Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
College Savings - short term
Old 02-19-2013, 11:16 AM   #1
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
College Savings - short term

I have $200K saved up for my children's college. My daughter starts in 2.5 years and my son starts in 5.5 years. I plan on withdrawing $25K a year for each of them for 4 years. If college costs more that, they will have to work and get loans. Both children are very intelligent and may get some scholarships but they will not be eligible for financial aid.

So the question is what is the best way to invest this money with a very short time window. If the investments fall in value, I have the ability to dig into my other savings or work more but I would prefer not to.

I currently have the money invested 20/80 in a brokerage account. I put the money in these bond funds a year ago when I was less financially educated and did not know about index funds. It has done well but I want to get the money out to avoid the outrageous fees I am paying.

What would you recommend I do with this money as I do plan on using it soon, but would sleep okay if it lost maybe 10% of its value? (I am already maxing out my roth and tax deferred for my retirement, so assume this money has to stay taxable.)

Thank you!
__________________

__________________
RetiringAt55 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-19-2013, 11:27 AM   #2
Full time employment: Posting here.
ronocnikral's Avatar
 
Join Date: Apr 2010
Posts: 852
how do you know your kids won't qualify for financial aid?

Harry @ TFB writes an excellent article on allocations for college savings. Asset Allocation for a 529 Plan

At this point, you've met your goal, so why continue to take risks?

as far as investment vehicles, An option if your kids have earned income is to contribute it to roth IRA for them. I believe Nords even posted about this. Starting your kid’s Roth IRA

I-bonds are another option (that will not be taxed coming out for education purposes) and perhaps a 529 to get a state tax benefit (but I wouldn't go overboard at this point).

Again, having saved what you would like to give them, I would just go into inflation protection mode (and reducing risk).
__________________

__________________
ronocnikral is offline   Reply With Quote
Old 02-19-2013, 11:42 AM   #3
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
I would definitely look into putting some of the money into your state's 529 college savings plan. Many states offer tax deductions for 529 contributions, up to some limit per year. If your state does so, the tax deduction might easily be the best "return" on your investment that you can safely get with such a short time frame.

I personally don't see anything wrong with your current 20/80 allocation. You need the money soon, but not immediately. I would use a short term bond fund for your daughter and an intermediate term bond fund for your son, considering that he is still over five years from needing the money. I have a lot of my investments with Vanguard, but of course there are other good low cost choices.
__________________
karluk is offline   Reply With Quote
Old 02-19-2013, 11:44 AM   #4
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
FAFSA also includes their stepfather's income and savings so we are way over the limits for financial aid.

I do not want to put the money in a 529 because I want to keep the money in my name. There is a crazy exH in the picture and I want to keep control over things. The divorce decree specified that I would have $50K for each of them in a bank account when they start college. The additional amount I provide is up to me and I am not legally obligated to provide more than this, but I want to at least provide an extra $50K each.

The kids do not have jobs now so I cannot start Roth IRAs for them.

I will check into I-Bonds. I guess I could also put them in 1-year CDs and make 0.8% or so but that is kind of painful.

One question is since I have several Plan Bs if this money does go down in value, is there a reason to treat it differently than other money I have?

Thanks for all the advice.
__________________
RetiringAt55 is offline   Reply With Quote
Old 02-19-2013, 11:54 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
If college spending is all pre-retirement, you might consider just investing the money as part of your in-retirement AA, starting it a little early. If this is added on to retirement withdrawals, then stay more conservative with the short-term money.
__________________
Animorph is offline   Reply With Quote
Old 02-19-2013, 12:00 PM   #6
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
I plan to retire from my job in 7 years but I will not have to withdraw retirement money until I am 70, 22 years from now. So I think I can be a little more aggressive with the money.

I will investigate 529s in more detail. I may want to put some money in there as Illinois does offer some nice state tax breaks. Something to seriously consider.
__________________
RetiringAt55 is offline   Reply With Quote
Old 02-19-2013, 12:20 PM   #7
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Quote:
Originally Posted by RetiringAt55 View Post
One question is since I have several Plan Bs if this money does go down in value, is there a reason to treat it differently than other money I have?
That is a very good question. I've changed my own opinion of this over the years. I used to have both my children's 529 money in an age-appropriate option. But, when my D was about to start college, the 529 plan notified me that her funds would be transferred into a money market account earning 0% interest. That's certainly age-appropriate, but naturally I was unhappy about this, since I had safe options outside the 529 that would earn over 2%. I eventually decided that money is money, no matter where it's located, and keeping the money safe didn't require me to make bad investment decisions.
So I transferred the 529 money to a total bond fund, while simultaneously transferring the same amount from a total bond fund in my 457 into the stable value fund. That allowed me to keep the same asset mix, but avoid tying up a lot of money in a 0% interest account.
__________________
karluk is offline   Reply With Quote
Old 02-19-2013, 12:25 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by RetiringAt55 View Post
I do not want to put the money in a 529 because I want to keep the money in my name.
You can keep the money in your own name. Make YOURSELF the beneficiary until the kids need it. Your crazy Ex-H would have no right to it.

Quote:
There is a crazy exH in the picture and I want to keep control over things. The divorce decree specified that I would have $50K for each of them in a bank account when they start college. The additional amount I provide is up to me and I am not legally obligated to provide more than this, but I want to at least provide an extra $50K each.
Is the $50K from your ex in the splitting up of assets?

529 rules allow you to withdraw the money if it is all not used. You would have to pay taxes only on the gains, the principle is returned to you tax-free..........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-19-2013, 12:27 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by karluk View Post
That is a very good question. I've changed my own opinion of this over the years. I used to have both my children's 529 money in an age-appropriate option. But, when my D was about to start college, the 529 plan notified me that her funds would be transferred into a money market account earning 0% interest. That's certainly age-appropriate, but naturally I was unhappy about this, since I had safe options outside the 529 that would earn over 2%. I eventually decided that money is money, no matter where it's located, and keeping the money safe didn't require me to make bad investment decisions.
So I transferred the 529 money to a total bond fund, while simultaneously transferring the same amount from a total bond fund in my 457 into the stable value fund. That allowed me to keep the same asset mix, but avoid tying up a lot of money in a 0% interest account.
Age-appropriate asset allocation plans will move the kid to cash, they are trying to eliminate the market crashing and screwing up college funding.
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-19-2013, 12:29 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by RetiringAt55 View Post
I have $200K saved up for my children's college. My daughter starts in 2.5 years and my son starts in 5.5 years. I plan on withdrawing $25K a year for each of them for 4 years. If college costs more that, they will have to work and get loans. Both children are very intelligent and may get some scholarships but they will not be eligible for financial aid.

So the question is what is the best way to invest this money with a very short time window. If the investments fall in value, I have the ability to dig into my other savings or work more but I would prefer not to.

I currently have the money invested 20/80 in a brokerage account. I put the money in these bond funds a year ago when I was less financially educated and did not know about index funds. It has done well but I want to get the money out to avoid the outrageous fees I am paying.

What would you recommend I do with this money as I do plan on using it soon, but would sleep okay if it lost maybe 10% of its value? (I am already maxing out my roth and tax deferred for my retirement, so assume this money has to stay taxable.)

Thank you!
529 plans are essentially a gifting mechanism to fund college. There are tax advantages to making lump sum payments to 529 plans. They are MUCH better than UTMA/UGMA accounts, I have many horror stories I could tell on how those ended badly........talk to your CPA or tax attorney to see how to maximize the benefits........
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 02-19-2013, 12:39 PM   #11
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Quote:
Originally Posted by FinanceDude View Post
Age-appropriate asset allocation plans will move the kid to cash, they are trying to eliminate the market crashing and screwing up college funding.
But that's exactly the point of my maneuver - I did have the money safe for DD. It was in the stable value fund in my 457. I had transferred the risk of a decline in bonds from the 457 to the 529. Sure, I might suffer an investment loss in the 529 if bonds tanked, but that would be exactly offset by the fact that I no longer had bond exposure in my 457. My investment risk was exactly the same, except now I was earning decent interest in the stable value fund rather than 0% interest in the money market fund.

I was responding to OP's question about whether college money should be segregated or treated as just one component of a unified portfolio. Treating all of your investments as a single portfolio gives you added flexibility without increasing risk.
__________________
karluk is offline   Reply With Quote
Old 02-19-2013, 12:42 PM   #12
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
Quote:
Originally Posted by FinanceDude View Post
Is the $50K from your ex in the splitting up of assets?
In exchange for my ex allowing me to keep the house, the decree specifies that I have to set up $50K each in an account for each child when they start college. If they do not go to college, the money goes to the other child and if it is not all used the remainder goes to my ex. So my hands are pretty restricted for $100K of the money. Luckily, both kids plan on going to college and $50K each doesn't last long, so it is unlikely exH can get his hands on it. He has tried to convince them that college is unnecessary but they are too smart to believe him. Both kids are in the 99th percentile with straight As, so I see bright things for their futures. D16 wants to be a genetic biologist and S13 wants to be an engineer like me.

But the 529 might be a good option for my non-obligated share of the money. I wasn't aware that I could be the beneficiary. I thought it had to be a child. I will also have to look into what exactly they define as a "college expense" so I can assess whether or not there will be enough expenses that qualify.
__________________
RetiringAt55 is offline   Reply With Quote
Old 02-19-2013, 12:48 PM   #13
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
Quote:
Originally Posted by karluk View Post
Treating all of your investments as a single portfolio gives you added flexibility without increasing risk.
I like this idea. I could increase the stock exposure in my roth to offset any bond loss in the college savings.

As I am leaving my employer when I am 55, I will also have the option of tapping into my retirement savings if I had to when my S13 is in college.
__________________
RetiringAt55 is offline   Reply With Quote
Old 02-19-2013, 12:53 PM   #14
Full time employment: Posting here.
 
Join Date: Jan 2013
Posts: 660
Quote:
Originally Posted by RetiringAt55 View Post
But the 529 might be a good option for my non-obligated share of the money. I wasn't aware that I could be the beneficiary. I thought it had to be a child. I will also have to look into what exactly they define as a "college expense" so I can assess whether or not there will be enough expenses that qualify.
You can make yourself the beneficiary, but that might very well affect your tax deduction. There's no need to make yourself the beneficiary in any case. The money belongs to you, not your child, no matter who the beneficiary is.
__________________
karluk is offline   Reply With Quote
Old 02-19-2013, 12:54 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,381
Each state I believe is different, but in my state , the most you can shovel into a 529 is $8k a year. I believe Illinois has a 4-5% income tax now, so you would be guaranteed that amount of return even if you chose the money market option. Yes, check on what the 529 can be spent on, but I do believe the options were generous. At least they were for me when I set mine up for my daughter.
Concerning IBonds. You can only get 10k a year max in them yearly, unless you were going to find them under your children's name, which I believe you were not wanting to. Due to the short amount of time you have, and the 3 month interest penalty for withdrawing IBonds prior to 5 years, and the 12 month "lockout period", I don't know if they would provide you any meaningful value at this point.
__________________
Mulligan is offline   Reply With Quote
Old 02-19-2013, 01:04 PM   #16
Moderator
rodi's Avatar
 
Join Date: Apr 2012
Location: San Diego
Posts: 8,817
Quote:
Originally Posted by karluk View Post
You can make yourself the beneficiary, but that might very well affect your tax deduction. There's no need to make yourself the beneficiary in any case. The money belongs to you, not your child, no matter who the beneficiary is.
This is my understanding as well. I "own" the accounts that are have my son's listed as beneficiaries. That was one of the appeals, to me. What if, heaven forbid, my kids turn out to be drug addicted losers..... I don't want them to have access to a large chunk of money in that scenario. (We have a family member who ended up like that... Now in his 50's... his brain is fried as is his health from years of abuse... No family is perfect.)
__________________
rodi is offline   Reply With Quote
Old 02-19-2013, 01:40 PM   #17
Full time employment: Posting here.
ronocnikral's Avatar
 
Join Date: Apr 2010
Posts: 852
Quote:
Originally Posted by RetiringAt55 View Post
FAFSA also includes their stepfather's income and savings so we are way over the limits for financial aid.
That's today. What about tomorrow? Certainly my father would have sent me to a different college if he knew he was going to loose his job in the middle of my first year.

Fill out the FAFSA. You can do mid-year adjustments.

Read the blog post on Roth IRA's. You seem to be a bit controlling over this whole thing, but it is a good option.

Not all 529's make sense. My state caps the tax deduction at $3k or so per child. I wouldn't go all in for the 529's, but some diversity is beneficial.
__________________
ronocnikral is offline   Reply With Quote
Old 02-19-2013, 01:50 PM   #18
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 117
I will do the FAFSA but I am not planning on getting anything. My job is stable and my DH gets a pension in addition to his job. I know the FAFSA is often required by colleges in order to get scholarships, so I do plan on filling it out.

I am already doing my Roth IRAs. If my children do not have earned income, I can't put any in an account for them, so I do not understand what you mean.

I looked at 529s and it is pretty nice for Illinois. A married couple can put in $20K a year and deduct that from their state income. That would save us $5000 in taxes in the next five years. The Bright Start program also has some nice index fund portfolios with expense ratios of only .2%. They use Vanguard Index Funds and an Oppenheimer Money Market. I printed out the 60 page booklet on it and it looks very interesting.
__________________
RetiringAt55 is offline   Reply With Quote
Old 02-19-2013, 07:57 PM   #19
Recycles dryer sheets
 
Join Date: May 2008
Location: Treasure Coast
Posts: 339
If anyone is a resident of Illinois, currently has kid(s) in college, and will pay up to $20K total for their 529 allowable expenses (not otherwise covered by scholarships or 529 withdrawals), you should contribute to the Bright Start program, put the money in the money market fund, then withdraw it immediately and use it to pay the allowable expenses. Doing so will net you 5% off your Illinois income tax on whatever you contribute. Do the whole $20K, and you drop $1,000 into your pocket with no risk. You can do this all online, and the money round-trips in about a week.
__________________
45th Birthday is offline   Reply With Quote
Old 02-19-2013, 09:42 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Mar 2010
Posts: 1,649
Quote:
Originally Posted by RetiringAt55 View Post
I will do the FAFSA but I am not planning on getting anything. My job is stable and my DH gets a pension in addition to his job. I know the FAFSA is often required by colleges in order to get scholarships, so I do plan on filling it out.
Have you looked at the FAFSA form yet? It's been a few years since I filled one out. You do not have to include any IRA funds or pension funds unless the form has changed. They don't look at any money set aside in or for retirement to my recollection. So defer all you can so you don't have to put it on the form!!

You might also be able to get around listing their step father's income unless he adopted them. Don't know how the father's income would play in here but if you are the one solely responsible then I'd certainly investigate that avenue.

You didn't say whether that account with the $50K had to be in the child's name but I wouldn't put it in their name....because of the FAFSA. The FAFSA will ask what specific funds they have in their names too! You don't want them to have any if at all possible.

We didn't get any aid due to FAFSA either but don't rule out college scholarships. Most colleges give them regardless of FAFSA.

And as another poster here said, you can request a yearly review after the start of each year...typically before the 2nd semester starts. By then colleges know more about their financial aid money and if there is extra they tend to give out some more.

Regarding where to put the money? I can't add anything else to what other's have said. I financed my daughter's college differently. Bought zero coupon bonds the first few years of her life with them maturing each semester during her scheduled college years.
__________________

__________________
sheehs1 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 01:00 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.