College Savings - Late start

[r2i02]

Hello

I have only 7 years before my kid will start college.I am planning to start with $10k and to contribute $200/month till start of college towards Mutual funds.I am leaning towards Nevada 529 plan.

I have a couple of questions:

#1: I am comfortable with 80-20 Stock / bond portfolio.Is this too aggressive considering only 7 years are left and markets being at peak?

#2: Is VBINX (60-40)better than VTSMX/VBMFX combo(80-20) ? Should I consider International allocation also?

Thank you

[byenare]

I am using UESP ( https://uesp.org/) for my kids. I am happy very with my decision. Very less expenses, zero minimum to open, good plans to choose from and impressive returns so far. I am attaching their program description pdf for your reference. I went ahead with Age based aggressive Domestic plan. This has a combo of VITPX(85%), VBMPX(12%), VFSIX(3%) funds for my 8 year old kid. As age progresses, allocation changes automatically. UESP will take cares of the right combination of funds and allocation. Hope this helps. Let me know if you need a referral.

https://uesp.org/wp-content/uploads/2016/09/UESPProgramDescription_dest.pdf

[Desi]

Hello

I have only 7 years before my kid will start college.I am planning to start with $10k and to contribute $200/month till start of college towards Mutual funds.I am leaning towards Nevada 529 plan.

I have a couple of questions:

#1: I am comfortable with 80-20 Stock / bond portfolio.Is this too aggressive considering only 7 years are left and markets being at peak?

#2: Is VBINX (60-40)better than VTSMX/VBMFX combo(80-20) ? Should I consider International allocation also?

Thank you

When Dow first hit 10,000, it was at its peak and yet today Dow is at 22000 today. Maybe 7 years from now Dow might be at 35000. Trying to guess whether market is at a peak etc is wrong thing to do.

You are going to put 200 per month for 7 years and 10,000 at the start.

If your return is ZERO percent every year, you will have 26800
If your return is 2% every year, your ending balance will be somewhere between 29000 to 30000.
If your return is 7% every year, your ending balance will be about 38000
If your return is 10% every year your ending balance will be about 44000.

So assuming no losses, you will have between 26800 to 44K.

The above amount may barely pay one year of a state university (depending upon how much the dorm costs, etc), 7 years from today.
If your child goes to community college instead, then of course the amount needed per year would be less.

So in essence, this is like starting to save at age 55 for retirement.

Now as to how you should invest. If I were you I would keep reducing my equity allocation by 10% each year. So if you start at 70%, you would be down to zero in equity after 7 years.

A 50% loss in market happened during housing crisis. Such types of losses happen once in decades. But that does not mean that 3 years from now, you would not get hit with a bear market and say 30% loss in equity. That would hit your portfolio by about 10% to 15%.

Depending upon how much risk you are willing to take, you will have to decide how much in equities. If I were you I would include some international and some REITS.

[r2i02]

# byenare :
Thank you for the details.I will PM you if I go the UESP route.
I was leaning towards individual funds where I can control the allocation.

#desi sir:
Thank you for your valuable advice.Looks like I need to double the monthly contribution to at least cover the first 2 years of college.
I will look into adding REITS outside of 529.

Should I split some of VTSMX into VIGRX ?

Thanks

[Desi]

I will look into adding REITS outside of 529.

Should I split some of VTSMX into VIGRX ?

Thanks

If I were you, I would just focus on VTSMX and TOTAL International for equities and forget VIGRX.

Vanguard also has a 529 plan >>> https://investor.vanguard.com/529-plan/list#/529-plan/asset-class/month-end-returns

Regarding REITS, there is a minor problem in that REITS generate a yearly return which is taxable if invested outside of 529 plan and will get taxed at your marginal rates. Further cap gains will also get taxed outside of 529. The way to avoid this taxation is to go for Coverdall IRA, UTMA or a ROTH account.

The other problem is that if you buy a Vanguard REIT fund, minimum investment is 3000, so this makes it untenable in your case since your original investment is 10,000 total.

If you opened Coverdall Education Savings account (education IRA), the Vanguard REIT will allow $2000 as initial investment, still it means you will have to put 20% of original money there. I would recommend only 10% in VGSIX.
Now you could instead in coverdall ESA buy VNQ instead but here you pay $5 commission everytime you trade. With this approach, you invest in VNQ only once a year (and not every month). This complicates things, but doable increases expenses a bit but if you choose other REITS, there expense ratios are high too.

That said, nothing wrong in opening a coverdall IRA account with a broker like schwab (I think they charge a commissions of 4.95 - check and make sure) and buy VNQ initially for $1000 and then every year buy enough shares to invest 240 every year. Verify that they do not have any charges on coverdall IRA (like maintenance or exit charges).

The money can be invested in Coverdall IRA, or in UTMA or in your ROTH IRA account if you qualify for ROTH and are not already investing in ROTH.

Alternately, you can forget about REIT.

The above are the options, hope this helps.

I also suggest to wait for a couple days at least as you may get some valuable advice from some other forum members and with multiple advice, you can make optimum decision.

[r2i02]

Thank you sir for the detailed explanation.I could not find VGSIX in Vanguard 529.I have Roth IRA and can buy VNQ as suggested.My understanding is if I withdraw from Roth for college before age 59.5 ,I need to pay income taxes on earnings portion.

I will start equity portion with:
VTSMX -40%
VGTSX -20%
VNQ -10%

For the remaining 30% ,should I buy Total bond market or split them ?

Thanks

[Desi]

Thank you sir for the detailed explanation.I could not find VGSIX in Vanguard 529.I have Roth IRA and can buy VNQ as suggested.My understanding is if I withdraw from Roth for college before age 59.5 ,I need to pay income taxes on earnings portion.

I will start equity portion with:
VTSMX -40%
VGTSX -20%
VNQ -10%

For the remaining 30% ,should I buy Total bond market or split them ?

Thanks

For the remaining 30%, I would consider 10% VFSTX, 10% Total Bond market and 10% International bond market (VTIBX).

Putting all in stocks is too much risk but putting money in bonds is also a risk with interest rates rising, hence 10% short term and 10% VTIBX but that has a currency exchange risk too. However, that is what I would prefer.

[GutsyGibbon]

Have you looked at the age based options. I opted for these few years back.
https://investor.vanguard.com/529-plan/age-based-options

I understand that having a 529 will mean that they expect the child to use the 529 money before they use the loan amount. I want my kids to take loans and go to college. So I stopped funding the 529 further. Does anyone know more about this?

[dixit]

My daughter is still 13 years away from college. I started pre-paying for private college credits before her first birthday. I use www.privatecollege529.com where you buy college credits for private colleges at today's rates.

Looking at the level of competition in CA-state schools, its a very strong possibility that my daughter may have to go for a private college education. I buy about a month to 2 months of tuition every year. By the time she is ready, I hope to have about 2 to 2.5 years of private college tuition paid off.

Upsides are --- my investment is not impacted by market fluctuations, I am saving for private college and still getting about 5-7% return (average annual increase in college tuitions). Downsides are ---- my investments are not impacted by market, if I pull money out for in-state colleges I will lose all gains.

[TAYLOR]

I understand that having a 529 will mean that they expect the child to use the 529 money before they use the loan amount. I want my kids to take loans and go to college. So I stopped funding the 529 further. Does anyone know more about this?

No requirement that should first of all use up the 529 money before able to use the other loans amount. But keep in the mind that only small amount of loans your child will be able to get at the low interest like 3.x %. Like maybe $10K loan per year. After that amount, it is not very finance-sensible for the child to be taking loans if parents can be able to afford the college costs. Interest can go to 6%, 7% and more up and up.