529 plans and astonishment at compounding

Club thrifty had a post recently about funding her kids’ college education, which caused me to take a look at how my kids’ 529 plans are doing.  We’ve been putting in $500/mo since each of them was born.  At the time of writing this (though not the time of posting), DC1 is 7.5 years old.

So if we’d just put $500/mo away in our mattress, we’d have $45,000.  That’s a lot of money, and would currently fund in-state tuition for four years at many state schools without any aid.

That’s not how much my 7.5 year old has in hir 529.  How much is in there, do you ask?  $69,874.56.

Let me say that again.

$69,874.56

That means the stock market and compounding has added something like $25,000!

~$25,000 just because we put $500/mo in the stock market instead of in a mattress (or instead of spending it!)

Doing this exercise has given me a few scattered thoughts.

1.  Compound interest from stocks over a long period of time is AMAZING. It’s just in one of the Vanguard target date funds from the Utah system, so we’re really just matching the market with a little bit of adjusting to bonds as ze gets older.

2.  This kind of thing is how the rich get richer.  The best truly passive income is reaping profits from the sweat of the proletariat.   Rent-seeking is where it’s at.  Getting those returns to capital.  The poor get poorer by comparison because they have to spend their money to live and can’t have their money make money.  It’s terrible.  At the same time, as a member of the upper middle class, it’s something we need to do to keep from sliding down the income/wealth scale.  Because if you only have a choice between rich and poor, it’s better to be rich.  We need major political change in this country.  Yes, charitable donations are nice, but the entire system needs a new Great Society overhaul.

3.  Sacrificing early and starting early with savings is the way to go.  We never really felt the $500/mo cut to our income because it coincided with our employment.  We made our decisions based on a smaller income.  When you get a new job, if you can max out your retirement funding before you get used to the higher paycheck, that’s definitely the way to go.  (Of course, high interest debt is also worth paying off– the trick is not to get used to a higher level of spending that you then cut down.)

4.  I don’t think it’s time to stop contributing yet.  We suspect DC1 will end up going to a private school (or, less likely, an out of state public that costs just as much).  Right now with both of us employed we’re in the middle area of whether or not we’d be considered for any financial aid at all, and there’s that hope that by the time DC1 gets to college we’ll be in the “no financial aid based on income alone” bracket (we can dream, right?).  If not, we still have time between our two kids to adjust based on what kind of aid the eldest gets or doesn’t get.  If DC1 gets aid, then we simply stop contributing to DC2’s plan at that point.

5.  Because of the way that financial aid is calculated, most people should max out their retirement savings before contributing to a 529.  We’re doing that now, but we weren’t doing that this entire time because we had *too* much room for retirement and didn’t realize that DH would be getting a better job that paid more, so we didn’t put away all 72K/year that we could have, figuring we’d need some of that money to pay for college! [Note:  For those who haven’t been following our finances for the past few years, DH no longer works for the government so we can no longer put away anywhere near 72K for retirement because he no longer has a 457 option or a second 403b option, just a really lousy 401K with high fees and a lousy match.]  Yes, you can withdraw ROTH contributions to pay for college, but it would probably not be enough.  The 529 is still a much better place for your child’s money than a savings account in your child’s name, for financial aid purposes.  That’s because the 529 in your name counts as your savings whereas any savings in your child’s name is expected to go 100% to college, which cuts down financial aid from the school.

6.  Regular savings that you don’t miss because you’re used to that money not hitting your checking account really add up.  However, if you can’t afford auto-deducting any of your paycheck (though automatic retirement savings should be a priority), 529s are a great place for monetary gifts for your kids to go.  A little bit early on really does go a long way.

What are your thoughts on retirement and 529s and compounding stealth saving?  Also, how often do you look at your accounts?

36 Responses to “529 plans and astonishment at compounding”

  1. eemusings Says:

    Oooh, yes to #2. Similar for real estate. Get that first property and it all builds from there.

    Compounding FTW. It hit me hard when we came back from travelling and I saw my net worth had not plummeted as much as I thought, thanks to these gains.

  2. OMDG Says:

    Everyone I know uses Utah’s 529. Interesting.

  3. L Says:

    Fantastic that you can put $500 a month into one account for one child. That is almost one third my monthly take-home. And some folks can’t even claim that much pay!

    • nicoleandmaggie Says:

      Yes, we have been fortunate in that respect. Frugality allows such things on a high income. (Though I am always astonished when I read one blog where they make what we used to make before DH left academia in a cheaper location and they spend all that money debt servicing because they can’t make sacrifices. Because compounding works the other way when it comes to debt, and the hole tends to get bigger faster.)

      Fortunately financial aid is pretty good many places for kids of low income parents.

  4. TheologyAndGeometry Says:

    What if you aren’t sure you’ll ever be able to save $72k/year for retirement? That would be a huge chunk of our combined income. Is the advice really to not contribute at all to a 529 for your kid(s) unless you can meet that mark with retirement? We have a 529 that we and family contribute to for DS#1 and were planning to set one up for DS#2 once he is born…

    • nicoleandmaggie Says:

      That is what we said in #5. We’ve never put away 72k/year (we’re not *that* frugal, nor were we that high income), and now we can’t because DH is private sector with crappy retirement options, so no 457 plan, no second 403b. He also makes too much for us to be IRA Roth eligible. So although we are making more money now, we don’t have as many places to save for retirement.

      Only people in state employment generally have the 457 option. Most people can do 17.5/person 401k plus 5k IRA and that’s it. And if you can’t max that out, chances are you shouldn’t be saving for college on top of retirement because you will get financial aid or because you need to cut back on spending. You can take out Roth money to pay for college without penalty, the contributions, but it doesn’t count against you or as much against you in aid calculations.

      • Chelsea Says:

        Sorry… the way #5 is written, it reads to me like you used to not contribute all $72k/year but now you do. Truth is I really don’t know enough about the nuts and bolts of retirement savings accounts (we just do our IRAs and 403bs) or – really – how much we should be saving for college. A perk of DH’s job is that – if they don’t change the policy in the next 16 years – tuition at his and peer colleges is covered for dependent children. So if we get that, awesome, but then we potentially have all this 529 money lying around. However, if we don’t save because we depend on that benefit, and all of a sudden it’s reneged, then we are in trouble.

      • nicoleandmaggie Says:

        No, we definitely do not. We don’t have access to that much savings room anymore. DH’s retirement options are terrible– they’re high cost and they only instituted a match recently and it’s not a very good match. I think he can put <5K/year in there to get a 50% match on that (after having worked there 2 months), and the fees are high.

        My school doesn’t offer any tuition benefits.

        You don’t need to save for college in a 529– it just won’t be 529-tax-advantaged if you don’t. If you’re not maxing out your ROTHs and you can, then that would be the place to put money first. Also, you may be able to withdraw the 529 money without penalty (just paying money on the taxes you didn’t pay) if college is paid for through unexpected scholarships– I don’t know how tuition reimbursement programs work into that calculation but if you’ve already maxed out your Roths or can’t contribute, that is something worth talking to an expert about.

        Bottom-line– if you can put money in your ROTH each year, do that, and do it before putting money in a 529.

      • Chelsea Says:

        This is going to show up in the wrong place but thanks. Good things to think about.

  5. Leigh Says:

    Sometimes I’m pensive about how the rich invest their money to earn money and then get richer and sometimes I feel guilty about it since I didn’t ask for all the lotteries that I’ve won. My family didn’t have much money when I was little – they didn’t start saving for my college education until a relative died when I was almost in high school and left me some money. All of my non-CS friends from college don’t have much money now. Even my CS friends, most of them paid for school, so they are several years behind me in $$$ saved. I’ve also really lucked out with some early salary compounding that some of my friends still haven’t gotten that first golden promotion.

    It’s incredible how much my net worth increases are no longer from my actions. In 2013, it was around $20k and another $47k that I didn’t include. This year, it’ll be about the same as last year probably. It’s pretty fun watching it grow without me doing much other than making good decisions. I also get a lot of enjoyment of watching my boyfriend’s accounts grow, almost more than he does because personalities! His contributions to investments are outpacing mine now since I’m paying down my mortgage aggressively, so watching his going up helps stem my interest in contributing to my own instead of paying down my mortgage so aggressively. (I’m really looking forward to joint finances some day, but for now at least we have similar goals and strategies! :D)

    I usually look at my accounts when the deposits go through and when it’s close to a round number. I was checking every day when my 401(k) was close to $100k, but I haven’t checked on my taxable account other than when dividends post in years with the no contributions.

    • nicoleandmaggie Says:

      I only tend to check when I have to. And sometimes when I’m stressed or depressed one of the things I do is look at my money and I find it really soothing. I’m going to be ok.

    • Kellen Says:

      Even though you received the money not from your own actions, you still made the choice not to just blow it. An old roommate went to college with a couple of girls who had million-dollar trust funds come into their control at the age of 21. By the age of 25, it was all gone.

      • Leigh Says:

        Exactly! People like to say kids will care more about school if they have to pay for it, but I had a great GPA and was more frugal in school than some of my friends paying their own way.

      • Leah Says:

        My mom paid for my education by picking up more hours as a nurse. You better believe I worked my butt off! I had a tangible vision of where that money was coming from. Plus, she’d call me at midnight on her way from the hospital to see how studying was going.

        I’m convinced I cared more than I would have had I taken a loan.

      • Rosa Says:

        I don’t think the caring more works the same for borrowed money as for earned money. At least not at the debt loads people are looking at now.

        I knew if I lived super cheap I could graduate with no loans to pay. So I lived *really* cheap. And that was with my mom paying almost all the bills – tuition and a little bit of spending money. I paid for rent & groceries & whatnot, which I could manage on minimum wage paychecks. That’s a big psychological payout compared to “I scrimped and saved and graduated with $80,000 instead of $100,000 in debt. ($100,000 is about 4 years at current cost of attendance, according to our flagship state U’s website.)

  6. Holly@ClubThrifty Says:

    I can’t believe you have putting $500 per month in for so long. That really is amazing!
    We put anywhere from $25-$50 per month in for each child then top it off at the end of the year. That usually means making sure that $2,500 gets into each of their accounts because our state (Indiana) offers a 20 percent tax credit on the first $5,000 we contribute each year. Since we’re getting $1,000 back at tax time for the first 5K we put in, it seems like a no-brainer! We don’t have nearly as much saved as you do but we also plan to use our rental properties to finance their education as it progresses. I hope it’s enough =(

    Anyway, great job! Compound interest really is amazing. I’m sure your kids will appreciate it when the time comes (or at least when they get older and realize how much debt all of their friends are in).

    • nicoleandmaggie Says:

      $20-50/month is going to compound at the same rate as $500. Putting nothing in is really the only way not to benefit from compounding.

      I read a Forbes article the other day about the best way to advantage funds for college. It mentioned rental properties, but I think under the “what not to do” if you want financial aid (I could be misremembering though– landlording is not part of our life plan). It might be worth talking to an accountant about depending on what income bracket you think you’ll be in when your kids are college-age.

      • nicoleandmaggie Says:

        p.s. This is part of why we still have carpet in the bathrooms, vertical blinds, and a car without automatic locks or windows.

      • Holly@ClubThrifty Says:

        We have talked to an accountant and *think* we’re doing everything right (or as right as we can). Our rental properties are part of our college plan and retirement plan, so they are not something we plan on nixing. They will be far too lucrative once they are paid off in around 12 years. My accountant told me it is not a good idea to plan now to get/not get aid for college because our kids are so young and the rules will likely change a few times before then.

        I also would really like to know how much money we will be making in 15 years! Wouldn’t that be nice? We keep thinking that Greg might quit his job in 5-7 years to work online but it is hard to tell. I wish I had a crystal ball sometimes!

  7. becca Says:

    *checks an inflation calculator*
    It looks like my Mom started saving for my college with what in today’s dollars was about half that. She was also probably making about half of what you were. But she put my college savings in government bonds. Let’s just say there was no magical compounding like that.

    Ultimately, my parents lived with the frugality needed of most of the personal finance people I read now, but did so with a fixation on “safety” that really hurt net worth. Granted, I felt really weird the first time I talked to a college prof who wasn’t sure if his daughter would be able to go to a [ridiculously expensive] school because of how the market was doing at the time she happened to need it, given that a few years ago they thought they were right on track. The first time I encountered that I actually thought “why would a *college prof* gamble with a college fund?” (I could see doing it if you viewed as an optional luxury, but most profs view it as a necessity). Now I don’t know if I feel the same way.

    Also, tax *credit*?? not deduction? Maybe Indiana’s not so bad.

    Right now, we’re relying on the kindness of strangers for our compounding (we live in Kalamazoo, and so at least an in state college tuition + mandatory fees are covered, if kidlet stays in this school system- it’s funded by an endowment set up for perpetuity, though goodness knows if it can sufficiently outpace college tuition, which is a legitimately tall order).

    • nicoleandmaggie Says:

      The idea is you pull back into bonds as you get closer to the target date. Most of the Vanguard funds in these 529 accounts will do that for you. (Illinois, I think, got into some kind of scandal during the downturn because they’d messed up investments somehow and it was only caught out when the market crashed, but I can’t remember exactly. I may just think it’s Illinois because that’s something Illinois would do.)

      I’ve read about that program– it is really intriguing.

      • becca Says:

        The Kalamazoo promise is super cool from a policy perspective- linkity link for more wonky side http://www.upjohn.org/Research/SpecialTopics/KalamazooPromise. Not sure how they are using my kidlet’s data though- whatup with that kind of an organization not having an IRB?

        I think the IL prepaid tuition thing is a boondoggle, but I couldn’t find a news story about the investment plans being mismanaged (by the state, that is. One investment company lost 38% in 2008 on a “conservative” bond fund, which involved mortgage-back securities)

        Yep, my kidlet’s 529 (which has just peanuts in it) is half in the Vanguard target date thingy. Part of it is in the social index fund, because I wanted to see if it would really do so much worse it wouldn’t be worth it to consider the socially-conscious investing thing further. *checks mint*. Actually, thus far it’s outperformed everything else (seriously Vanguard social index? 57% up? Seriously??). Even if it were doing a little worse, it’d make me more happy. It’s like, I also overpay for school supplies at target to get the yoobi kind (they donate one of what you buy to a school in need- it’s a great example of making charity tangible and incredibly easy).

      • nicoleandmaggie Says:

        The state chooses which plans are allowed and is supposed to provide oversight– so it was that 38% loss on a conservative fund that wasn’t actually conservative.

        I thought upjohn did have an IRB. That’s weird if it doesn’t.

    • Holly@ClubThrifty Says:

      Yes, it is a 20% tax credit on the first 5K you put in a 529 in Indiana! (not a deduction). So we basically get 1K back for contributing 5K in one year.
      http://collegesavings.about.com/od/statetaxdeductions/a/indiana529tax.htm
      I had to read that a few times and check with our accountant before I believed it.

  8. bogart Says:

    Yes.

    I look at my 403b pretty regularly, and e.g. at the moment it has gone up more over the past quarter than my take-home pay amount for the same interval, and almost more than my gross. Of course, that goes either way (+/-), in snapshot time. But — yes on the being grateful I started early and have stuck with it.

    When you start clearly matters for short intervals (decade or less?). I left my first job in 1999, and that 403b only fairly recently (2012?) doubled. In contrast, I rolled another 403b into a Roth in 2010, and it’s just 7% (of its current value) shy from having doubled since then (of course, the bottom may fall out today, making the two accounts’ fates more parallel %0! )

    We’re focused on retirement savings and debt; DS’s only 529 is a grandparent-gifted one, but if I continue working where I do and the plan persists, we’ll have access to a lovely tuition benefit for his education. And DH is already to a point where his retirement accounts are accessible without penalty.

  9. Debbie M Says:

    I can’t afford to max out my accounts (I don’t even make that much!). But I have been maxing out the Roth IRA since it was invented.

    Unfortunately, the magic of compound interest is crippled by the anti-magic of inflation. Even though inflation has been pretty low since the invention of the Roth IRA, let’s just say it’s a good thing that I’ll also get a pension. (As a reminder, Roth IRAs were born in 1998 and back then the maximum contribution for one person was $2,000 per year, and back then I could barely afford that. Now the maximum is $5,500 and is set to keep up with inflation.)

    I eventually got to where I could afford more than the IRA max and started adding some to my 403b as well, but then I couldn’t deal with the stress of that job and my salary has been pretty low ever since.

    All in all, I love my retirement accounts. And I loved putting part of my raise each year into those (and my charitable contributions), so I’m a big fan of the stealth factor as well.

    I do also get annoyed that the privileged get the privileges. For example, healthy people are better at fighting off injury and disease, plus their doctor visits are mostly free (because they are mostly preventative check-ups paid for by insurance). White people don’t have to worry about walking-while-black. Etc.

    On the other hand, my income history is strictly below average (though not usually by much). I like to compare my salary to that of first-year teachers in my town, except that they have generally made more than me. And yet I still have been able to take advantage of some things that richer people do. I bought a house (though it was small and on the edge of an iffy part of town so it cost only 60% of the median). I have profited greatly from the stock market. I also get credit cards with good rewards–even at my current low salary of 27K because of good credit. I’ve always had free checking. I’m not married, but I’ve always had a roommate, so I don’t lose out there, either. Some people are indeed too poor to get any of those advantages, but it’s not always just about income level.

    I look at my accounts once a month when I make various personal finance calculations. Fortunately this doesn’t make me flip out–the only changes I make in response are rebalancing. (Actually, I do flip out, but not enough to actually sell on the way down.)

  10. chacha1 Says:

    I look at my 401(k) about once per quarter. It’s on an auto-rebalance thing, but I recently stopped further contributions to one fund that I felt was too risky in this market, sold off part of the holding in that fund and parked it in two other funds. Going heavier with bonds. At 48 I still have room to be a little aggressive with investments, but my husband doesn’t have any retirement funds to speak of so basically it’s all on me. There was almost $250K in my account last time I checked. I contribute 8% of my pretax income. Was going to bump it to 10 this year but then Family Drama happened and I wanted to keep that extra few dollars available, which turned out to be a good thing.

    We are working on trimming some expenses, but sh*t happens. Just had to buy a new refrigerator, and I’m going to need to trade in my 19-yr-old car within the next couple of years. The idea is to trade mine for a hybrid (probably a compact SUV like the Ford Escape) that will work for a hauler (when we go up to the Sierra) but also as a daily driver for the man, who currently spends nearly $500/month on gasoline. I will take his car, which he is illogically in love with, as *my* daily driver since I barely drive. Maybe after a while driving a new car with all the technology he needs built in (his car is a snakepit of MacGyvered wiring because 1999 Accords did not come with Bluetooth etc) he will get over loving the Accord so much and we can trade *it* for something more practical.

  11. Leah Says:

    My husband balances our books every week (or every other), so he checks accounts then. Sometimes, I check in about our retirement stuff. I only visit my retirement accounts when I want to feel good about money and our savings. Mostly, I just check my credit card and bank acct to make sure my spending isn’t out of whack. Of course, with a new baby, everything is wonky — I keep trying to tell myself we’ll settle into a new normal soon, but hospital bills and all that are keeping me frustrated for now.


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