One thing I’m always trying to get better at is predicting the future. I do this as an investor and try to see what the world will look like in five, ten or even twenty years. The sooner you can see the curve ahead, the better you can adjust before hitting the guardrail.
I had a revelation recently. I came to a shocking conclusion after being unable to pay for a new car worth more than $50,000 with investment income (rather than principal). I may run into the same problem when I use our children’s 529 plan to pay for college. In other words, even if I saved and invested diligently for them for 18 years, I still might not be able to spend all the money when the time comes.
For those who are curious, I recommend participating in a 529 plan. This is a tax-advantaged way to make future college tuition more affordable. If you have funds left over, you now have the option of converting a portion to a Roth IRA. What’s not to like?
The Ultimate 529 Plan Funding Challenge
When I think about the biggest financial burdens on parents, three categories always come to mind. housing. health care. tuition fee. These three costs often determine a home’s comfort or stress for decades.
So the logical steps are simple. Gain neutral real estate by owning your primary residence. Work for an employer that offers generous health benefits. Be proactive about saving for your child’s college expenses.
If you want to eliminate the fear of one day not being able to afford your child’s dream college, then aim for this stretch goal. Contribute enough to bring the total balance to match the current four-year costs of today’s most expensive private colleges. Once you do this, your college expenses should be pretty much determined. During most periods, a balanced 529 portfolio has a good chance of matching or beating rising tuition costs.
This is what I do. In 2017 and 2019, when my two children were born, I super-funded both programs with this philosophy in mind. My parents also donate every year. Five years after super funding, we are back to making our annual maximum gift.
Reached my 529 plan stretch goal
Fast forward six years, eight and a half years. Each 529 plan is now worth over four hundred thousand dollars. The bull market has been a huge help. But so does the delayed gratification of buying things we don’t need, like a new car from the past decade.
The most expensive private colleges currently cost about $100,000 a year. Just based on math alone, we should be in good shape. In a recession, we lose years of gains. But in the long term, we should be able to fully cover college through two 529 plans from 2035 to 2041.
In many ways, this also frees up financial aid dollars for families who truly need help. It feels good. At least on paper.
Managing expectations for children
Some believe donating enough money to pay for the most expensive private schools is overkill. I don’t think so.
According to my observation, Life is only going to get more competitive Because of artificial intelligence and globalization. What a tragedy it would be if your child worked so hard to get into their dream school only to find themselves unable to attend because of a lack of money.
Given that young children have little ability to earn, save, or invest for themselves, parents must do the heavy lifting. As a parent, you cannot expect your child to receive a grant or scholarship. You can’t expect your child to be a prodigy at an instrument or sport. You cannot rely on college admissions trends that match your family background at the time.
The only thing you can control is saving aggressively and preparing for the worst-case scenario.
If your child does receive a scholarship or attend a school that is much more affordable than expected, the remaining 529 funds can be passed down to siblings or even future grandchildren. In fact, using a 529 for your grandchild is one of the most impactful gifts you can give. It reduces financial stress on children even decades before they are born.
You may not actually be able to spend the money
This is where things get interesting. Ten years later, after I couldn’t pay for a new car with my investment income, I realized something deeper was going on. Even if we have money, it’s emotionally difficult to spend it. I’m worried I’ll freeze when the time comes to spend the 529, even though that’s the whole purpose.
Today’s college tuition already feels like loan sharking. Why is modern technology like this? still The degree takes four years to earn and we have unlimited access to online information. We have free access to full courses from the best professors in the world. Yet tuition is rising at twice the rate of inflation. What’s the point?
At the same time, artificial intelligence is eliminating millions of entry-level jobs. If your child graduates with a degree that is not aligned with the future labor market, he may go home like many of the adult children I see in San Francisco.
Over the past twenty-five years, every neighborhood I’ve lived in has had at least one or two adult children who moved back because they couldn’t find jobs that paid enough.
I’m not arrogant enough to think that my kids will magically escape this trend. Partly due to the cost of college, life has become too expensive for our younger generation.
University decision-making thought experiment
Let’s imagine a scenario. Your child receives early admission to a top 50 private university. You feel proud. Your spouse bursts into tears of joy. After 18 years, you feel validated as a parent.
Then the acceptance letter arrived. Basic aid is not required because your family income is slightly higher. Yet you don’t feel rich. You live in an expensive city, work hard, and pay lots of taxes. Your expenses are growing every year. Even though you’re making several six figures a year, you may feel like you’re barely getting by.
Let’s say the school is Boston University. Your family earns $350,000 per year in Boston. You are thrifty and frugal. You work 50 hours a week. Your mortgage is high. Groceries cost a fortune. The total annual cost of attendance after taxes is approximately $95,000. Thankfully, you have a 529 plan worth $400,000.
If your child can attend UMass Amherst for $38,000, are you really comfortable spending nearly $100,000 a year for four years?
I doubt it.
You’ve spoken with dozens of parents who graduated from Boston College, Boston University, Northeastern, Brandeis, Babson, Bentley, Wellesley and other private schools. 75% of their children are underemployed. Many people are not working in the fields they study. Some people live at home. It feels reckless to spend more than $400,000 on a degree only to graduate into a workforce overrun by artificial intelligence.
You still believe in college. You still believe in the experience, the friendship, and the growth. But you wouldn’t trust a $400,000 gamble when an alternative of $160,000 exists.
So you send your kids to UMass Amherst, despite their protests. You keep $240,000 in a 529 plan. You slowly put the remaining money into a Roth IRA for your children to use when they become adults. They graduate debt-free. They are not suffocated by expectations. They have money to start their lives.
For those who don’t get any free assistance, this feels like a better deal.
Repairing my car is my own public school decision
When I ended up repairing my 2015 Range Rover Sport for $1,900 instead of spending over $50,000 on a new car, it reminded me to choose a public college over a private one.
If I decided to YOLO and buy the latest Range Rover Sport for $115,000, it would be a private college with no free financial aid decision. A decision is about desire. The other is about long-term pragmatism.
In my Wall Street Journal bestseller, Buy this or not thatI suggest parents earn at least seven times If they figure out what’s affordable, what’s the net annual tuition cost. Ten years from now, tuition at the most expensive private colleges could hit $150,000. If your family does not receive free aid, you should have a gross income of at least $1,050,000 if you want to go the private school route. For both unemployed parents, the possibility of earning seven figures is slim to none!
At that time, my parents were paying $2,800 a year for me to attend the College of William and Mary, while my private school friends were paying $20,000. At the time, my dad even said William and Mary felt great. I turned out great. So, yes, I am biased towards lower cost options for my kids.
If 529 plans become more flexible, the temptation to save money and spend it on more practical things will only grow.
When I actually spent the full 529 plan
After this thought exercise, I realized there were only two situations in which I would feel comfortable spending the majority of my 529 plan funds on expensive private schools without aid.
First, if the 529 plan grows to at least twice The amount required to cover all four years of schooling. For example, if the 529 plan grows to $1 million, the total cost of college is $500,000. Well, it would feel silly not to use half of your 529 plan for its intended purpose.
Second, if my passive income grows to at least double our desired family living expenses. With so much extra money and not having to do much, splurging on an expensive degree is easier to digest. Because in this case I will be able to pay for college through passive income.
These are the only two variables that make me accept the possibility of negative financial returns. The bigger the net worth, the better, but most net worth is illiquid. What really matters is revenue and cash flow.
Ideally, I’d like my kids to be involved. They should feel the weight of their decision by paying some of the cost of college.
When I was young, I knew that my parents were not rich. We live in a modest townhouse and drive an 8-year-old Toyota Camry. As a result, I chose public school. I knew that if I didn’t have a job when I graduated, I could work at McDonald’s and pay them back.
So what do you think? After years of saving and sacrificing to fund your child’s 529 plan, can you really afford to spend that money on an expensive private college despite declining returns on investment? Or, even if you can afford the expensive options, will you find ways to optimize, save, and extend your money??
Planning college the right way
One tool I’ve relied on since quitting my day job in 2012 is Empower’s free financial dashboard. It remains a core part of my daily routine of tracking net worth, investment performance, and cash flow. Now I’m using this tool to help plan for paying for two colleges.
If you haven’t reviewed your investments in the past 6-12 months, now is the perfect time. You can do a DIY inspection or get Get a free financial review with Empower. Either way, you’ll likely find useful insights into your allocations, risk exposures, and investing habits that could lead to stronger long-term performance.
Stay proactive. A little optimization today can lead to greater financial freedom tomorrow.
Empower is a long-term affiliate partner of Financial Samurai. I’ve been using their free tools since 2012 to help track my finances. Click here to learn more.
