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?