each side is
00:11:34.280 | not bad so it's better to have too much money rather than too little money.
00:11:38.920 | Moving on to the final column, the high column, the COCA column. This assumes a
00:11:44.760 | 30,000 annual contribution every year until 18 with a 7% compound annual
00:11:50.040 | return. So you get a double whammy here. Two people contributing $15,000 and a
00:11:56.960 | higher rate of return. 7% it feels a little bit aggressive nowadays
00:12:01.640 | especially after a long bull market and especially we saw a loss decade from the
00:12:07.720 | year 2000 to 2010 but these are my assumptions so that parents can get to
00:12:13.360 | 1 million dollars by the time the child is 18. So again a little bit back of the
00:12:19.480 | envelope to get to that 7% but a million dollars is that target amount and it
00:12:24.400 | sounds crazy but you know from reading my previous posts and perhaps listening
00:12:29.120 | to my previous podcast that one can easily spend $800,000 on grade school
00:12:37.240 | education from kindergarten through 12th grade and then for private school and
00:12:42.320 | everything and then you add on inflation and rising costs and the opportunity
00:12:46.640 | costs of not investing your funds in profitable investments and yeah $1
00:12:51.760 | million doesn't sound too unreasonable and you can't blame parents for wanting
00:12:56.820 | to give their kids the best if they can afford it or if they want to do it but
00:13:01.280 | if you want to do it you got to try to get to a million dollars so who should
00:13:05.640 | follow the high column the coca column well parents who have a newborn or child
00:13:10.520 | who has yet to be born because you can open up a 529 account under your name
00:13:14.240 | and then transfer it to your child's name I know one reader told me he opened
00:13:19.000 | up a 529 plan account in 2008 12 years ago and they don't have children yet and
00:13:25.480 | I think they probably want to have children a little bit sooner than that
00:13:28.440 | but you know good for him for planning ahead and I think once the kid is born
00:13:34.040 | the kid will have a pretty good 529 plan okay second parents who plan on only
00:13:39.080 | having one or two children a child is of below average intelligence and athletic
00:13:43.920 | ability so below it's not just average but below it's kind of ironic but look
00:13:49.160 | that's just the way it is it's a very competitive world out there getting
00:13:52.600 | scholarships is tough and you know not everybody is going to be average or
00:13:56.120 | above average please don't take offense the child insists on going to the most
00:14:00.480 | expensive private school whether that's grade school and college I don't know
00:14:05.560 | some some kids I hear they just don't care they want to go to the most
00:14:10.760 | expensive school and it doesn't matter if it's not their money or not parents
00:14:14.800 | who are very wealthy and are willing to make their children five to nine plan
00:14:18.920 | millionaires and are okay with with taking that risk because I think a lot
00:14:24.200 | of parents worry what if what if we give our children everything best private
00:14:29.680 | schools huge five to nine plan you know we're driving around in nice cars we
00:14:34.680 | have a huge house are they gonna are they gonna want to work hard themselves
00:14:38.320 | and identify and build their own identity I think that's it's hard who
00:14:44.060 | knows next parents who believe college tuition will inflate much faster than
00:14:48.480 | three to five percent a year it's possible it's been doing that for
00:14:52.240 | decades now and then finally grandparents who have enough money to
00:14:55.840 | superfund their grandchildren's five to nine plans to help reduce their estate
00:14:59.640 | super funding just in case you don't know is the ability to contribute five
00:15:04.280 | years worth of $15,000 a year in the first year so that is $75,000 per person
00:15:11.120 | and once you do that you can contribute for the next five years so if you've got
00:15:15.440 | a lot of cash or your grandparents want to reduce their taxable estate because
00:15:19.600 | it's above the taxable amount in 2020 that's eleven point five eight million
00:15:23.480 | per person you can do that you can superfund you you might be able to even
00:15:27.560 | fully fund the five to nine plan and go to the max but of course check with your
00:15:32.280 | lawyer and check with your estate planner and so forth I do want to
00:15:36.720 | reiterate that there is no precise and right amount you shouldn't contribute by
00:15:42.320 | age the goals are $100,000 $500,000 and 1 million dollars by the age of 18 or
00:15:49.200 | whenever your child wants to go to college and this is really dependent on
00:15:52.800 | your income your beliefs where you live and the future not everybody knows the
00:15:57.680 | future I don't but we can have some guesses all columns are fine if the
00:16:02.600 | amounts are aligned with your goals and beliefs if you're behind contribute more
00:16:07.160 | or convince a grandparent or loved one to contribute more if you're ahead you
00:16:11.600 | can throttle your contributions and use your money for other purposes it would
00:16:16.320 | be irrational if you save based on the low column but of a child who is one
00:16:21.320 | year old and you want him to go to the most expensive private university in 18
00:16:25.520 | years without any grants conversely it would be irrational to follow the high
00:16:30.380 | column if your child is already 14 years old is brilliant and will likely get a
00:16:35.900 | free ride to any school she chooses whichever column you do choose to follow
00:16:41.440 | make sure the numbers align with your current financial situation your child's
00:16:45.640 | intelligence and work ethic and your beliefs about higher education as for my
00:16:50.720 | family we're probably going to follow the medium column the Bravo column and
00:16:55.920 | try to shoot for 500,000 per child because my kids are only three years old
00:17:00.040 | and almost five months old now so that's 15 to 18 years to go maybe longer if
00:17:07.000 | they decide to take a gap year who knows I've done the math and $500,000 looks
00:17:13.280 | like the realistic quote worst-case scenario in terms of cost and I'm
00:17:18.920 | generally a conservative person so I would love to build enough money in the
00:17:23.720 | account that it can cover 100% of the cost if necessary now I don't know
00:17:29.280 | whether I want to cover the entire tuition room and board expenses for my
00:17:33.460 | children it's always good to have some skim in the game you know working at
00:17:37.960 | McDonald's in high school really made me appreciate the value of the dollar
00:17:41.400 | because making $4 an hour while flipping burgers and cracking eggs really really
00:17:46.280 | kind of stung so I really appreciated the value of the dollar and it made me
00:17:50.880 | work harder so this is something you got to figure out for yourself I have no
00:17:54.960 | idea exactly how my children will turn out in terms of work ethic work ethic I
00:18:00.720 | really think is the number one thing that'll help people get farther in life
00:18:04.440 | and I hope to instill that into my children by demonstrating you know dad
00:18:09.080 | waking up at 4 a.m. 5 a.m. and working or pulling the weeds or whatever but
00:18:13.480 | there's just no guarantee ideally I think it's good to save just the right
00:18:18.160 | amount in each five to nine plan but if you end up saving too much you can
00:18:22.660 | always just reassign the beneficiary to your grandchildren or someone else
00:18:26.880 | thanks so much everyone and if you like this episode I'd love a positive review
00:18:31.480 | and share with your friends gosh it took a long time to create that chart and to
00:18:35.320 | think about this but this is important we got to think about these things as
00:18:38.680 | parents and I hope every single one of you have brilliant children who won't
00:18:43.480 | need that five to nine plan at all oh there actually might be a problem you
00:18:48.580 | save too much in your five to nine plan and you didn't live as good of a life as
00:18:52.840 | you could have but let's just talk about that in a different episode thanks so