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529 Plans: How Do you Choose?

May 31, 2021 by Lazy Man 20 Comments

[I know this is Memorial Day. We should be focused on the people who made the ultimate sacrifice for our freedoms. There are a lot of great news stories that cover the significance in great detail… far better than I ever could.

Instead, I cover personal finance and while many people were at BBQs this weekend, we had 529 Day on May 29th. I republished an article then, but it was a Saturday on a holiday weekend. Since I have this other 529 article, I think it makes sense to republish this as well. Between the two weekend holidays, maybe it counts as one regular week day.

I originally wrote this article in 2007 after days of reading about to best gift money for my nephew’s college. Fourteen years later, the specifics of the plans may have changed, but the overall lessons and logic remain the same. My nephew and niece (who came later) have $5,000 each in college savings in the plan. I’m keeping this original 2007 form even though a lot has changed since then.]

I mentioned yesterday that I’m looking to give my newborn nephew a head start in his education savings. Having gone through a number of options, I decided that a 529 Plan was my best option. Unfortunately, a lot of research may be necessary to decide on the right state’s 529 Plan for you. Here are the steps I took to determine which state will receive my money. Remember that I’m looking to give $500 initially and $100 a year after that.

Check your own state first
My home state is California. I thought it would be very easy to see if there was a tax benefit for my state. However, states don’t often advertise that your invest is NOT tax-deductible. They are in the business of getting you to invest with them, so it doesn’t serve their cause to advertise a fact that could be construed as a negative. When the originating source isn’t helpful, I suggest looking for a third party. Kiplinger.com came to the rescue with a list of states that offer a 529 Plan tax deduction. It’s not the most recent list, but the best I could find. If your state is on that list, chances are your best option is to invest in your own state’s 529 Plan and take the tax deduction. The exception is if your own state has a significant reason to reject them, such as the ones below. If your state, like mine, isn’t on that list, there’s no particular advantage that I could find for going with that state. In fact, you may be better off looking at another state’s for a variety of reasons that we will cover now.

How is a state’s 529 Plan sold?
There are two basic ways to invest in a 529 Plan. The plans are sold directly or through an advisor. Some states may offer either one or both options. The direct sales is the do-it-yourself method and the advisor option is for people that wish to have a little more guidance. If you’ve been reading my writing for any length of time, you know that I’m a direct kind of guy. I hate paying fees when I can do the research myself, so I eliminated any plans that didn’t have a direct sales option.

How do I know if a state’s plan is any good?
Put simply, this is the biggest question for those that are looking outside their own state. With 50 states and some having multiple plans, you could spend a week reading about each of them. I typically find this stuff fun, but it has it’s limits. I spent a lot of time researching various articles that listed 4 or 5 good states, but none of them gave me anything to compare or went into detail on why they are good. I finally stumbled upon Saving for College’s 5 Cap Rating System. With their list you can pretty quickly scan through and weed out quite a few sub-par states. In my research, I only looked at plans that had 4.5 Caps for the out-of-state and had a direct sale option. This left me with just a handful to consider. I still needed to narrow it down which required me to reject some plans.

Reasons to Reject a state’s plan:

  • Minimum Investment
    Since I intend to invest only $500, any plans that required more than that had to be excluded. I came across a few that were $1000 to start and some that seemed to require automatic deposits of $25 a month. After eliminating those I was left with about 4 or 5 different options.
  • Maintenance Fees
    Some states charge $25 a year if you don’t have $25,000 in assets with them. We are expecting to contribute $100 a year in addition to our initial deposit. Those maintenance fees would be 25% of each year’s investment. This eliminated Utah for me despite the fact that it’s one of the best state plans according to most reviews.
  • Expenses
    Like mutual funds, 529 Plans have expenses. Like you and me, the financial folks have to make their living. There are numerous reports on how index funds often outperform the managed funds, so I prefer to go with them. They typically have very low expenses since they aren’t out visiting companies to research their investments. So I looked at the expenses of the remaining choices. I was happy to stumble upon two states with expenses as low as 0.30% that matched all the above criteria.
  • Investment Options
    I might be getting a little picky here as most plans offer the basics – age-based plans, equity plans, balanced plans, etc… However, a few plans go above and beyond and offer more choice. Other plans offer fund families you might already know and trust.

The Winner
Ohio passed all the tests with flying colors. I don’t have the beneficiaries social security number, so I haven’t signed up yet. Maybe during the final review there will be some kind of gotcha, but right now all systems are go. They seem to have put together a best of breed program. There are no fees, no significant minimums (just $15 per investment option). Their expenses are amongst the lowest I found (except for you lucky folks who live in Louisiana) as long as you go with their Vanguard option. I’ve read that you can mix and match a few different Vanguard funds, which, if true, is going to be icing on the cake. If it’s not true, then I’ll go with the Aggressive Growth option as it’s 85% Vanguard Total Stock Market Index and 15% Vanguard Institutional Developed Markets Index Fund. I love the way that Vanguard has handled my ETF portfolio, so I’m excited to give them a little more money to work with.

The Runner-up
Michigan almost had it all – it really was a photo-finish. The only differences I could find were in the investment options. TIAA-CREF is a great organization, but I don’t know them like I do Vanguard. They also had only three static investment options and it didn’t seem like you could build a portfolio from them at all. Though their all equity option was tempting, I’m passing Michigan for more choice.

Have you invested out-of-state 529 Plan? If so, I’d love to read in the comments what factors influenced your decision.

Filed Under: College Tagged With: 529 plan

How Much Do I Need to Save for College?

February 6, 2019 by Lazy Man 15 Comments

A little over 6 years ago, I became a dad. Less than a month later, I wrote an article about saving for college.

Yes, I’m weird.

I thought I’d do something I call “Then and Now.” The idea is to look at an old blog post, review it, and update it for now. I feel that the value of a blog is the journey. Otherwise, you might as well just create a website. Here we’ll see how things have changed in the first trimester of our college financial planning. I think we’ll find that not only has our family has changed, the world has changed, and my knowledge of the saving for college has changed.

Life would be boring if nothing changed over six years, right?

Let’s get started with my 2012 view. Then we’ll get to my 2019 view.

Then: How Much Do I Need to Save For College (2012)

College Advantage Savings Growth

That’s a question that my friend Kevin asked me probably around 3 years ago. It was a simple question. He had recently had a son and he wanted to put aside money to cover his education. Kudos to him for starting early. The question lead me to write this article: Saving for College – An Exercise in Depression. In hindsight, it was a total cop-out as I never did answer his question.

Today, I think I’m going to do better… hopefully a lot better.

I have a vested interest this time around. My own son is four weeks old today and I’m in Kevin’s shoes (not entirely, but I’ll get to that the end). I got in reminder about all this from CollegeAdvantage, the place I determined had the best 529 plan for my niece and nephew. Specifically their newsletter had this image on the right (click for a larger view). The part that caught my attention is the bottom that assumed annual deposits of $2,400. For all practical purposes (minus some interest compounding) that’s $200 a month.

This didn’t answer Kevin’s question, but goes down the right track, giving me a good estimate of how much I’d have if I saved roughly $200 a month. However, it didn’t tell me how much college was going to be when Little Man is 18. Without this information I really can’t know how much to save.

When in doubt, I fire up Excel and get nerdy with some math. Here’s what my Excel spreadsheet looks like (click for larger) and I’ll explain what I did here:

College Costs

On the right you’ll see three headings with numbers below them, “Monthly, Interest, and College Increase.” These are the main variables that I’m playing with here. If I save $674 a month (more on that seemingly random number later) and earn 6% interest I’ll have the amount at the bottom of the “Interest” column under the Savings heading. The Interest column represents how much money I’d have at the end of year assuming deposits and interest. I could have titled this column better, but that’s the beauty of Excel, I’m getting to the numbers quickly. For fun I’ve totaled up the amount of actually cash I’d be putting aside by saving $674 a month. So putting $145,584 over time yields me $350,957 when Little Man is 21. I didn’t factor in taking the deductions out of this to actually pay for college, so there’s room for improvement here. It is important to remember that this is an estimate and there’s no guarantee of earning 6%.

Now let’s turn our attention to the right column of College Costs. Using the “College Increase” value, I can estimate how much college might cost Little Man at age 18. The 4% is just a best guess. Ideally, I would know how much college costs are expected to go up over the next years. Perhaps some research group has a good answer there. I settled on 4% because quite honestly, if you put a 8% number in there the last year of private college is $212,000. I don’t see that happening. Even at 4% the last year being $96,000 looks pretty daunting. However, in 18 years it might not be. I’ve totaled up the last four years of the college costs and you can see that public college is likely to cost around $184,500 with private school costing $363,000. Now it becomes a little clear where that $674 a month came from… that amount gives me the $350,000 range that covers 4 years of private college.

The last piece to the puzzle is where did I get the information for the public and private school costs to start with right now? The answer is Collegeboard’s annual estimates. They did all the heavy lifting give me a number for how much an average public or private college would cost with most of the typical fees rolled in.

So now that I’ve gone through all this math, let me make things easy for you. Saving for College has a College Cost and Savings Calculator, which is dead simple. You just put in a child’s age and it tells you a number that you need to save. I put in $0 just now and it came up with a $602 number that I have to save each month. From there, you can adjust the scenarios just like I could with my Excel spreadsheet. If I had seen this calculator first, I would have skipped the spreadsheet, but the spreadsheet does give me helpful checkpoints. When I did it a couple of weeks ago, I believe that number was $674. When I plugged that $674 number into my Excel spreadsheet things started to fall into place.

The calculator from Savings for College also has a lot of other valuable information. For example, it assumes a 6% cost of college increase using historical information. The 4% assumption in my spreadsheet looks to have been an underestimation. If that stands true, the last year of private school for Little Man is going to cost $143,543. Zoinks!

There are still a few different factors at play here. Going back to the CollegeAdvantage chart, there are taxes to consider, but 529 plans can help with that. If you are saving in a regular brokerage account, who knows what long-term capital gains are going to be at that time? Again, you just take your best guess and adjust as you get closer.

Now for the fun part… I get to throw most of this research in the trash. It turns out that Little Man appears to be eligible to get free public education thanks to my wife’s GI Bill with the military. I knew that it was a tremendous benefit, but this exercise has put it in a whole new light.

Now: How Much Do I Need to Save For College? (2019)

Kevin’s simple question about 9 years ago as his son was born is still an important one: How Much Do I Need to Save For College? Did he need to put aside $50, $100, $200, or even $500 a month to cover his new son’s college expenses. At the time I got depressed doing math of saving for college, as college costs were going up as fast as the average stock investment was projected to. The end result: Expecting compound interest to help your college investment seemed doomed to failure.

It’s important to note that he viewed paying for his son’s college as a strong financial goal. Living in Silicon Valley at the time, I believe he had the income flexibility to put significant money towards that goal.

Then (2010 and 2012), I took the question on face value. It’s an interesting mathematical question. My thought was, “Let’s do some objective number crunching! Yum!”

Now (2019), I feel it is more necessary to talk our feelings about college costs. For this article, I’m going to put aside the question of whether you should or shouldn’t pay for your kids’ college. Kevin felt strongly about paying 100% of the costs. I feel strongly about helping, but also that the kids have to have some skin in the game. Other people may not be in a position to help at all. We all come from different backgrounds and have different philosophies on this topic.

Instead, I’m going to do my best to work with the objective math of paying for 100% for college costs. You can always adjust it to suit your parenting style/philosophy.

Then (2012), we had my wife’s GI Bill that would cover Little Man’s public college schooling for 4 years. It even covers some living expenses. Now (2019), we have two kids. We have to split the benefit between them. That means there’s a gap that we have to save for. The original question was for one kid… and that easy answer was the GI bill. Now things are different.

In 2015, when the boys were age 2 and 3, I put together a spreadsheet to estimate their education costs in high school and college. We send them to a private prep school due to a large discount we are eligible for. We plan to continue to do that through the 8th grade. At that point, we’ll have to navigate the high school waters. Many of children in the class will go to some of the best private high schools in the country which cost as much as some of the best colleges. I decided to include that into the numbers, but I don’t think that’s feasible without some kind of scholarship. For the purposes of this article, you can pretend the high school component doesn’t exist. (Again, it’s best to customize to your specific situation and goals.)

Here’s what the numbers look like for kid 1 (the oldest):

Education-Kid1-2015

Remember these numbers were from 2015. I used the average cost of public and private college that year and assumed a 3% increase each year. Years ago, I thought it would increase at 7%, but those numbers just got really, really crazy.

Here’s kid 2. Since they are almost the same age the numbers are pretty close:

Education-Kid2-2015

Here’s the summary that’s going to be the glue that makes the first two tables make some sense:

Education-Summary

I’m going to start with the summary first and work backwards. The summary adds up the high school costs (the four years in bold in the high school column) and the college costs (the four years in bold in the average college column). Because I don’t know if if the kids will go to public or private school, I averaged the costs of the two. The college cost is divided in half which is an estimate of using my wife’s GI Bill. I then added up those numbers coming to around $300,000 for each kid (one a little more and one a little less).

Once I knew that my goal was to save $300,000 each, I could play with the monthly savings number and projected investment gains (estimated at 7%). It turns out that I needed to put $625 for kid 1 and $600 for kid 2 to come up with those kind of numbers. That’s a lot of money, but remember that the high school would be the expensive part, and I don’t see it happening (my wife doesn’t necessarily agree with me on this).

If we were only concerned with college, we’d have a much more manageable amount of around $220 for each kid to cover the estimated gap not covered by the GI Bill.

Of course 2015 numbers aren’t relevant. I’ve updated the same three charts above for 2019.

Kid 1:

Education-Kid1-2019

Kid 2:

Education-Kid2-2019

Education Summary

Education-Summary-2019

One thing that stood out to me is that the costs of college didn’t go up 3% every year as I expected. Overall, they went up 7% in the three years total. I had expected it to go up more than 9%.

This math assumes that one were to start saving from scratch now.

How Much Do You Need to Save for College?

This is a lot of math that is very specific to our family and our financial situation. I don’t expect the numbers to mean much to you.

What I’d like for you to take away from this is the process. It isn’t perfect. It makes a lot of assumptions that will eventually be shown to be wrong. However, there’s value in doing this exercise at least every few years. I learn something new every time I do it. Finally, I continue to get more data and that helps my planning over time.

Have you planned how much you need to save for college? Has the plan changed over time? Let me know in the comments.

Filed Under: College Tagged With: 529 plan, saving, tuition

My Great 529 Plan Motivation Experiment

May 29, 2018 by Lazy Man 3 Comments

Happy 529 Day! Today, 5/29, is often cited as a day to look into and donate to 529 college saving plans. (Are we all too Foolish to associate 4/01 with 401K plans?)

I’ll get to all the exciting stuff in 529 Plans in a minute, but first I’d like to reflect on Memorial Day weekend. There’s a lot going on in our country (assuming you are reading this in the US) and it’s helpful to pause and reflect on the good things and those who fought for those good things.

It’s because of those brave people that I can experience stupid, insignificant problems like spending hours at IKEA to find that they were out of stock of everything I wanted. It seems like a big deal at the time.

Now let’s get back to the wonderfulness of 529 plans.

Eleven years ago, I was looking for some way that I could help get my newborn nephew started on the right financial foot. I didn’t have a ton of money, but I had time. Given that he didn’t have object permanence yet, I had years. If I had the chance, I might have opened up a retirement account for him. However, it seems that I’m the only one crazy enough to think of tax breaks on such things.

I went for the next best thing, saving money for education. With 18 years, I figured that whatever I contribute will likely be 4x for him. Mathematically, that is roughly assuming 8% return and using the Rule of 72 to double once by around age 9 and again at age 18 (72 / 8% = 9 years.)

Until I started have kids of my own, I put a few dollars in there for birthdays and Christmas. Now, 11 years later, it’s grown fairly nicely. A lot of that is due to the great run of the bull market. It might end up being enough to cover 1/3rd of a year of tuition by the time he gets to college.

It should make a very noticeable difference for him, but I barely even noticed the money was gone. I feel there are very few “no-brainer” decisions in the world, but this is one of them.

Last month, I came across a regular reader and commenter, Stephanie from Graduated Learning, and her Tweet:

Friends, I'm the worst PF person/mother: We still haven't opened a 529 (or other college savings) for our daughter. Help! Please send your advice/recommendations so I can get this figured out!

— Stephanie (@StephTheBlogger) April 10, 2018

I should have probably sent my guide on How to choose a 529 Plan, but I figured that’s actually the easy part. I just gave it a Google search and there are several high quality sources there.

Instead, I shared something extremely interesting that my state, Rhode Island, does. It gives you $100 grant if you sign up when your baby is born. It’s the opposite of the old Monopoly Community Chest card where you pay the $100 for a baby.

However, since Stephanie doesn’t live in Rhode Island, I figured I’d use the same motivation:

Rhode Island gives a $100 grant if you sign up for a 529 Plan when your baby is born.

I'm not RI, but I'll PayPal you $25 if you can show me you opened one up in the next 3 days. :-)#Motivation

— LazyManAndMoney (@LazyManAndMoney) April 10, 2018

To my surprise a couple other long-time personal finance bloggers, Poorer Than You and My Journey to Millions saw this and decided to jump in:

Looks like we are up to a $75 in free money for @StephTheBlogger to set up a 529 plan in the next 3 days.

At this rate, we'll have tuition for any school covered in by tomorrow afternoon. :-).

— LazyManAndMoney (@LazyManAndMoney) April 10, 2018

The plan worked! Baby Stephanie has a 529 Plan.

With my 4x rule above, we can expect the $75 to grow to around $300, which isn’t even a drop in the grand scheme of college savings. However, Stephanie is going to start monthly contributions. Baby Stephanie should be the beneficiary of years of compound interest.

I’ll be the first to admit that I loved how this worked out. I often need a kick in the pants to do what seems like a small, insignificant thing. Now, I just have to figure out how to draw on this experience to motivate myself.

Filed Under: College Tagged With: 529 plan

Rhode Island’s New CollegeBound Saver is Great!

July 25, 2016 by Lazy Man Leave a Comment

Editor’s Note: While I usually try to write for a national audience, today’s topic is more fitting for residents of my state, Rhode Island. However if you stick around until the end, you might have a chance at some free money.

It’s good to be back to work after a week’s vacation. We just got back from a trip that was very similar to last year’s when we traveled from Rhode Island to kids’ parks in New Jersey and Pennsylvania. Last year the stops included: Sesame Place, Hershey Park, Please Touch Museum, and the Crayola Experience.

This year we kept Hershey and Please Touch on the itinerary. We substituted out Sesame Place and Crayola for Diggerland and Knoebel’s Theme Park. This article isn’t about my vacation, but I do want to mention a couple of quick things. We should have waited until our boys were 5-7 for Diggerland as they weren’t tall enough to do much. Knoebel’s was much better than I anticipated, but we got a really hot day and it was last on the trip, so we couldn’t really give it the fair shake it deserved.

When we got home yesterday, I noticed that the mail contained the new program description of CollegeBound Saver, Rhode Island’s 529 plan. Rhode Island decided to change the management group of the 529 plan from CollegeBound Fund by AllianceBernstein to the new “Saver” by Ascensus. We were finally getting details about what the new program was about.

I knew much of the program wouldn’t change. There are laws in place that govern the general details of the state’s 529 plan. My biggest concern was that we’d have to leave the sweet, sweet, low expenses of the Vanguard funds at AllianceBernstein.

I’m a skeptic by nature and figured that because we were being thrust into this new system with no vote that it wouldn’t be good.

I was wrong.

I found the CollegeBound Saver program description a little confusing. I think it was because it was designed to introduce people who are new to 529 plans and saving for college in general. The book is 80 pages long with some information about unrelated programs like Coverdells.

The “meat” of what I was interested in was the investing options. The new CollegeBound Saver program has three core “goals” which are each broken down into smaller investing options. There are target date portfolios, target risk portfolios, and individual portfolios. I can target 2030, an aggressive mix, or just choose the funds that I want.

I like to choose my funds, so that’s the option I focused on. The CollgeBound Saver individual portfolios have names like “U.S. Stock Portfolio” and “Bond Portfolio.” These are mapped to underlying funds such as Vanguard’s Total Stock Market Index Fund and Vanguard’s Total Bond Market Index.

It took a little digging, but I finally found what I was looking for. My assets were moved from my previous Vanguard Total Stock Index funds to the new Vanguard Total Market Index. I’m investing in the same thing!

The big change is that the expenses are estimated to be 0.04% which is the lowest I recall seeing outside of my wife’s Thrift Savings Plan. The book includes a chart of hypothetical $10,000 investment cost chart. The easy math shows that I’ll be spending a whopping $4 a year in management costs a year. In 10 years, it will be $51 total. The other investment options are also very low for the most part.

Years of reading personal finance magazine have drilled the following in my head: Control expenses, because you can’t control the market and expenses add up over time. The new 529 plan has two funds with expenses over 0.16%: a 0.37% stable value option and a 0.61% Invesco Global Sustainable Equity option. As long as investors steer clear of those, the expenses mean almost nothing over the 15 years (give or take) that the money is going to be invested.

Now for that chance at free money. Later on this week, I’m going to be sending out my VIP email newsletter. It’s free to join (of course). You can join it here. Readers of the newsletter will have a chance to win $25 (payable in Paypal or Amazon gift card, I haven’t decided yet). I know it isn’t life-changing money, but I will easy for even the laziest of people.

Filed Under: College, Investing Tagged With: 529 plan, CollegeBound Saver, Rhode Island

CollegeAdvantage is Giving Away More Free Money

May 9, 2010 by Lazy Man 2 Comments

Several times in the last year (or longer) I have written about Ohio’s CollegeAdvantage 529 Plan and their gift of free money. It seems like they are always giving away free money. If you missed the last opportunity, now you have the chance for $50 in free money again.

Ten years from now, I see one of two things happening… either Ohio’s CollegeAdvantage 529 Plan is going to rule the 529 Plan World (at least for those states that don’t give tax breaks) or it’s going to need some rescuing from giving away all this free money. I’m betting on the former. Why? Well people tend to keep their 529 plans for a long, long time. They also tend to put a lot of money in them (as college is expensive). The combination leads to some significant gains for the financial institution. However, it is worth noting that CollegeAdvantage has some of the best low-expense Vanguard funds to choose from. In fact, before CollegeAdvantage had this program, I had written about my own adventures in choosing a 529 plan, I realized that CollegeAdvantage was the best option for me.

How to Sign up for CollegeAdvantage

  • Go to Ohio’s CollegeAdvantage and open an account before June 30, 2010.
  • When asked for a referral code use 2481398 to receive the bonus.
  • Deposit $25 or more to qualify for the bonus
  • You should receive your $50 $25 bonus in 7-10 business days. Updated to reflect that it is a $25 bonus.

If you want, you can then use your account to refer a spouse and pick up even more free money.

Some people may avoid this because they have no children now – and no plans to have children. My wife and I have no children. I’m taking advantage (pun intended) of the program for either a future child, my niece or nephew… or possibly even myself or my wife when we retire.

Filed Under: College Tagged With: 529 plan, collegeadvantage, ohio

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