Saving for college - How much risk? (funds, pay, taxes)

[michgc]

The time frame for college savings really isn't that long - about 20 years if you start when a child is born. Even shorter if you start later.

My daughter is in 6th grade, so she will, Gd willing, begin college in fall 2020, a mere 7 years away. Yikes! It doesn't seem prudent to take on too much risk with such a short time frame. Fortunately, we started contributing when she was born, although with small amounts. We just sold our former primary home and are now in a position to add a lump sum into her college fund, but with it being only 7 years away, I'm hesitant to take on too much risk.

Right now her college fund looks like this:
-$25.5K in a CD earning 4.5% interest. It comes due mid-2015.
-$7.5K in Vanguard Wellington.
Both of the above are in an Education Savings Account (ESA). We add $2K to her ESA each year (we've been adding it to her CD during our credit union's "add in" period since the rate can't be beat, especially for the low risk)

We are now planning on opening up a 529 plan for her with some of the proceeds from the sale of our home. We plan on putting $36K into her account within the next month. And we will put $2K into her ESA CD the first week of January (add-on period). So she will have a total of $71K in a few months.

Slightly less than 40% of that will be in the CD. Ten percent is in Wellington. How would you allocate the $36K, which will be about half of her college fund? I don't want to go too risky since the time frame is relatively short, but I would like some decent return. I was planning on opening up a NC529 since we can deduct a contribution of $5K per year from our state taxes, which will save us about $400 per year. (Expense and admin. fees are about .37%. There are no other fees.)

The choices in the NC 529 plan are:
-Vanguard aggressive growth portfolio
-Vanguard growth portfolio
-Vanguard moderate growth portfolio
-Vanguard conservative growth portfolio
-Vanguard income portfolio
-Vanguard Total stock market index
-Vanguard Total international market index
-Vanguard Total bond market index

Do you think 40% in growth funds is too much for someone only 7 years out of school (although technically, we could prolong the withdrawlas for 4 additional years). I was thinking of breaking up the $36K among growth, moderate growth, and the stock market index. Does this seem particularly risky too you? Not risky enough? Thoughts on our plan? I've never invested in a 529 plan before, so any tips or ideas are welcome.

As additional info: after this lump sum contribution, we will only be putting in $2K per year into her ESA CD until she finishes college. In 2015, however, the 4.5% CD will no longer be available (although interest rates may be at that level by then anyway). But at a mere 5 years out from college, I would probably want to keep a large portion of her college investments in something stable at that point. I know the total amount saved likely won't be enough for college, but this is the amount we're dealing with right now.

Thanks!

[flyingsaucermom]

I would actually refer this question to the folks in investments.

[michgc]

Originally Posted by flyingsaucermom

I would actually refer this question to the folks in investments.

I thought of that, but I wasn't really looking for specific investment advice like "invest in 30 shares of J&J" but more of a general risk level discussion. It is a pretty short-time frame and I was curious how much risk others have taken on. I suppose it could fit in either sub-forum. There's certainly overlap.

[chet everett]

I have a major distrust of 529 plans, mostly becuase I live in Illinois where we have had some notorious scandals surrounding 529s and connected insiders putting the money into terrible funds.

Vanguard is a good firm and I really like their Total Stock Market Index -- it trades as VTSMX and is easy to track. My hunch is that you could keep even 60% of the proceeds of the sale in that with little real worry. The other 40% can go in the Total Bond Market Index. I have less faith in the hybrid "portfolio" type offerings as I have no idea how you track them -- if some negative event happens how do you track that?

I would also make sure you know the rules about getting money moved between funds -- especially in a student's last two years of high school any big financial melt down is going to be awfully hard to recover from and if things move negative in a big way you need to be able to move to ulta low risk / cash equivalent type fund pronto...

[mathjak107]

My opinion is for money that has to be there when the time comes i would always want to leave a 15 year window min for equities if the equities are to be sold ..

under 15 years there is a chance of being down.

[bbnetworking]

what is she chooses not to attend college? There's always a chance.

To answer your question, I think 7 years is long time, I would definitely put it in growth.

[mathjak107]

for money you have to be able to count on, the markets can not depend on 7 years anymore as a long term time frame.

anyone who had money in equities in 1999 and needed it in 2008 was in for a shock.

so far 15 years is the minimum time frame where no one historically would have sold at loss if they needed the money.

it really is going to depend on how bad the person needs the money and how stressed and sleepless will they be if we are down a year or so prior.

[michgc]

Originally Posted by bbnetworking

what is she chooses not to attend college? There's always a chance.

To answer your question, I think 7 years is long time, I would definitely put it in growth.

If she chooses not to attend college of any type, the money can be used toward a trade school also. I cannot imagine that she would do neither of the above because we would strongly encourage one or the other. But in the slight chance that happens, the money can be transferred to a sibling (she has two younger ones, ages 6 and 8). Worst case scenario, I transfer it to myself and go back to school. But I'm not too worried about that aspect of the savings.

Seven years does not seem too long to me.

[michgc]

Originally Posted by mathjak107

for money you have to be able to count on, the markets can not depend on 7 years anymore as a long term time frame.

anyone who had money in equities in 1999 and needed it in 2008 was in for a shock.

so far 15 years is the minimum time frame where no one historically would have sold at loss if they needed the money.

it really is going to depend on how bad the person needs the money and how stressed and sleepless will they be if we are down a year or so prior.

That's kind of how I feel also. I am a fairly conservative investor but am willing to put a percentage in stock funds. It's just hard to decide what percentage that is with a relatively short time frame.

[michgc]

Originally Posted by chet everett

I have a major distrust of 529 plans, mostly becuase I live in Illinois where we have had some notorious scandals surrounding 529s and connected insiders putting the money into terrible funds.

Vanguard is a good firm and I really like their Total Stock Market Index -- it trades as VTSMX and is easy to track. My hunch is that you could keep even 60% of the proceeds of the sale in that with little real worry. The other 40% can go in the Total Bond Market Index. I have less faith in the hybrid "portfolio" type offerings as I have no idea how you track them -- if some negative event happens how do you track that?

I would also make sure you know the rules about getting money moved between funds -- especially in a student's last two years of high school any big financial melt down is going to be awfully hard to recover from and if things move negative in a big way you need to be able to move to ulta low risk / cash equivalent type fund pronto...

First, congrats on your win, Chet! Well-deserved.

I've avoided the whole 529 plan up until now only because we didn't have the funds to put in beyond $2K per year anyway, which is why we took advantage of the Education Savings Account. But the attraction of the 529 is that earnings grow tax-free plus the tax deduction of up to $5K per year which results in about $400 in savings. So for $36K, we would save ~$400 per year in taxes for the next 7 years (you can roll over the contribution amount for tax purposes, I believe). At 5% earnings, we would not pay taxes on $1800 per year (either federal or state), so about another ~$600, I think. Is it worth losing that $1000 benefit per year to avoid 529s and invest in Vanguard directly? Probably not. Thinking aloud here.