Closet_Gamer
Thinks s/he gets paid by the post
My older daughter heads off to college in the fall of 2018. Having spent 18 years assembling the financial artillery to pay for the college war, I now need to figure out how to draw it down.
I'm guessing others on this board have been through this and would welcome any insights on best approach.
Apologies for a long post but wanted to share all the facts.
Situation Facts:
2 kids -- one will leave in fall of 2018, the other in fall of 2021
$450k in college savings
$275k in 529s that grow at the rate of college inflation
$175k in a generic after tax brokerage
Our original plan was to get each kid through a private, four year degree with zero debt. Any grad school would be on them.
DD#1 is now pursuing a six year PharmD program...so the notion of four years and then she's paying goes out the window. We won't have access to need-based financial aid and net of merit aid, our estimated out-of-pocket to get thru the PharmD program is $300k accounting for inflation.
Assume DD#2 follows a similar path…accounting for inflation her estimated cost would be $350k.
Combined, we’re looking at a 9 year drawdown schedule where DD#1 enters in 2018 and DD#2 finishes in 2027 for total nominal outlays of $650k (we’ll expect them to pay back about $200K combined, but this question is about draw down.)
College Investment Facts
The quandary is how to balance three funding sources (cash from income, after tax brokerage assets, and inflation protected 529 assets) to confidently pay out the costs over 9 years recognizing that Years 4-6 are the peak burn rate with both of them in school.
Year 1-3: Pay cash from income (~$150K)
Year 4: Pay cash from income (~$100K)
Years 5-6: Clean out the brokerage and some of the 529s (~$225k)
Years 7-9: Burn down the inflation matched 529s (~$175k)
In essence I will cover the gap between $650K nominal and $450K saved by fronting the first few years in cash and then use the saved $$$ in the later years.
Questions:
Thanks!
I'm guessing others on this board have been through this and would welcome any insights on best approach.
Apologies for a long post but wanted to share all the facts.
Situation Facts:
2 kids -- one will leave in fall of 2018, the other in fall of 2021
$450k in college savings
$275k in 529s that grow at the rate of college inflation
$175k in a generic after tax brokerage
Our original plan was to get each kid through a private, four year degree with zero debt. Any grad school would be on them.
DD#1 is now pursuing a six year PharmD program...so the notion of four years and then she's paying goes out the window. We won't have access to need-based financial aid and net of merit aid, our estimated out-of-pocket to get thru the PharmD program is $300k accounting for inflation.
Assume DD#2 follows a similar path…accounting for inflation her estimated cost would be $350k.
Combined, we’re looking at a 9 year drawdown schedule where DD#1 enters in 2018 and DD#2 finishes in 2027 for total nominal outlays of $650k (we’ll expect them to pay back about $200K combined, but this question is about draw down.)
College Investment Facts
- The 529 program we use grows the money at college inflation rates and can be used for either kid. In my mind, this is “magic” money as its liability matched, tax deferred, and paying an effective rate of 3.5% on a pretty short maturity. Of course, it can only be used for college.
- Brokerage investments are just investments...but the short time horizon is a challenge. Equities create sequence of returns risk while interest rates won't keep up with college inflation.
- I have excellent free cash flow and could pay the costs out of cash flow if necessary.
- I will likely FIRE in Year 4 of the 9 years. So years 5-9 need to be confidently funded as I won't have income to cover any variance between college savings and college costs.
The quandary is how to balance three funding sources (cash from income, after tax brokerage assets, and inflation protected 529 assets) to confidently pay out the costs over 9 years recognizing that Years 4-6 are the peak burn rate with both of them in school.
Year 1-3: Pay cash from income (~$150K)
Year 4: Pay cash from income (~$100K)
Years 5-6: Clean out the brokerage and some of the 529s (~$225k)
Years 7-9: Burn down the inflation matched 529s (~$175k)
In essence I will cover the gap between $650K nominal and $450K saved by fronting the first few years in cash and then use the saved $$$ in the later years.
Questions:
- What do people think of this approach?
- Do people agree that the inflation protected 529 money should best spent last even though its “single purpose” college $$$?
- What AA would you suggest for the brokerage $$$ that needs to be tapped in ~6 years from today?
- What else am I missing?
Thanks!