ER with Kids/College Money
- Thread starter JWV
- Start date
J
John Galt
Guest
Even though my kids are mostly all grown, this is a subject near to my heart.
Oldest 2 were ready for college when I was
still working. Typically, I hadn't saved a dime. Also
typically, it worked out fine. Both graduated with honors. Last child was ready after I was fully retired
and divorced. No savings again. Her mother chose
the court system to try to replace the non-existent savings
Anyway, as with ER planning in general, all I can do is
tell my story. It would be ridiculous to advise anyone
to follow my example.
JG
Oldest 2 were ready for college when I was
still working. Typically, I hadn't saved a dime. Also
typically, it worked out fine. Both graduated with honors. Last child was ready after I was fully retired
and divorced. No savings again. Her mother chose
the court system to try to replace the non-existent savings
Anyway, as with ER planning in general, all I can do is
tell my story. It would be ridiculous to advise anyone
to follow my example.
JG
The majority of my children's college funds came from EE savings bonds bought when they were young. Now that my kids are older and started working, I have started a ROTH for them. I use the ROTH as a vehicle to funding their retirements. My parents were very generous to me with inheritance and I want the same for my kids. Starting their ROTHs takes the pressure off of capital preservation with my assests.
To each their own. I know not everyone is concerned with this, but I am. I would love for my kids to feel as secure with their financial future as I do my own.
LovesLife
To each their own. I know not everyone is concerned with this, but I am. I would love for my kids to feel as secure with their financial future as I do my own.
LovesLife
UTMA, EE bonds, & $400/month
Way back in 1992 I projected that four years at Hahvahd starting 2010 would cost $200K. $100/week for 18 years at a 10% IRR would produce about that amount. (The first projection modification was that 10% number.) Today our spreadsheet posits 6% annual college inflation, 7% total return (before taxes, which are minimal anyway), and I reset the projection annually from the College Board website. I'm surprised by how well it's tracking.
When the kid was born (1992) we started buying EE bonds via payroll deduction. (The "Peter Lynch" approach.) The bonds are in our name so that their interest is tax-free when used to pay for education. We kept that up for about four years until yields started drooping. They're yielding ~4%, they're about 10% of the total, and they should fund a year of private school or a couple years at a state school.
Next we started a UTMA with Tweedy, Browne Global Value (TBGVX). The kid's been handsomely rewarded for such perspicacity and we realized that the UTMA would buy a heckuva Ferrari if we didn't cut that out. It'll pay for another couple years of school and it's not hers until age 21 so we feel reasonably secure that it won't be misappropriated. Anyway the kid shows signs of being pretty sensible with investing & spending and it's only a third of the total.
After abandoning UTMA contributions I've fenced off a "college reserve" of Berkshire Hathaway. That's grown to a little over half the college fund.
Since we started this savings project we've had a few philosophical changes of heart. We're not entirely convinced that parents should subsidize 100% of the college experience. We'll wait until we see what the scholarship/work situation looks like before we decide on our contribution. If the kid ends up with a scholarship free ride or at a military academy or a work-study program then we're going to draw down the UTMA first and keep the rest. We also think that small colleges are way better than big ones. That doesn't necessarily make a cost difference but it certainly shifts the balance of the costs and the local living expenses, and we're not trying to save for Stanford anymore. Finally, we're thinking that the first year or two at a junior college might be a better choice than dropping right into a four-year school. Of course that's going to depend on high-school AP courses, the college search, and transfer credits. I'm not enamored of having a full-time college student living with us full-time and I doubt she is either.
529 plans came along a little later in the game for us so I'm not convinced that they're a good idea for any but the most blissfully-ignorant hands-off investors. I'm not accusing 529 owners, but the plans seem to be the educational equivalent of 401(k) plans with a custodian's license to steal through program fees & expenses while not much of a savings in a low tax bracket. OTOH I may change my mind about that if cots go down (or I become a grandparent someday).
I know that the college savings asset allocation is supposed to shift from stocks to bonds to cash as matriculation approaches, but we're going to leave the allocation the way it is until the last minute. One option would be gifting appreciated stock to the kid's brokerage account and cashing it in for lower taxes. (Who knows, someday I might even tell her what I did!) Depending on the college & expenses we won't know what to draw down first until it's time to pay a bill.
Speaking of 401(k)s, we've started a kid's version of that program. We introduced the idea when she turned nine but YMMV. We track it in Quicken, again fenced off from the rest of the money. She sees the balance rising with every weekly contribution (deducted from her gross allowance, of course) and it'll grow to $5000 at age 16. In 2008 she can have our 1994 Ford Taurus wagon for free (the $5K will probably barely cover insurance & gas) or she can shop for her own ride. She's thinking British Mini-Cooper, I'm thinking project car, and she's been keeping an eye on the market for over a year so it should be thoroughly unromantic & boring by the time she turns 16. Doing it as a 401(k) has taught her a number of financial concepts, not the least of them being deferred gratification!
Way back in 1992 I projected that four years at Hahvahd starting 2010 would cost $200K. $100/week for 18 years at a 10% IRR would produce about that amount. (The first projection modification was that 10% number.) Today our spreadsheet posits 6% annual college inflation, 7% total return (before taxes, which are minimal anyway), and I reset the projection annually from the College Board website. I'm surprised by how well it's tracking.
When the kid was born (1992) we started buying EE bonds via payroll deduction. (The "Peter Lynch" approach.) The bonds are in our name so that their interest is tax-free when used to pay for education. We kept that up for about four years until yields started drooping. They're yielding ~4%, they're about 10% of the total, and they should fund a year of private school or a couple years at a state school.
Next we started a UTMA with Tweedy, Browne Global Value (TBGVX). The kid's been handsomely rewarded for such perspicacity and we realized that the UTMA would buy a heckuva Ferrari if we didn't cut that out. It'll pay for another couple years of school and it's not hers until age 21 so we feel reasonably secure that it won't be misappropriated. Anyway the kid shows signs of being pretty sensible with investing & spending and it's only a third of the total.
After abandoning UTMA contributions I've fenced off a "college reserve" of Berkshire Hathaway. That's grown to a little over half the college fund.
Since we started this savings project we've had a few philosophical changes of heart. We're not entirely convinced that parents should subsidize 100% of the college experience. We'll wait until we see what the scholarship/work situation looks like before we decide on our contribution. If the kid ends up with a scholarship free ride or at a military academy or a work-study program then we're going to draw down the UTMA first and keep the rest. We also think that small colleges are way better than big ones. That doesn't necessarily make a cost difference but it certainly shifts the balance of the costs and the local living expenses, and we're not trying to save for Stanford anymore. Finally, we're thinking that the first year or two at a junior college might be a better choice than dropping right into a four-year school. Of course that's going to depend on high-school AP courses, the college search, and transfer credits. I'm not enamored of having a full-time college student living with us full-time and I doubt she is either.
529 plans came along a little later in the game for us so I'm not convinced that they're a good idea for any but the most blissfully-ignorant hands-off investors. I'm not accusing 529 owners, but the plans seem to be the educational equivalent of 401(k) plans with a custodian's license to steal through program fees & expenses while not much of a savings in a low tax bracket. OTOH I may change my mind about that if cots go down (or I become a grandparent someday).
I know that the college savings asset allocation is supposed to shift from stocks to bonds to cash as matriculation approaches, but we're going to leave the allocation the way it is until the last minute. One option would be gifting appreciated stock to the kid's brokerage account and cashing it in for lower taxes. (Who knows, someday I might even tell her what I did!) Depending on the college & expenses we won't know what to draw down first until it's time to pay a bill.
Speaking of 401(k)s, we've started a kid's version of that program. We introduced the idea when she turned nine but YMMV. We track it in Quicken, again fenced off from the rest of the money. She sees the balance rising with every weekly contribution (deducted from her gross allowance, of course) and it'll grow to $5000 at age 16. In 2008 she can have our 1994 Ford Taurus wagon for free (the $5K will probably barely cover insurance & gas) or she can shop for her own ride. She's thinking British Mini-Cooper, I'm thinking project car, and she's been keeping an eye on the market for over a year so it should be thoroughly unromantic & boring by the time she turns 16. Doing it as a 401(k) has taught her a number of financial concepts, not the least of them being deferred gratification!
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Re: UTMA, EE bonds, & $400/month
Nords, this is a very creative idea. I never liked to rag on my kids to save money, so they really didn't learn the concept, in spite of the fact that we were livng fairly frugal lives.
When they got money, either gifts or jobs, they spent it. And as adults, that is pretty much how they do it too. I wish I had been able to do a better education job on this one.
Mikey
Nords, this is a very creative idea. I never liked to rag on my kids to save money, so they really didn't learn the concept, in spite of the fact that we were livng fairly frugal lives.
When they got money, either gifts or jobs, they spent it. And as adults, that is pretty much how they do it too. I wish I had been able to do a better education job on this one.
Mikey
Re: UTMA, EE bonds, & $400/month
I'll second this. These plans get so much hype, and I thought there must really be something to it. So I examined it for my own situation and decided to pass. Actually, I thought ours was mismanaged, and I got into some heated communication with our State Treasurer. The guy was clueless. So I went to my State Senator and he was pretty clueless too, but within a few months they made some of the changes I suggested. By that time it was too late for me to use it. No great loss.
I sort of like Nords'd and Loveslife's idea about
buying I-bonds and EE bonds. I believe they are
tax free if used for education regardless of whose
name they are in. On that point, I think it is a good
idea to keep them in your name ..... just to keep
your options open and not expose your kid to the
temptation when they come of age. Also, there may
be some advantages wrt financial aid as I recall.
I funded my kids educations through the UTMA
route but I never gave them the details. I trusted
them to a point but you know how hormones rage
at that age.
Cheers,
Charlie
buying I-bonds and EE bonds. I believe they are
tax free if used for education regardless of whose
name they are in. On that point, I think it is a good
idea to keep them in your name ..... just to keep
your options open and not expose your kid to the
temptation when they come of age. Also, there may
be some advantages wrt financial aid as I recall.
I funded my kids educations through the UTMA
route but I never gave them the details. I trusted
them to a point but you know how hormones rage
at that age.
Cheers,
Charlie
JWV
This is a subject particularly close to our heart, as the ''Education Fund'' was one of the first joint financial initiatives my wife and I put together after getting married (a full 2 years before our daughter was born).
This was particularly important for us as we do not want our daughter to go into the local public school system, for a variety of reasons, and so her education will require full funding from us from nursery through graduate study.
As we do not wish to finance ever escalating education costs during our retirement, or worse have to change to cheaper schools or even to public schools, due to unforeseen financial problems, we decided to do all the heavy saving early, whilst we are both working.
We continue to save the contemporary equivalent of full school fees, plus a little for extra-curricula activities, for two children, as we plan/hope to have a second child pretty soon. These fees currently equate to around $2000 per month. Our plan is to pay directly from current salary income for the first five or six years of school until the funds are large enough to draw down from to finance the remaining years senior school, undergraduate and graduate school years. The peace of mind aspect is huge for us, as whilst we can both live with the idea of working longer, if necessary, we can't tolerate the thought of significant dislocation in our children's education. Our scheme may well seem like overkill to many people, but we feel it is necessary.
That said, the funds are currently invested in global index funds, but as age milestones approach, this will be reallocated into more conservative vehicles.
None is taxable so I have nothing to offer on tax issues related to other schemes, but can't emphasise enough the value of starting saving early for this.
Simon888
This is a subject particularly close to our heart, as the ''Education Fund'' was one of the first joint financial initiatives my wife and I put together after getting married (a full 2 years before our daughter was born).
This was particularly important for us as we do not want our daughter to go into the local public school system, for a variety of reasons, and so her education will require full funding from us from nursery through graduate study.
As we do not wish to finance ever escalating education costs during our retirement, or worse have to change to cheaper schools or even to public schools, due to unforeseen financial problems, we decided to do all the heavy saving early, whilst we are both working.
We continue to save the contemporary equivalent of full school fees, plus a little for extra-curricula activities, for two children, as we plan/hope to have a second child pretty soon. These fees currently equate to around $2000 per month. Our plan is to pay directly from current salary income for the first five or six years of school until the funds are large enough to draw down from to finance the remaining years senior school, undergraduate and graduate school years. The peace of mind aspect is huge for us, as whilst we can both live with the idea of working longer, if necessary, we can't tolerate the thought of significant dislocation in our children's education. Our scheme may well seem like overkill to many people, but we feel it is necessary.
That said, the funds are currently invested in global index funds, but as age milestones approach, this will be reallocated into more conservative vehicles.
None is taxable so I have nothing to offer on tax issues related to other schemes, but can't emphasise enough the value of starting saving early for this.
Simon888
Simon888, regarding public vs. private schools - it must depend on where you live. My kids have mostly attended public schools and the education received was top-notch. In fact, we do have a private school in our town, and after sending our oldest there for a few years, we transfered her; the public school was better. My youngest just started college and I'm confident she could hold her own against any exclusive, expensive, east-coast prep-school graduate.
As far as colleges are concerned, in the midwest there are some good small public universities, but it's important to shop carefully. All-in-all, our kids have had great experiences with public secondary, post-secondary, and graduate schools.
Bob_Smith
Yes you are quite right. Before anyone, particularly the teachers, are upset, I should expand on the reasons behind my comment.
I have no wish to undermine or deride any country's public schools or the public school system. Our position is not "anti-public school" but is instead primarily driven by our location, which is non-US, and the specific educational needs our child/children will require.
The main thrust of my post was the importance, I believe, of starting to plan early, particularly when retirement is planned to start long before educational needs are likely to finish.
As Nords has mentioned, school fees are almost recession proof and almost always outsprint inflation.
Simon
Yes you are quite right. Before anyone, particularly the teachers, are upset, I should expand on the reasons behind my comment.
I have no wish to undermine or deride any country's public schools or the public school system. Our position is not "anti-public school" but is instead primarily driven by our location, which is non-US, and the specific educational needs our child/children will require.
The main thrust of my post was the importance, I believe, of starting to plan early, particularly when retirement is planned to start long before educational needs are likely to finish.
As Nords has mentioned, school fees are almost recession proof and almost always outsprint inflation.
Simon
J
johnblake
Guest
My understanding is that this is only true if you are the parent. I have several neices and nephews and am planning on contributing to their educations. I don't think I-Bonds or EE Bonds will also tax free withdrawals in this case.
My only option is the 529, and I've been hesitant for the reasons described above.
I am also under the impression that bonds after a certain date (after Jan 1990) could be used for educational purposes regardless of the name issued. My daughter's bonds have her name listed as one of the owners.
Some of my daughter's bonds are way earlier than that date, but since she is allowed to earn some income without paying income tax (personal excemption) we have been cashing in so much each year and staying under the limit. The tuition at our local state college is <$3000 per semester. When she cashes her bonds she is only taxed on the interest earned and it falls under the amount she is allowed to earn without paying tax on it.
LovesLife
Some of my daughter's bonds are way earlier than that date, but since she is allowed to earn some income without paying income tax (personal excemption) we have been cashing in so much each year and staying under the limit. The tuition at our local state college is <$3000 per semester. When she cashes her bonds she is only taxed on the interest earned and it falls under the amount she is allowed to earn without paying tax on it.
LovesLife
Jarhead, this is hilarious! It sounds exactly like something my Dad would do (and I would do). My youngest brother recently told about sitting in study hall and looking out the window and seeing our Dad storm up the sidewalk toward the principal's office. He's a huge, powerful man, and when he's p*ssed, you definitely stay out of his way. My brother turned to a friend who had seen him too, and the friend said, "Oh man, this is gonna be ugly!". He was right. We have some good laughs now about those days. Dad would hammer us if we were in the wrong, but he always went to bat for us if we were in harms way.
Bob:
Exactly, and My guess is that he had no tolerance for "bullies", as I have never had.
My kids were aware that if they were wrong, they would probably welcome a 3rd. party input, rather than mine.
But they also knew I was there to back them up on the other side.
Anyway, that's all behind us now, and my kids are doing fine, and the only thing that irritates me now is when the weather doesn't co-operate.
Regards, Jarhead
One thing that intrigues me with the I bond/EEbond interest is not only can you use the money for your children's education, but you can use it for your own. As nerdy as it sounds, I really like school and have some interest in at least taking some classes. Apparently this is a very popular activity for retirees so I am not alone.
I understand that I/EE bonds which are issued in your name can be used for your education, your spouse's education and your dependants'. It must be used for tuition and fees only--not room and board or recreation. There is a phase out as your income increases.
I understand that I/EE bonds which are issued in your name can be used for your education, your spouse's education and your dependants'. It must be used for tuition and fees only--not room and board or recreation. There is a phase out as your income increases.
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Martha, I am curious. What sort of classes would you enjoy taking?
Mikey
newellcr
Recycles dryer sheets
- Joined
- Aug 26, 2003
- Messages
- 224
"529 plans came along a little later in the game for us so I'm not convinced that they're a good idea for any but the most blissfully-ignorant hands-off investors. I'm not accusing 529 owners, but the plans seem to be the educational equivalent of 401(k) plans with a custodian's license to steal through program fees & expenses while not much of a savings in a low tax bracket. OTOH I may change my mind about that if cots go down (or I become a grandparent someday). "
Nords,
I find it interesting that you find major fault with the 529 plans. I knew when I opened my 529 plans, but couldn't recall the costs so I just looked it up. The costs are 0.65% in MI for the equity option. There are no costs for the guaranteed option if I read the plan disclosure right. The price of membership doesn't seem too steep to me. Once upon a time Kiplinger.com had an article posted that rated all of the state run 529 plans. I can't locate it now. Anyway, all of the saving vehicles have warts of some kind.
There are some posts here that might provide some benefit. http://early-retirement.org/cgi-bin...t_board;action=display;num=1092764542;start=2
Cheers,
Chris
Nords,
I find it interesting that you find major fault with the 529 plans. I knew when I opened my 529 plans, but couldn't recall the costs so I just looked it up. The costs are 0.65% in MI for the equity option. There are no costs for the guaranteed option if I read the plan disclosure right. The price of membership doesn't seem too steep to me. Once upon a time Kiplinger.com had an article posted that rated all of the state run 529 plans. I can't locate it now. Anyway, all of the saving vehicles have warts of some kind.
There are some posts here that might provide some benefit. http://early-retirement.org/cgi-bin...t_board;action=display;num=1092764542;start=2
Cheers,
Chris
brewer12345
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Mar 6, 2003
- Messages
- 18,085
Yeah, I'm not impressed with 529s. Education IRAs appear to be OK, though. Realistically, the college money is likely to be just commingled with all the rest of the after tax money, since I am on the hook either way.
Well, once again it's a numbers game and I kept my notes from the first time. In 2002 when our kid was 10 (with eight years to go) I presumed a $4800/year savings rate into a fund with a 0.60% ER and 10% (admittedly wildly optimistic) annual returns in a 27% tax bracket.
We used the formula
FV = (payment/year)*[(1 + return-fees)^^years - 1]/(return-fees)
Before taxes that's ($4800)*[(1+0.1-0.006)^^8-1]/(0.1-0.006) = $53,710.
A 27% tax bite (paid every year!) knocks that 10% return down to 7.3% which starts working against the compounding very quickly. After taxes that's ($4800)*[(1+0.073-0.006)^^8-1]/(0.073-0.006) = $48,718, so a 529 plan saves you $4991 with these numbers. Looks pretty good from the dollars standpoint.
But that was 2002. Since then I've retired to a lower tax bracket, the brackets themselves have come way down, and I've noted some amazing fund expenses from Vanguard & Fidelity. I've also realized that 10%/year is not too likely from your average mutual fund. So let's use some more realistic 2004-5 numbers: $4800/year, 0.60% ER, 7% annual return (still optimistic) in a 15% tax bracket. I'll presume we still have eight years left (although now the actual number is slightly less than six).
Before taxes is ($4800)*[(1+0.07-0.006)^^8-1]/(0.07-0.006) = $48,195 and after taxes is ($4800)*[(1+0.0595-0.006)^^8-1]/(0.0595-0.006) = $46,413. Using 21st-century numbers instead of the hyped '90s data gives a more realistic 529 plan that saved me a whopping $1781 over eight years. Keep in mind that I've lost control over using that money for anything but education. No college commuter car, no starter-house down payments, no wedding gifts, nothing but education. If the kid does it all on scholarships & work/study then the 529 money is hostage to another generation (or we pay a penalty). I've saved on taxes but I'm not sure that the expense was worth the cost of relinquishing control.
And what if I'd been able to find equivalent returns from a generic S&P500 fund with lower expenses? Let's take Vanguard's 0.09% ER (one of the cheapest funds in existence) and pay taxes: ($4800)*[(1+0.0595-0.0009)^^8-1]/(0.0595-0.0009) = $47,270.
I'm only $925 behind the 529 plan after eight years, a difference of 1.9%. I paid taxes but I ended up with almost as much money and all of the control over it. And frankly, most of that Vanguard fund's gains would be cap gains taxed at a 10% or even 8% rate instead of 15%.
I'm not trying to prove that 529s are a bad deal. But qualifiers like "good" or "bad" are meaningless without a numerical context and an appreciation for the loss of control over what the money can be used for.
I still think that 529 plans benefit the custodian the most. You have to admit that your 0.65% ER is one of the lowest around, and many are much higher than that. A 529 plan may also be a good deal for big savers with high tax brackets and a long time to compound before college, but for many of us a UTMA or gifting can cut way into the 529 plan's advantage. A low-turnover index fund with rock-bottom expenses in a low tax bracket has considerably narrowed the 529's lead, but everyone has to do their own UTMA/gifting tax math.
Or I could remain blissfully ignorant, stick with the 529, and get a life.
newellcr
Recycles dryer sheets
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Hello Nords,
I'm working on the 18 year horizon for each kid. It should mean about 50k (current year dollars) tax free for each of my kids. Plus I don't pay state tax on the contributions. (That's a couple of years worth of investment expenses.) You make a really good point about the cap gains tax break. I am also working on an outdated rule of thumb that after about 7 years, a tax deferred investment (with 10% penalty) will outperform a non-tax deferred investment for the same period.
Great points about good and bad labels and running the numbers for each case.
Kind Regards,
Chris
I'm working on the 18 year horizon for each kid. It should mean about 50k (current year dollars) tax free for each of my kids. Plus I don't pay state tax on the contributions. (That's a couple of years worth of investment expenses.) You make a really good point about the cap gains tax break. I am also working on an outdated rule of thumb that after about 7 years, a tax deferred investment (with 10% penalty) will outperform a non-tax deferred investment for the same period.
Great points about good and bad labels and running the numbers for each case.
Kind Regards,
Chris
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Actually, while it may not be exciting, it is very satisfying. I took a course on plant propagation, and learned a lot about rooting cuttings, etc., and I enjoyed doing it for many years.
It is a little lonely for me now, but in other circumstances I would like to do it again.
Mikey
KB
Thinks s/he gets paid by the post
Martha,
I've been through the Master Gardener program once and will start in January for the second time. I highly recommend it. For my first time, I was unable to complete my volunteer hours and dropped from the program. This time I plan on doing extra volunteering.....I have much more free time these days even though I'm still working.
Let me know if you need the link to your state's program or have any questions.
I've been through the Master Gardener program once and will start in January for the second time. I highly recommend it. For my first time, I was unable to complete my volunteer hours and dropped from the program. This time I plan on doing extra volunteering.....I have much more free time these days even though I'm still working.
Let me know if you need the link to your state's program or have any questions.
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Martha, thank you for a very sweet comment
Mikey
