I guess I’m not going to front-load DC2’s 529?

I’d been waiting for our emergency fund to refill after all of the big expenses we had had.  (March has been so long that I don’t even remember what the last big thing was… I mean, I know we hired a handyman to fix some stuff because I haven’t finished that post yet, and I know we bought a car this summer, paid for lots of summer travel and camps that probably won’t happen now, maybe it was front-loading DC1’s 529… probably that.  Bad market timing there, eh?  Shoulda kept dollar cost averaging!)  Since our tax bill and estimated taxes ended up being a wash again this year, we’re back to having more money than we need for the long unpaid summer.

I still don’t know how much college is going to cost for DH’s relative’s kid next year.  They weren’t clear about if the number given was just for summer semester (which they mistakenly put down as the first semester of attendance) or the full year or what.  They also didn’t know if that number included loans etc. etc. etc.  So they were going to move his start to the Fall with everyone else and then get the page with the full work-up of the costs to us.  That hasn’t happened yet because the ‘Rona shut the university down and so on.

In any case, I’m hoping he’s still planning to go in the fall [update:  currently unlikely– he’s moved out and may not finish high school] and I’m thinking that selling stocks is not such a great idea right now, even if they’re only down to 2017 levels.  So instead I’ll keep stockpiling in cash.  There seems much less of a reason now to try to figure out where to put money.  I can’t predict the future, but I somehow doubt we’re in a temporary market low that will immediately zoom back up making me regret not having invested more than our usual right now.

Potentially excess money can sit a while in savings until we find out whether or not it will all be turned into tuition next year or regular spending if DH gets laid off.  We can re-evaluate on frontloading DC2’s 529 in the future, and in the mean-time we will continue to put $750/month in there.

All the good personal finance bloggers out there will say stay the course, and we are… I’m not dropping 403b/457/regular 529 investing.  But I’m also not looking at this as a huge opportunity to get in the market.  Who knows how long the recession will last.  Maybe things will bounce back after a vaccine is out.  But maybe all the things that the Trump administration did to hurt the economy will be exposed and it will be a while before we dig out of this one, just like with W’s recession.

Are you changing any money plans because of the pandemic/upcoming recession?

 

Should I put lump sums in the 529 instead of dollar cost averaging?

One of the reasons this blog seems to have become a spendapalooza is that there’s really not any obvious place for extra money to go.

But there actually is one place for extra money to go– the kids’ 529 plans.  (A 529 plan is an awesome way to save for college or vocational school such that the earnings are tax-free.  But, it’s a good idea to max out your retirement before setting money aside in 529 plans because retirement accounts aren’t included in college financial aid calculations and you can take out loans for college but you can’t for retirement.)

In the past, I’ve always said, “and the kids’ 529s are on track to pay for the school of their choice [by the time the graduate college].”  What I mean by that is that we’ve been putting away $750/month in the accounts, even in the summers when I don’t get paid.  (It used to be $500/month, but we increased it when we paid off the mortgage and stopped paying for daycare.)  But we haven’t *actually* put enough money to be able to cash flow the remainder of the cost of (a four-year private) college yet.  We’re just on track to.

Over the next 4 years before DC1 starts college, $750/mo works out to $36,000 (actually a little less than that since it’s November, but it’s an estimate).  Over the next 8 years before DC1 ends college, it would be $72,000.  (That’s a LOT of money!)

We could just put in $36K (instead of $9,000) over the course of this year and then either start contributing again once we know where DC1 is going to college or not based on the cost of hir chosen school.  (Given hir struggles in English, it is likely that HMC is out, but also out with HMC is its insanely high $72K/year tuition.  I told DC1 we could get hir a unicycle anyway.)

Doing it this way loses some dollar-cost averaging benefits, but it gains the benefits of a longer period of untaxed earnings.

There are some wrinkles to doing BIG 529 account transfers.

The first is that even though the account is a custody account and doesn’t actually belong to the child, it still is subject to the annual gift tax.  For 2019, the amount that can be given annually without tax is $15,000.  Each parent can give that amount, so a married couple can give $30,000 in one year.  $36K is more than $30K, but there’s a loophole with the 529.

This wrinkle has its own wrinkle:  An individual or couple can give a larger lump sum, so long as the total given in that five year period is still less than 5 times the annual exclusion.  So DH and I *could* give $150K this year so long as we didn’t contribute again for another 5 years.  (Of course, that’s a moot point because we don’t actually *have* $150K to give, but you get the idea.)  That means when DC1 actually gets into college, we should be able to continue to contribute to hir 529 without penalty.

So our plan is to do a lump sum of $36K this month to DC1’s account (this gets rid of all our excess cash and digs pretty deep into our emergency fund, but the emergency fund doesn’t actually have to be full until May since we can cash flow most emergencies when we’re both being paid).  Then we will stop contributions to hir account entirely.  We will continue as normal with DC2’s account (contributing $750/month) until we build up excess cash and I start to feel like forcing DH to buy all the Apple products again.  At that point we will re-evaluate and decide whether we want to do a lump sum to DC2’s account or if we just want to increase the monthly contribution.  I’m sure I will post about what we end up doing.

In ~4 years when we know where DC1 is going to college, then we’ll decide whether or not to start contributing to that 529 plan again, and we will have a better idea about how much DC2’s account can bear without going over.

Grumpy Nation, I don’t have a good question for this post.

Ask the grumpies: How to save for multiple kids’ 529s?

First Gen American asks:

Once our mortgage is done again, we’ll swap that out with a 529 auto deposit option that comes out of both paychecks….which brings me to another question…Should we funnel a ton now into older kid and worry about younger kid later (he’s 4 years younger) or should we fund both at the same time now? I’m assuming we can roll over older kid’s excess into younger kid if we over deposit but then if we die before kids do, an uneven distribution would screw things up for kid 2. Not sure what to do yet.

I have also spent some time thinking about this.  I am not sure it actually matters that much.

Yes, if you have too much money for kid #1, you can easily transfer the leftover amount to the second child.  (An added wrinkle–if you undersave for DC1, will you take from DC2’s account?  You can, but would you be willing to?)

A quick check on the internet suggests that the 529 does not automatically go to the child who is named on its behalf– you can name a beneficiary.  It is also something that you can talk about with an attorney for a trust if you do not have a successor that you trust not to just liquidate it at a loss.

We have target-date accounts for our children in their 529s, so it makes sense in terms of risk to fund them separately.  That means DC1’s account has less risk in it right now (a larger bond to stock ratio) than DC2’s does because DC1 is closer to college.  But I’m thinking of them as separate buckets and we’re aiming to fully fund 4 years at a private school given that we’re not expecting much financial aid.

If you’re not thinking of them as separate buckets, then you might want to think of it as if you are going to “retire” and you know you’re going to be alive for 8 years after “retirement” and then suddenly “die” (if you’re planning on funding post-college education, or your DCs might take more than 4 years to graduate, then you might want to add some years to that).  What kind of investment portfolio would be optimal in that scenario?  It’s going to depend on your risk aversion, but you probably could pick a single fund that would fit your risk preferences given that scenario.

In terms of how we’re funding, I don’t actually think that our method of putting in $X/month to each child’s fund is necessarily optimal.  It would make better sense while we have excess cash to put in lump sums right now and stop contributing later (allowing for more tax preferred earnings).  But $X/month/kid is predictable and is easy to fiddle with should our situation change.

The important thing that gets brought up in the comments when we talk about this kind of situation is the perceived fairness of the situation by the kids.  Pick some rule that seems fair for both kids and stick to it.  If you have to make adjustments, make sure that you adjust for the other kid as well.  For us, we’ve decided that fully funding tuition without loans is what we consider fair, so we will be ignoring the actual costs and financial aid for the schools.  Our kids will get college paid for by us no matter what college they choose.  Other people choose a specific dollar amount (though I hope they adjust it for inflation!), or may have a rule like, “we will pay up to the cost of state school X”.  What you don’t want to do is pay full freight for one kid and force the other to take out loans for the full amount because that can lead to them writing about how you don’t love them on money forums, and nobody wants that.

Grumpeteers– How do you think First Gen should save for two kids’ college?

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?

A post for Ana on 529 plans

We were poking around on medical moms blogs when we came across this comment from reader Ana. She said she wanted to just be told what to do with 529 plans because she’d hit the paradox of choice and everything was all complicated.

The post was almost a month old so  we felt silly for replying to it there, so we figured we’d reply to it here and hope that Ana saw it.

Also:  a disclaimer.  We’re not financial advisers.  Take our “advice” such as it is at your own risk.

Step 1:  Check to see if you live in one of these states that offer tax breaks for 529 contributions.

1a.  If you do, then go with your state’s 529 plan.

1b.  If you don’t, then go with Utah.  There are some other 529 plans that are now just as good as Utah’s but Utah’s has always been ranked among the top and we hope will continue to be ranked so.

Step 2:  Pick a plan company within the plan.

2a.  If Vanguard is one of your options, go with that.

2b.  If not, then look at the fees.  Pick one with low fees.

Step 3:  Pick a fund from your choices.

3a.  You want to look for terms “age-based”, “life-cycle” or “target-date”.

3b.  If there are multiple choices among these options, then it doesn’t really matter which one you pick.  They’ll be different in terms of risk and possibly fees.  You’ll again want to focus on the lowest fee plan first.  If your kids are little, more risk is better, if they’re closer to college, less risk is fine.  Don’t worry about the risk if you can’t decide– flip a coin or something.  It’s better to pick something randomly than to pick nothing at all because you’re worried about getting the “best”.

So, if you’re in a state that doesn’t give a tax advantage, you want the Utah UESP Vanguard Age-Based Aggressive Global fund.  And you’re done.  If you’re in another state we’d be happy to poke at their options for you.

Put in what you can.  We like putting some away automatically each month.  Something is better than nothing.

Are you saving for your kids’ college?  How?

August Mortgage Update and ponderings on 529 plans

Last month (July):

Balance: $102,221.27
Years left: 8.666666667
P = $798.18, I =$416.22, Escrow = 621.66

This month (August):

Balance: $100,747.56
Years left: 8.5
P = $803.97, I =$410.44, Escrow = 621.66

One month’s savings from prepayment:  $2.62

Hopefully by this time there’s a new addition to the family!  If not, I hope ze comes out soon.

In any case… For DC 1 we’ve been putting away $500/month every month since ze was born.  Ze has a pretty sizable kitty now, and is on track to be able to pay for the private school of hir choice should we keep this up (depending on the calculator we use and the assumptions we make).  We’re hoping to be making enough money that we don’t qualify for financial aid.

The question is:  What should we do for DC 2?  We could do the same thing, ignoring inflation, and start putting away another $500/month.  Then DC2 will also be on track, give or take, to pay for the private school of hir choice come college time.

The problem:  What if DC1 decides to go some place that doesn’t cost hundreds of thousands of dollars?  What if ze gets huge amounts of merit aid*?  What if I move to a university that pays tuition costs?  Basically, what if ze doesn’t liquidate hir 529 for school?  Then we’ll want to be able to transfer it directly to DC2 (since we don’t really believe in paying for graduate school as much as we believe in paying for college), but if DC2’s 529 plan is also pretty full we might end up with more money in 529s than we actually need.  We would then have to transfer it to some other relative, pay for our own kids’ graduate school, or take the money out at a penalty (in which case, why use the 529 in the first place?).  None of those options are appealing.

However, there are several years between DC1 and DC2, so in theory if we saw DC1 costing less than predicted, we probably could just stop putting money away to DC2’s plan at that point.  Right now putting $500/month away probably isn’t going to put us in any danger of oversaving in 529 plans.  We, of course, may have to readjust once our work situation changes.

So I guess that’s what we’re gonna do.  Put $500/month for each kid until we have some reason not to.  After all, it’s the early savings that are going to benefit the most from the tax advantage since they’ll have more time to generate earnings.

*Currently it looks like there’s a way to take money out without penalty up to the amount of a merit scholarship, but there’s no guarantee that will still be the case in the future.

Link love

This is a little late because a lot of bad stuff has happened this week (I almost miss the days of focusing on just the pandemic… btw, we’ve passed the 100K mark in deaths :( ) and I wanted to have links to things we can do, though I’m still at a loss for some of them.  Americans– we need to get on our phones and write letters and get back to activism, even though it’s hard.  If you have the spoons, we need whatever help you can provide.  (This is partly a pep-talk for me.  But anybody who can help with time or money or both, We Need You.)

 

Violence against black Americans is back in the news again.  (I don’t want to say it’s happening again because I’m fairly sure it has *been* happening, it’s just that our news cycle has decided to notice again.)  Earlier this week, a woman named Amy Cooper from NYC called the police on a birdwatcher who had asked her to comply with the leashing dog policy.  She lied and said he was threatening her.    Then we found out more about George Floyd’s death when a police officer crushed his windpipe for ~9 minutes, even after he had passed out after pleading for his life.  While the officers were fired, none were charged with murder until after protests erupted across the country (so far only the one who did the actual kneeling in the video was arrested).  Protests in Minneapolis  were peaceful until the police came out and attacked protesters with tear gas and other riot gear.  (Contrast that to the non-reaction armed white dudes were getting in Michigan for taking over the State capitol.)  A black Latino CNN reporter was arrested even though he complied with all rules (as seen on film) while his white colleague was ignored.

Trump then tweeted that the protesters should be shot.  Here’s a script for calling your members of congress (MOC) about that from Celeste P.  Earlier that week, Twitter had put a link in one of Trump’s false tweets about voting for more information and Trump had retaliated with an executive order attacking twitter.

 

Donate to the Minnesota Freedom Fund to help get protesters (the kind that actually get arrested because they’re protesting injustice, not the white dudes with guns and no masks) get bailed out.  (Also may help other people get bail money.)  Donate to the North Star Health Collective Fund which is providing street medics during the protests.

White people:  Have a plan for what you are going to do if you see a minority person being harassed by the police.   You could save a life.

Trump to cut ties with World Health Organization.  In the middle of a pandemic.  That he’s badly bungled.  Because he’s the banal kind of evil.  The legality of him doing that is unclear.  Celeste P says to call your MOC (that’s senators and house) and remind them that we are in a pandemic and we need global cooperation.

This nurse is tired.  This pharmacist also.  Trump is evil and the people who harass the people who are trying to save our lives the same.

People are dying from covid in meat packing plants because Trump invoked the Defense Production Act to keep them open.  Meat prices in supermarkets are high, but my colleague who has a ranch in another state says that cattle prices are lower than he’s ever seen.  Now would be a good time to go a little more vegetarian than usual if you’re a meat eater.

 

Why We Plan (or Not)

OMDG needs children’s book recommendations!

 

Link love

Open the country protests are an astroturf operation

Trump owes tens of millions to the Bank of China and the debt is coming due soon.

Wondering about when you’ll get your stimulus check?

Quarantine crapfts thread.

XKCD with a yeast conspiracy.

Link Love

The nonconsumer advocate is angry, and with good reason.

What South Korea is doing.

Trump fires the inspector general of the intelligence community in an act of retribution.  (This is a DIFFERENT inspector general than the one in the above story(!))

Two different takes on the label grief.

Having to choose is Hell.  You get Shirley Jackson and Maya Angelou but you have to have Rand and Kafka?  WHYYYYY?  Or Parker and Hurston but you have to have Joyce and Hemmingway?  Stein but also Hubbard??!?  So many of these men (and Ayn Rand, of course) are douches.  I guess House #1 because at least Wilde will make me laugh… I mean honestly my first question would be at which one of these houses am I least likely to be sexually harassed, which it really shouldn’t be… so in that respect House #3?:

RBOC

  • DH’s relative’s kid got into the closest regional school!  No word on financial aid yet.  Hopefully it won’t be too bad.  We’ve decided to put off thinking about how much we’ll expect him to contribute once we see the numbers.  We can definitely cover tuition, but living expenses is double that.  Ideally we’d be able to do a dormroom, mealplan, and books on top of tuition, but that could get pricey.  I’d prefer for him not to have to take out loans, but subsidized loans are not the end of the world.
  • We are sending DC1 to a fancy out-of-state specialty camp this summer for a week.  The camp only picks up kids DC1’s age who are flying Southwest Airlines (because they won’t pick up “unaccompanied minors” and SWA allows 13 year olds to travel alone) who land/leave at specific times.  We got everything figured out, including taking SWA at Christmas and having DC1 lead us around the airports etc. … and then they changed the flight.  But, although cutting things close, it was still in the allowed time window.  Then they changed the flight home so that zie would have to change planes.  In Orlando.  There are no longer any direct flight options for the way back.  And… DC1 is 13.  We can’t do that.  Our current plan is to keep the flight there (assuming it doesn’t change again) and to cancel the flight back.  (They are allowing us to refund without penalty.)  Instead DH or I will book a r/t and DC1 will get a one-way with a different airline that does have a direct flight to the airport closer to our town so that DC1 is accompanied on the way back.  This will greatly increase the time and the cost.
  • Burt’s Bees baby shampoo changed its formula so it’s itchy just like everything else (I am not the only person to complain about this– the Target comments section is full of complaints starting around 7 months ago).  Now what am I going to do?
  • Getting another tax refund from the government that goes directly back into estimated taxes for next year and a tiny refund.  I guess this is ok with us?  It seems silly though.
  • Emergency fund is finally full again for the summer.  Since we didn’t have to pay taxes or estimated taxes I don’t need to hold on to the excess, not that there’s much excess yet, but in a couple months there may be.  Of course, it might be best to keep the excess in cash for that first bullet point come August.  I hope the financial aid information comes soon so we can plan all this out.
  • DH’s company was supposed to get a Phase 4 grant from the DOD this summer (verbal agreement, not in writing) that would pay for several years of the company, but then the guy in charge at the DOD got promoted and the project got transferred to another department and that funding is no longer likely to be forthcoming.  So now it looks like the company has full funding through the summer, but they’re going to need to secure more funding after that.  So… I guess I won’t be doing a lump to DC2’s 529 this year since we might need the cash instead.