From a financial perspective, one of the best things to come out of the coronavirus-induced market meltdown is being able to contribute to your children’s 529 plans at lower index prices. Given parents are investing for an expense that might not occur for another 10-18 years, it’s easier to invest in a 529 plan during times of turmoil.
Originally, I had only planned to invest $15,000 into my daughter’s 529 plan in 2020 because I was nervous about the stock market after a 10-year bull run. However, once the stock market started selling off in February and March, I decided to contribute more to her plan.
The stock market kept on tanking until I ran out of bullets. By the end of March 2020, I had ended up superfunding $75,000 into my daughter’s 529 plan. If I had contributed more, I would have violated the superfunding rule, which allows families to front-load five years worth of contributions ($75,000 per donor/$150,000 per couple) without having to file gift taxes, while protecting their lifetime gift and estate tax exemption.
Given the world felt like it was coming to an end in March 2020, my wife and I decided to have her dollar-cost-average into our daughter’s 529 plan by $15,000 a year for the next five years just in case the recovery takes years.
When the stock market began rebounding in April, so did both of our children’s 529 plans. Today, our son’s 529 plan account is only about twice as large, despite being 3X older.
This is when I began to wonder what is the appropriate 529 plan amount by age. I was beginning to feel like we had over-contributed to our daughter’s 529 plan.
Why A College Degree Is Getting Devalued
One of the most important things all parents and kids who want to attend college should know is this: Due to the coronavirus, the value of college has declined. While this decline in value has been ongoing for years and started well before COVID-19 arrived, with tens of millions of people sheltering in place for months, the depreciation has accelerated.
A student or parent should not have to spend the same amount of tuition for classes that are being taught online instead of in the physical classroom. An important part of the college experience is in-person networking to build lifelong connections and friendships. Moving online impedes this invaluable opportunity.
It is already too late for many of us who have spent big bucks and many years getting our college degrees. However, it is not too late for our children to make wiser educational and financial decisions about their higher education.
If we do nothing, then we will be creating another generation of massively indebted and highly dissatisfied college graduates who are unable to find meaningful work. Debt and a lack of meaningful work hurt relationships, delay saving and investing, delay or eliminate family formation, and create deep levels of dissatisfaction.
We all know some messed up, angry people who could have had better lives if they weren’t so burdened by student loan debt and had more enjoyable occupations.
- Online education devalues a traditional college education.
- It is nonsensical for a student to still have to spend 4-5 years before being awarded a college diploma when the internet has made research, learning, and communication much quicker.
- Unless you are already rich or receive grants, paying full private school tuition is fiscally unwise because data shows that there is no discernible income difference between both types of college graduates from private or public schools.
- Even public school tuition is becoming too expensive given a consistent decline in state-supported funding. No type of education is increasing in value.
- From a financial standpoint, it’s more beneficial to learn everything for free online, develop skills in a high demand field, take an apprenticeship, and get to work sooner after high school.
Recommended 529 Plan Framework
To come up with my recommended 529 plan amounts by age, we must make several assumptions. I will provide three columns to address these assumptions. Then you can follow the column that most closely matches your situation and beliefs.
529 Plan Assumptions:
- You are a rational parent who likes to take advantage of tax-advantageous accounts to potentially grow your investments quicker. You believe that if you are going to invest for your child’s education, then you might as well invest in a 529 plan where the contributions compound tax-free.
- The contribution range per year is between $5,000 and $30,000. The range takes into account contributions from single parents, dual-income parents, grandparents, and rich relatives.
- The compounded return range is between 0% – 7%. This range accounts for bear markets and lower returns as child gets closer to attending college. Lower returns are due to a greater shift to bonds.
- The goal is to pay for between 50% – 100% of college expenses when the time comes. The percentage range takes into consideration parents who do not have as much money or have lower investment returns. The lower percentage also accounts for parents who want their children to have more skin in the game.
- For 2020, the average public tuition & fees cost is ~$10,500 a year for public-instate, ~$23,000 a year for public, out-of-state, and ~$37,000 for private universities according to US News & World Report.
- College tuition and expenses will increase by an average of 3% a year, even though the value of college is declining. It is very hard to stop momentum, especially due to growing international demand.
- Some of the 529 plan may be used to pay for grade school tuition and expenses. As of 2020, $10,000 a year can be used from a 529 plan per student per year for private, public or religious elementary, middle, and high school tuition.
- Financial support for education stops at 25. Age 25 is old enough for a child to have started and finished a Master’s degree. It is also old enough for the adult child to get on the path to financial independence. You plan to spend down 100% of the 529 plan after 25 years.
- Contributing too much is an inefficient use of funds because the money could also be spent on living a better life.
Now that we have these assumptions in place, let’s look at the recommended 529 plan amount by age.
Recommended 529 Plan Amounts By Age
Low Column (Alfa)
The Low column simply assumes a $5,000 contribution per year with 0% growth to account for several bear markets during the initial 18 years. The goal is to have saved $100,000 per child by the time he or she begins college. Starting at 18, the parent uses $20,000 a year to pay for college education expenses.
Those who should follow the Low column:
- Parents who have older children already (10+)
- Parents don’t believe strongly in the value of a college education
- Child will go to a public university, community college, two-year college, or potentially no college
- Child is a genius or a talented athlete and will get tuition subsidies from universities
- Parents have a family business
- Parents have many children and cannot fully fund all their 529 plans
Medium Column (Bravo)
The Medium column assumes a $15,000 annual contribution every year until 18 with a 6.2% compound annual return. The goal is to have saved $500,000 per child by the time he or she begins college. After age 18, $100,000 a year is used to pay for college until the 529 plan goes to 0 at age 25.
Those who should follow the Medium column:
- Parents have a newborn or children under three
- Parents only plan to have one or two children
- Parents believe a college education is still valuable
- Child is of average intelligence and athletic ability
- Parents want to hedge against a continued rapid increase in college tuition
- Parents have a family business
- Parents tend to be more financially conservative
High Column (Coca)
The High column assumes a $30,000 annual contribution every year until 18 with a 7% compound annual return. The $30,000 comes from a combination of two people always contributing $15,000 each. The two people can be both parents, one parent and a grandparent, two grandparents, and so forth. After 18, $200,000 a year is used for college tuition until the 529 plan is spent down to $0 at age 25.
Those who should follow the High column:
- Parents have a newborn or a child who has yet to be born
- Parents plan on only having one or two children
- Child is of below average intelligence and athletic ability
- Child insists on going to the most expensive private school
- Parents are very wealthy and are willing to make their children 529 millionaires
- Parents believe college tuition will inflate much faster than 5% a year
- Grandparents have enough money to superfund their grandchildren’s 529 plans to help reduce their estate
Each column represents the appropriate amount based on your goals and your child’s educational goals. All columns are fine if the amounts are aligned with your goals and beliefs.
If you’re behind, contribute more or convince a grandparent or loved one to contribute more. If you’re ahead, throttle your contributions and use your money for other purposes.
It would be irrational if you save based on the Low column but have a child who is one year old and you want him to go to the most expensive university in 18 years without any grants.
It would also be irrational to follow the High column if your child is already 14 years old, is brilliant, and will likely get a free ride to any school she chooses.
Whichever column you choose to follow, make sure the numbers align with your current financial situation, your child’s intelligence and work ethic, and your beliefs about higher education.
529 Plan Goals For My Children
My wife and I are personally going to shoot to save up to $500,000 per child by the time each turns 18. In other words, we plan to contribute a combined $15,000 a year and hope for roughly a 6.25% compound annual return.
Worst case, if our children are not smart enough to attend an in-state public university or don’t get grants from a private university, then we are looking at between $100,000 – $125,000 a year all-in per child. The cost is based on a 5% compound inflation rate for the next 15-18 years. $500,000 per child in a 529 plan will be able to cover this realistic worst-case scenario.
As our children get older, we will have a better idea of their intelligence levels and work ethic. We can then adjust our contributions accordingly. My wife and I have always been of average intelligence. Therefore, our children will likely have the same level of intelligence. We cannot count on instilling in our children a strong ethic, no matter how hard we try.
Whether you follow my Low, Medium, or High 529 plan savings goals by age, know that investing in a tax-advantageous account for your children is better than not investing in one.
Ideally, you want to save just the right amount in each 529 plan. But if you end up saving too much, you can always just reassign the beneficiary to your grandchildren or someone else.
Take advantage of high online savings rates. CIT Bank offers one of the highest online savings rate at 1.45%. This compares favorable with the 10-year-bond yield at under 1%. Unlike buying a risk-free treasury bond, there is no multi-year lockup with an online savings account. You can sign up for a CIT Bank Savings Builder account here.
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Related: Recommended 401(k) Amounts By Age
Readers, how much are you planning to have saved in your child’s 529 plan by the time they go to college? What do you think has happened to the value of a college degree post-COVID-19? Do you think colleges will start lowering tuition or go out of business? Which 529 plan savings column goal are you going to follow?