With regular contributions, company matching, profit sharing, and conservative returns, many of you will eventually become 401(k) millionaires. But what may be more exciting is if your children become 529 plan millionaires before they even get their first full-time job!
With $1 million by the time your child gets their first full-time job, they’ll be able to live a life of leisure (or purpose). They won’t feel pressured to take a high-paying job they hate just because society says it’s prestigious work. Further, they might feel less guilt knowing their parents didn’t have to sacrifice so much to pay for their private school tuition.
Think about how many more young adults would become teachers, non-profit workers, journalists, and volunteers. Clearly, the world would be a better place if everybody did work they loved. And there is no greater love than being able to help others.
By going the public school route from kindergarten through college, the vast majority of parents who are able to pay private school tuition in the first place, will have accumulated $1 million or more if they diligently save and invest the difference for 22 years.
Given the tax advantages, let’s use the 529 college savings plan to see what type of contributions or returns are necessary to make millionaire dreams come true for kids.
Becoming A 529 Child Millionaire
Scenario #1: $15,000/year
As a single parent with no contributions from anybody else, making your kid a 529 millionaire is going to be difficult. You’d have to contribute $15,000 a year for 18 years and earn a compound return of 12.6%. Active fund managers have achieved such results before, namely Warren Buffet. But you aren’t Warren Buffet.
Your goal should be to convince the absentee father or mother to do the right thing and at least contribute to the child’s education as well. Another solution is to find a new partner who is willing to pitch in.
$15,000 a year is the current maximum gift limit for estate tax purposes.
Scenario #2: $30,000/year
With two parents contributing $15,000 a year to their child’s 529, becoming a 529 millionaire is highly possible. After 18 years of compounding at a more achievable 6.2% rate of return, the 529 plan will have ballooned to $1,003,512.
Based on historical returns, a 6.2% annual rate of return can be achieved with a 20% stock, 80% bond portfolio. Perhaps future rates of return will be lower for both stocks and bonds, but all the same, even a 50/50 allocation is quite conservative and may achieve a 6.2% IRR.
Scenario #3: $45,000/year
Another great way to get to 529 millionaire status is to convince one or two grandparents to contribute a combined $15,000 a year. Many grandparents I know are more than happy to help out their grandchildren while still alive. With $45,000 a year compounding at just a 3% rate of return for 18 years, the 529 plan will have grown to $1,012,908.
Your goal should be to ensure the grandparents live as long as possible and have a healthy life. This means regularly calling, e-mailing, and visiting them. Show them the love and respect they deserve for raising you to be the outstanding citizen that you are. They will love that you are an unselfish parent willing to put your kids first.
Of course, if you can somehow get multiple grandparents and relatives to contribute more, then your child will likely be a multi-millionaire after 18-22 years. But this is an unlikely scenario so let’s leave things at $45,000 a year in contributions.
My Son’s Current 529 Plan
My son currently has ~$130,000 in his 529 due to me superfunding his account in 2017, and contributions from my wife and his grandmother in 2017 and 2018. Based on the superfunding rule, I won’t be able to contribute any more money for four years.
Our base case will be $15,000 a year in 529 contributions from my wife for 17 more years. To reach 529 millionaire status, we would need a 7.9% annual return, which while attainable, is probably too optimistic as the fund gets less aggressive closer to the target college date.
Thus, to be more realistic while still increasing the chances of getting to $1,000,000 before he goes to college, I will be lobbying for at least one grandparent to contribute $15,000 a year along with my wife’s $15,000 annual contribution.
To demonstrate appreciation to a grandparent or two, my son will regularly write letters updating the grandparent(s) on how he’s doing. He’ll learn about the power of investing and the purpose of his education. A win all around!
In such a scenario, all we need to do is return 4.2% a year to get to 529 millionaire status.
If I somehow fail at convincing any grandparent or my wife to contribute $15,000 a year, all is not lost. Starting in the year 2022, I can start contributing $15,000 a year or more again. But his plan would have to earn closer to a 8.5% compounded annual return.
Below is the chart of my son’s 529 plan I started in July 2017, a couple weeks after I received the proceeds from my SF rental house sale. I felt bad selling the house because I had envisioned keeping it for him to manage and/or live in one day. It was our insurance policy against runaway real estate inflation 20+ years from now.
But the maintenance, tenants, and $23,000 a year in property taxes really started getting to me, so I sold to simplify life. The least I could do was start his 529 plan and conservatively redeploy the rest.
A Better Child Millionaire Solution
The problem with being a 529 millionaire is that you can only use the 529 money for education. Further, there are limits to how much you can contribute to your child’s 529 (~$300,000 – $520,00 depending on state), even though that limit is always rising. Thus, you won’t be able to gift your little one any balance that’s left upon his college graduation, even if he does go to public school.
Further, if he gets one whiff that you are trying to make him a 529 millionaire, he will likely decide to go to the most expensive private school available and use up all the money! Shhhh.
The clear solution for making your child a millionaire by 22 is to grow their 529 plan to the cap for tax benefits and then open an after-tax brokerage account or digital wealth advisor account once the cap is reached and consistently contribute. You can model the structure of the after-tax portfolio to one of the many 529 target date funds if you so choose. Any funds left over after college expenses can then be reabsorbed into your estate or given to your child if s/he makes you proud.
You’re free to contribute much more to your child’s investment account if you are willing and able. However, it’s probably not a good idea to make your kid a multi-millionaire upon graduation, otherwise, your child might lose all motivation.
A Good Idea To Make Your Child A Millionaire?
I believe that if my parents had cut me a surprise check for $1,000,000 after graduating from The College of William & Mary in 1999 I would not have slacked off. Instead, I would have been so grateful and used the gift to take more calculated risks.
The whole point of my going to William & Mary was so that I could minimize their financial burden. Tuition was only $2,800 a year when I went, so I knew that I could pay them back even by working a minimum wage job. They worked government jobs, hence, were middle class folks.
With $1,000,000 in the bank, I would have certainly bought the 2/2 Manhattan condo I missed for $799,000 back in 2000 that would now be worth over $2,000,000 today. With the remaining $800,000 or so, I probably would have invested at least $30,000 in VCSY instead of just $3,000. The $30,000 would have turned into $1,500,000.
With that type of money at age 24, I would have confused brains with luck and eventually lost a fortune investing in other internet stocks.
I’d like to think that I’d still work until age 34 because for at least 10 years I enjoyed working in International Equities. It was exciting times because both China and India were opening up to foreign investment in the early 2000s. But there was a moment at age 25 when I really wanted to move back to Hawaii and just chill out due to the events of 9/11.
With at least a $1,500,000 net worth at 26, it would have been very tempting to call it quits and be a surf bum. Then again, with so much money, I might have left banking earlier to join or create a successful startup.
It’s important for parents who plan to diligently save for their child’s education to do the following:
- Never tell them of your plan to make them millionaires
- Continuously demonstrate sound financial habits in front of your children
- Continuously demonstrate a good work ethic
- Provide them with ongoing financial education
- Make them work minimum wage jobs in high school
- Make them volunteer to help others less fortunate
Because we lived in a very humble townhouse and my parents drove an 8-year-old Toyota Camry when I was in public high school, I appreciated every single dollar my parents provided. But if my parents had driven new BMWs, lived in a mansion as some of my friends did, and I went to a private school, I probably wouldn’t have appreciated any financial gifts they may have given me.
Whether you want your kid to have a million bucks or not, you’ll likely have this option if you simply save and invest consistently for him. If you don’t want to make him a millionaire, then you can simply be one yourself.
How’s that for the power of financial discipline? Once you know what’s possible, everything becomes more achievable.
Related:
If You Want To Be A Real Millionaire $3 Million Is The New $1 Million
Everything To Know About The 529 College Savings Plan
If your 529 plans change: 529 plans offer significant flexibility should the designated beneficiary (student) decide not to attend college, or if the funds are not used for other qualified educational expenses. You can take out the money as a non-qualified withdrawal, but any earnings on non-qualified distributions are subject to federal income taxes at the recipient’s rate as well as a 10% federal penalty. Of you can use the funds on another family member.
For the record: My hope is that my kid wins the SF public school lottery and gets to go to a great public school that’s not too far away from our house.
Stay on top of your money: Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. Run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. What you measure can be optimized.
Graphic by Colleen Kong-Savage.
My husband and I are blessed to be in a very secure financial situation. We are considering front-loading our kids 529s if/when the market corrects. I’d love to hear more of your thoughts on pros/cons of potentially overfunding 529 accounts. It seems you are on the side of aggressively funding 529 accounts. I recently read another article in support of this (http://rpgplanner.com/529-plan-opportunity/) but a financial advisor that I spoke with recently recommended being conservative with my kids 529s to avoid the penalty and putting extra money into other investments (taxable brokerage, real estate).
How would you advise a single parent approach 529 savings for two kids, and starting late (6th grade), on a modest income (approx $125K), in a high cost of living zip code.
I believe this advice as written is for much higher income, single child, dual income families. Unfortunately, that is not me!
Thank you
My opinion:
I paid for my brother’s tuition – Masters (5 years younger than me) 4 years back, so I can talk with recent experience. This probably sounds a big deal, but I am an immigrant and in my culture, it’s OK for the elder sibling to look out for the younger one. It’s actually a proven ticket out of poverty.
There are 2 perspectives of this article. The first is that of prudence – will it cover all education related expenses, if the current tuition bubble keeps growing? The second is about gifting financial freedom to your child. I have my perspectives to both.
Prudence:
This is the perspective I would mildly entertain. Gifting your child a life without student loan is a big deal. You are giving a kid the opportunity to fly as they wish. You are handing them a clean slate. I love that aspect of a education fund. However, $1M, the only way I could justify is the brand! Personally, I don’t see myself justifying a $1M tuition/expenses, but that could be because I am an immigrant, employed in hi-tech, where your alma-mater helps open the door for your first job. After that, not as much.
Gifting Financial Freedom:
This comes from my experience. I do not like this option.
My brother got a free ticket to a Masters degree in the U.S. I pretty much put 3 years of diligent savings. That delayed my personal milestone. My “why” for the sacrifice: It would worth it, if it helped kick start my brothers life. I was giving him a 5 year head-start in comparison to his peers (Post-master, he would start as a Project Manager, I took 5 years to get there).
What I discounted is that my brother had no clue how much I gave up (eating PBJ when the rest of your colleagues are going out for lunch specials does hur). He did not have the fire-under-the-belly mentality that I had. I grew up with him, we went to the same school, we lived in the same place. I just assumed, he would be like me. And there was no way, I would have predicted that he would be that much of a slacker. I love him, I wanted the best for him. I was blinded by that. I thought, it would just work out! This is a miss in my judgement, I agree. AND, I believe every parent would be blinded by a similar emotion !
Huge gifts, rarely have the desired income. I have come to see that the receipient invariable starts believing that they deserve the entitlement and that creates a new problem.
My take:
I would probably only fund the education costs. Specifically, I want my kid to have skin in the game. My thought: I will be paying for tuition and books, the rest of the expenses, my kids cough up. I could be brutal and wrong, but I have been burnt once!
I would still save the $1M, but that money would be inheritance and be routed through trusts. And they would have to earn it – academic scores, volunteering, age-based accomplishments etc. Personally, giving free money is like gifting a a gun. You can teach all you want, they are the ones who pull the trigger. I would rather they earn it !
Again, this is my personal opinion. I believe the Sam – big fan – has the right intention. It’s probably not what I would do.
This article is pretty timely for me. I just started toying with the idea YESTERDAY of doing a 529 for my nephew. He’s less than a year old.
Of course, he won’t be a 529 millionaire. His father died mysteriously (cause of death is still unknown) and his mother doesn’t work (yet). I’m sure she will start saving for him and I’m sure the grandparents will pitch in as well. I don’t plan on putting much in myself, but I figure regular contributions of about $25/paycheck plus investment gains should help pay for SOMETHING.
I wouldn’t just hand someone that kind of money at that age ($1,000,000). They need to prove themselves. Even if the kid goes onto to support himself in a crappy apartment with a low paying job, at least the kid would experience the wealth that he/she earned. If I had that money to be handed off to a child, it would come with some strings attached.
Good article.
Sincerely,
ARB–Angry Retail Banker
We’re not saving a single penny for our two young children. Not one cent. But we are spending a considerable amount of time teaching them about personal finance, entrepreneurship, business, responsibility and anything else needed for them to launch their own businesses long before high school.
Maybe they’ll become millionaires, maybe they won’t, but it will a conscious choice on their part.
Self-made millionaires will never be confused with trust fund babies. Never.
It’s hard to believe that FS would actually advocate for this given his personal life story and work ethic. I suppose it will take more exposure to the latter group – and perhaps his own children down the road – before reaching the same conclusion. It even seems like he’s already vaguely aware of this conflict given all the “Shhh, keep it secret” comments in the post.
A well known quote on my desk says “Happiness is not a state to arrive at, but a manner of traveling.” The same applies to achieving FI. You certainly don’t achieve FI (much less work ethic, character and any number of other wonderful life skills) by opening your hand and having Dad drop a $1M check into it on your 21st birthday.
I like the article and agree with a great many of the comments. But I will add young persons can be given opportunity but they need to have a sense of “skin in the game.” My wife and I work and are putting money away for all these things in our children’s lives and want them to do better than ourselves (every parent’s desire).
But the money will not be unconditional. Standards will be met to get the money. The money will also not be flat given for event. Our children will be on dollar for dollar match program for everything: first car, tuition, wedding, etc. They and their future partner will need to show what they bring to the table.
Great job funding that much for your son’s 529 plan. I think funding a million bucks for college is a bit too much but the idea of constantly funding the account and seeing it grow by the compounding effect shows that you are dedicated to cover most, if not all costs for your kid during their time in college.
If I had a million dollars in my son’s 529 plan, I would not disclose to him that amount because it may not motivate him to do well when he’s in college. He may take it for granted because the costs are covered and may put a higher priority on doing other things like hanging out with friends or going to college parties.
Before he gets to the college level, I will try my best to teach him basic finances like learning how to value money, saving and the power of compounding. I want to give him that awareness that money is great tool to achieve your goals and provide happiness.
Sam,
Like you said, let’s say your child does become a 529 millionaire, what could he do with the rest of that money after education related costs.
I mean he could gift that and transfer it over to other family members right? Is there something I’m missing?
With a handful of exceptions, you’ll pay income taxes and penalties on any distributed funds not used for education. It’s similar to pulling out retirement funds before retirement age. That’s one major downside of overfunding a 529 plan and includes the pretty common situation where your kid decides college is a waste of time and either never attends or graduates.
It indeed seems ridiculous that you need to have a million dollars to send your kid to school and college. I think the US education system is broken, just as the healthcare system.
Luckily, you guys get the opportunity to save with before-tax dollars for your education. At least that helps. But still, the need to save 15, 30, even 45k per year for 18 years is crazy.
Here in Europe (The Netherlands at least) education is cheaper. High school is maybe a few hundred euros per year, college and university are around 2100 euros per year for most universities except for private ones (these are up to 15,000 per year in tuition). However, a lot of public schools are as good as or better than some private schools.
Sometimes I wish I would’ve been born in the US, given your guy’s salaries I read sometimes. When reading articles like this one, I’m pretty happy with The Netherlands.
Hi, Sam! Love your blog and your humor. This is the first time posting. We just sent off our firstborn to college and tapped into our 529 to pay the first semester. Being Asian American too, I was raised with a little bit of feast/famine mentality. Frugality and security is deeply rooted into my psyche. When I got married, we started funneling money aside into a mutual fund to pay for college until the kids were born and opened up 529 plans. We expected college to be down the road and our goal was to not have student debt for our kids.
Fast forward to now – we have about $235K for our oldest and $119k for our second child. Going in-state helps as well as a handful of scholarships. Most of our friends provide an allowance for spending/entertainment money but we decided to provide her the amount that she was awarded in scholarships since she earned those. (She also earned money during the summer at a fast food restaurant.) Any remaining funds in the 529 can be used for graduate school or rolled into another beneficiary.
I guess I’m questioning about the benefit of having $1 million dollars tied up in 529. I realize many people are just starting the early stages of parenting and education costs are continuously rising….but $1 million per child in 529? Would it be better to have a minor account or IRA for contributions beyond the 529 cap? We did neither so I’m just asking out of curiosity.
In regards to having the $1 million available to children – I don’t think there’s any right/wrong answer to it and it’s really personal to each family. Money can provide security and opportunity but it can also mess you up if not handled correctly. I’ve seen families broken up fighting over an estate or monetary gifts. Watch the documentary “Born Rich” by Jamie Johnson (heir to Johnson&Johnson) – it’s eye-opening to the expectations, fears and anxieties wealth can bring.
Thank you, Sam, for bringing up thoughtful topics regarding wealth.
My goal is to have 4 years of state school (ny) tuition saved for my son.
If he wants to go to a private college he can get loans to bridge the gap.
Student loans build character.
Our approach is similar. I wish these articles delved a bit more into financial strategies. For better or worse, our strategy for each child entails:
– Fund 4 years worth of state school
– Let child know up front that is the plan. If they want masters or more its on them. If they want more expensive private college the excess is on them
– Require a degree that can make money – STEM, accounting, business, etc. If they want social sciences, music etc that is fine but they must do both (ie double major) to get the money
– To achieve we target about 75% of 40K (roughly current state tuition) times 4 years. Sam points out that 529 millionaire is silly and it is. Any balance over the cost you expect to pay is a loss – assuming you are not planning on using 529 for other relatives. Of course if you start early and are aggressive there is a risk of overfunding if markets do really well, so redo numbers annually.
– To help incentivize kids we offer any money they earn in scholarship they keep half and we keep half from the savings we would have paid after any 529 penalties – assuming extra exists. So if we have 130K earmarked for a kid’s 160K college and they earn 100K in scholarships, we pay the remaining 60K out of the 130K leaving 70K in 529. We then give them 50% of that amount less penalties and fees. Whether we cash in that 529 or just move excess to another child depends on need.
You’ll enjoy this article as the ultimate strategy: How To Stop Worrying About Your Child’s Future Again
Fine print question: once you hit the 529 limit (say 300,000) does that mean you can’t put any more funds in, or that you would have to take any extra from growth out? In other words, can the balance exceed the limit due to growth? And how quickly is that limit growing (varies by state I assume)? I’ve tried to figure this out, but it seems to require a lot of digging.
This may have already been stated but if you open a 529 and name yourself as beneficiary then there is not a limit due to the gift tax.
Interesting! So I can just put myself as a beneficiary, change my mind when my son needs to get his tuition paid, and go from there?
No I do not suggest that fewer people become teachers, rather people find out the realities of the classroom and not take it up because of nebulous benefits like short hours and long holidays. I spent most of my “free” time on self improvement and have had wonderful experiences all over the US. For this, I was expected to arrange and conduct inservices. Sadly I seem to remember statistics that show the average time spent in the classroom by a second career teacher is 2 years.
Having said that, it is a wonderful career and what I did with my own children was to volunteer as this really shows you what a school is like whether public or private. This gives a good insight as to whether to consider teaching as a career.
As you did with your tennis coaching
The other place to assess the teachers in your local schools is the local colleges which carry out teacher training. These feed their local schools and the college that invests heavily in good training turns out good teachers.
My best experience has been to have ex students tend to me in my recent near death experience and my worst was the student who remarked that teachers shouldn’t be able to afford a BMW when I was driving my husbands.
I am increasingly bothered by seeing, on FIRE websites, the teaching profession touted as a “worthwhile” profession for financially secure people with time on their hands. Trust me, teaching is hard work. I have taught in a mixture of schools both in the UK and the US. Single gender, mixed, rich, poor, private, public. Although I taught in an all girls private school, we sent our own children to our excellent public schools. In retirement, I now substitute at these local schools and can vouch for the professionalism and hard work of the teachers I substitute for. These teachers have to have degrees and clear credentials as well as take regular in services and further degrees. In my view, teachers are badly underpaid. I was a physics and chemistry teacher yet I never received the salary I should have received. But of course, I am serving the community so it doesn’t matter.
As for private v public, get into a good school district, and go public. Public school teachers are much better qualified. Public schools are better funded and equipped if the district is good. And parents can make that happen. Then encourage your child to do an undergraduate degree at the state university. My children went to UC Irvine, lived at home and ended up with no student loans. My son entered the US Navy as an enlisted man straight from school, then worked at night at Boeing as a fitter. With money from both of these and living at home, he was financially secure. My younger daughter was able to do her junior year abroad.
My son believes that the Navy helped him mature.
To clarify, are you recommending less people become teachers? If so, why is that?
I believe teachers are undervalued. I believe they should get paid more. And I believe there should be more teachers.
I’m a high school tennis coach, and I put way more time in to my job and the pay warrants.
Sam you touched on a very good subject (not 529 related): “Should you give your child $1M when she’s 21, or private school education from K-12?”.
We have friends who sent their kids from K-12 to very expensive private schools. I did some rough calculation if you put $40K per year from 2005 to 2018, you’d get ~$1.2M from S&P 500(with dividend re-invested).
Honestly I’d prefer my dad give me that kind of money when I graduate from college. My first 20 years professionally had been just pure struggles: putting together down payment while saving for retirement, on a single income, while trying to raise a family, being laid-off twice, etc.. This means back pains, hair loss, endless sleepless nights, etc.. Luckily I hit the stock options jackpot later, but I don’t know if all that sacrifice is worth it. On the other hand, we’ve seen some recent graduate who effortlessly bought homes in bay area with help from their parents, raise much bigger families while holding so-so jobs, and see their home values soar to millions. I’m not sure my contribution to society is greater than theirs, but certainly my struggle was much more.
My wife and I bought two rental apartments 14 years ago before we had our first child, who is now 7. The younger one is 3. We always want d two kids and thought real estate, amongst some other fund investments could be good for the kids. Both apartments are paid off thanks to a steady stream of tenants paying the bills. They are both in the center of a large capital city with excellent demand. Both are worth around 800k$. Given the current demand I think they still have excellent room to grow before we sell them, so both kids should have a nice investment when they “come of age”.
Congratulations to you and your children.
Thanks. Love your blog. Keep it coming :)
People are still worshipping at the altar of “higher education” for reasons that are totally unclear to me. Many, maybe most, of the jobs that require higher education (physician, attorney, professor) are disappearing or becoming both less remunerative and more unpleasant. I really think the value of a formal degree is diminishing drastically from both educational and pecuniary standpoints. The world has changed from when today’s parents were children, and inherited wealth has taken on much more importance as salaries decrease and formal work becomes worse and worse.
The best thing you can do for your kids is teach them about finances and frugality and give them at least a small financial boost as they hit their twenties. I’m not sure a college degree will be necessary in twenty years, so be careful with the huge 529s.
Great Post SAM! I definitely appreciate snow’s take as well as LH’s. However, I’m rolling with Snow and Sam on this as “Why not work smarter, rather than harder” especially if we are solving for the “Same” end goal which is “Wealth and/or Fin Independence”, right? We get up, commit, grind, sacrifice and then wash/repeat all over again for MONEY. At times the grind is a thrill, but it’s still about MONEY to tackle your end goal.
Thus, why not teach your kids Asset management and hard work? Do what the rich and wealthy have done for decades with their kids and let’s not reinvent the wheel? Sure, the law of averages will occur in any family as we are all unperfect human beings (i.e. Lazy kid = Lazy kid/adult; Driven kid = Driven kid/adult). However, between hard work and/or asset management they can at least feed themselves.
Overall this is interesting because this issue and conversation is too common among those from humble/poor beginnings who are also on a upward trajectory of wealth (Mid/upper class). But yet, we can’t imagine our kids not having to STRUGGLE. Heck, I have my fair share of poor stories (i.e. welfare, trailer homes and ghettos) but I’d willingly trade those for an upbringing consisting of similar values of hard work and grit. IT’s POSSIBLE…I’ve seen many very wealthy families who harp on frugality daily and who’s kids also want their own independence, etc. Don’t get stuck in the middle class trap and way of thinking.
In regards to the need for fancy education (especially upper education that’s readily free online), it’s a nice “bonus”, but to Sam and Snow’s point be careful to not place too much emphasis on it . 10-15+ years from now, it’ll be equivalent to selling your kid a cassette player to listen to music. I’m looking at private (k-12) like a country club membership with the added bonus of a solid foundation. Your kid and fam can make better connections there than at some colleges. College is just a good place to grow, network and maybe make a few more connections, lol.
Take it from somewhere smarter than me and look up Albert Einstein….”Compounding quote”
Thanks – that was my approach in the beginning as well (not worrying as much about asset allocation), and then as always, time flew by. I’m also at Fidelity, so fees weren’t crazy but the difference between the two was ~.6% so it adds up as the balance builds/compounds, but more importantly I think over an 18 year horizon the managers of those time based funds will materially under perform against the index, but time will tell…thanks again.
My siblings and I all knew as early as first grade that we were expected to go to college and that our parents would fund it – which they did 100%. We weren’t spoiled or entitled as a result, and now that I have a daughter entering college as a freshman this year, and another who will be going in about five, I am paying it forward to them. I also established a ROTH IRA for my eldest using her earned income during school years, and will do the same for my youngest. This also is intended to mimic a gift from my parents at graduation to me and each of my siblings. I hope that it will allow my children to make choices and take some risks that they would otherwise not be able to make if saddled with significant student loan debt or a lack of any safety net when they first start their careers. Those things that my parents did for me made all the difference in my financial life. I hope that it has the same effect for my children.
Good to hear. Do you ever wonder how you would’ve turned out if you had to pay your way through college? How do you think your kids would respond if you told them they had to foot the bill? I think it would be a fun social experiment! And then if you find them to be really struggling, you can say, “surprise! I got this because dad loves you.”
Good questions. I probably would not have moved to NYC without a job when I graduated from college, or gone back to law school (I borrowed money to do this, as I have always viewed the money from my parents as insurance and a small amount of freedom). But I think I would have had a decent career even if I didn’t go back to law school and had to pay back undergraduate student loans. I witnessed the freedom of having money as a child and would have wanted to position myself for that regardless. The more interesting question is whether I would have wanted the freedom associated with money if I hadn’t seen it early in life. I am not sure about that. As for my kids, I told my oldest that she needs to keep sufficient grades to keep her merit scholarship (about $16,000) or she would need to pay for that through loans. If that comes to pass I will follow through, but would consider paying those off later for her. I am not sure how or whether I will need to incentivize my youngest (who is 13). I learned early on that “one size doesn’t fit all” when it comes to kids.
Keep thinking and blogging. I enjoy your posts.
Not concerned about over funding your child’s 529 plan? Now that I’ve got enough saved to cover the full cost of attendance at our state flagship university, I don’t know that it makes sense to continue contributions. I’m thinking starting next year I may contribute a nominal amount to get our nominal state tax credit, but divert the rest to other investments with more flexibility. This seems to be consistent with the advice of older folks who’ve already put their kids through school, although I’m not entirely convinced I shouldn’t just save enough to cover private tuition since I can and have time.
I tend to agree that overfunding is probably not the best decision (of course if you have money come out your ears, sure, why not) simply because (a) it is locked up and (b) depending on the age of your kids, you have no idea what the future holds. For example, I graduated high school in 2000 and since then there are two things that have exploded in popularity: (1) AP classes and (2) Technology. As to (1), while AP classes have been around for a while, they have really kicked into gear the last 20 years (my sister graduated high school in 1996 and went to a top 5 liberal arts school for college, there was 0 mention of AP credit at that time). As a result, depending on the school, it may be possible to eliminate a semester or two just by having the proper AP class; even at my top 20 liberal arts school, I knew several people who were able to knock out 2-3 classes simply with AP credits. As to (2), just think about all the technology that has blown up over the last 15/20 years. No one has any idea what the future may hold and what skills will be in demand, and whether college will be the best way to teach them.
Now, while I still think college will be important for the kids of most people reading this (although maybe not our grandchildren), there are no guarantees. I have 529s for both my girls. If I keep my savings rate constant, my contributions will pay, in current dollars, for 1 year of private school or 2 just shy of 2 years of public school. While I will continue to increase my contributions, once I reach enough to cover 4 years at our public school, I will divert elsewhere simply because I think it is a better use of funds.
I have 3 kids: 9/6/2 yo. Here’s my strategy: Put $20k per year (max that’s tax-deductible in IL for in-state 529 plan) into IL 529 plan, and in addition to it, put $2k per kid ($6k total) into a Coverdell Account.
I think people don’t give enough credit to Coverdells: yes the max is miserable $2k, but you can invest into almost anything (I use Schwab), and, if you send your kid to a private school, you can use the Coverdell as an emergency-emergency savings account that you can withdraw from since you can use it for k-12 expenses. Additionally, at least in IL, you can transfer the balance from Coverdell to 529 and deduct state taxes from the principal of the contribution.
Please note that even with the tax law changes, not all states allow use of 529 plans for k-12 expenses. Illinois doesn’t.
There are multiple benefits to 529. Some states give deductions. Also there is federal tax sheltering. So, with recent changes in law I believe even in Illinois 529 for k-12 can be beneficial since growth on savings are tax sheltered. Also, maybe a state’s limits should not dictate your limits – I believe. The 20K/year max is just how much you get for IL state deduction purposes. But if you can do more you should maybe at least consider it because you still get tax sheltering of federal. Worth looking into. If you check it out with an advisor or professional and find this is not correct please update.
Having a $1,000,000 account balance at graduation would have been very nice. While I can’t know for sure, I don’t think having that balance available to me would have changed my decision to attend graduate school. However, it may have enabled me to stay in the northeast and have given me a very solid cushion to live from until I could find a decent job during the recession. Otherwise, I don’t think anything would have changed in terms of my decisions.
Because I’ve never been a spendthrift, I would have invested it at a 60/40 split between stocks and bonds or pursued some alternative form of investment. I can say for sure it would not have gone toward consumption. If I didn’t follow the 60/40 stock/bond allocation, I would have done something similar to your thoughts, Sam, and bought some nice, appreciable real estate to call home and hold as an investment. I would have found a roommate to help with the monthly bills and established a nice home base.
As for doing this for my children, I can’t say for certain I’d give it to them at graduation. I’d try to award it to them in phases as I see they’ve proven to be smart with money. I would hate to see money my wife and I contributed diligently and wisely over 22 years go to waste on extravagant, wasteful purchases that do nothing to help my child get ahead in life. I suppose I would know the child well enough come time for graduation to have some sense of their money habits and would be open to the idea, so long as I know the thriftiness on our part isn’t wasted.
Great job superfunding your son’s 529 and growing it to that size so quickly! Tuition is crazy expensive and you are really prepared and are fortunate to have options. Lots of great points in this article. I laughed when I read your “shhhh”. Building funds but keeping it on the downlow from your kids is a good idea. :)
Never tell them of your plan to make them millionaires
Continuously demonstrate sound financial habits in front of your children
Continuously demonstrate a good work ethic
Provide them with ongoing financial education
Make them work minimum wage jobs in high school
Make them volunteer to help others less fortunate
I’d also like to add giving to others whether charity or gifting to close ones.
Asian cultures are not big on charity to strangers but giving to close ones is a definite. Eg red pockets.
Looks like my parents achieved all of the above for me.
These are my principles. Thanks for those words Financial Orchid. Can I suggest JA.org. I volunteer for this organization once a semester and I love it. I get to teach kids about finances because I am passionate about it.
I take my kids about once a month to the bank so they can deposit their pennies. We also go through their old toys and close and sell it. Then, they take the money and deposit into their savings accounts. As they will get older, I will implement different financial lessons.
Honestly, I am afraid of making my kids millionaires. What about if they turn out to be total lazy morons after us trying to the best parents we can be? Now, they will go a waste all the money that WE worked so hard for? No way in hell, I am going to risk that. I prefer having our kids be knowledgeable and if they perform, we will have the money ready but in our accounts and in our names. I could careless savings few percentage points on taxes. To us, the risks outweigh the costs.
We totally lucked out with our kids. They taught them about investing at a young age. Scholarships and bank of mom & dad covered tuition at private colleges, hence no student debt. Both are working and married.
However, I totally worry that my grandkids might grow up entitled!
I got behind the 8 ball with my daughter’s 529 because she ended up going to England after the divorce for 6 years and I didn’t contribute (later won custody and got her back for 6th grade). Currently she has about $69k in 529 plan in 8th grade so I think it might be a little too late to make her a 529 millionaire. Probably wouldn’t have shot for that goal even if I started out from the very beginning contributing to the max.
I do like the idea of creating a startup fund to give to your kid(s) maybe in the mid 20’s or early 30’s. Nothing too extravagant, maybe like 40-50k to set them off on the right financial foot. But I don’t want to be raising a trust fund baby that I see typically gets super spoiled and doesn’t do work etc.
Just want to point out that a surprising number of colleges overseas (Canada, Europe, Asia, etc.) are eligible for paying through 529 accounts. In England, Oxford and Cambridge are eligible for example.
As long as a college is on this list you can pay qualified education expenses via 529.
https://ifap.ed.gov/ifap/fedSchoolCodeList.jsp
The $15,000 per person per year tax deduction, are you talking about the gift tax deduction? I just want to be clear as my wife and I already do $10k per year for our son for the state tax benefit. I did not realize, nor admittedly know too much, about the federal gift tax deduction. I want to make sure I am researching the correct thing.
Annual gift exclusion from your estate. You can give/contribute more, but technically it will be taxed somehow, in the end if you have money beyond the estate tax threshold. But now that the threshold is a whopping $11.18M per person… perhaps it doesn’t really matter at all.
I like the thought exercise but making your kids millionaires via their 529 won’t let you do most of the things that you note. The money can only be used for education, and if it’s withdrawn for other reasons then it will be taxed at your income tax rate plus a 10% penalty.
A better option would be a trust (although no tax deferral, tax free growth) if you want them to access the $$$ or provide additional freedom, a combination of 529 for education and Roth IRA for retirement would set them up nicely for education and the future, and a combination of Trust/life insurance policy with any excess that you wanted to gift would allow you to give them greater freedom when they’re younger and protect them if anything were to happen to you.
Agree. Check out the conclusion. Sorry, I know I write long posts. If you don’t want to read, you can listen to the podcast.
Long but worth it. Thanks for the heads up Sam!
Agreed. My grandparents set up a trust fund for my younger brother. When he got to college, he had over $100K growth over a 10-year period. When he got to college, he was able to apply for 100% financial aid because his trust was not in his name, but he was only the beneficiary. He had no income for it and therefore didn’t have to report anything on his FAPSA. He was able to take advantage of the free money from financial aid and also have a future asset that he could chose to tap at some time in his future as he wished to do so. He had the best of both worlds.
I am bigger believer in trusts because it keeps the options open for its beneficiary to maximize more financial vehicles for education and non-education needs than a 529 alone over a longer period of time. Worrying about trust fund babies is overblown. If you mentor the recipient on good personal finance habits, the lessons will make them more successful over a lifetime than if they don’t have the mentorship. If you model good financial behavior to kids at an early age, good life long habits will follow.
But his financial aid was still a loan right? If so, I would rather have any financial aid at all if you don’t need it.
Student loan interest rates are much higher than mortgage rate loans.
Hey Sam, long time reader, first time posting. Curious to hear your thoughts regarding an alternative investment strategy for children using a whole-life insurance policy in lieu of 529/brokerage savings. The appeal being the long term cash value as an alternative income source in retirement and a self-funding asset via dividends once fully funded. I have a 3-month old son and am thinking this may serve as an alternative to the 22-year-old-millionaire dilemma. Instead, there’s financial security almost guaranteed in his golden years and, god forbid, a fail-safe for his family once he has one. Thoughts? Maybe another post on the topic? Would love to see it. Thanks!
Could be good, but I’ve always shied away due to the cost of whole-life. If you have excess funds after 401k/IRA/529/HSA etc, then I don’t see why not get an extra whole-life insurance policy buffer.
Maybe you’d like to write a guest post about this process? I’ve done little-to-no research on it so far.
My two cents on whole life is that while the dividends and tax-deferred capital gains look good, the huge hit you take from paying the commission at the front end is a problem. I have several whole life policies from a blue chip insurer, and have (obviously) been pitched constantly to “overfund” them and buy more; but the cash value starts so much lower than your premium, I think any stable investment is better. Just put it in municipals or the S&P, and it will be more flexible (you won’t need to wait 30 years before you start to do better than just investing) and worth more. I recently realized the monthly auto premiums for whole life were no too high/ longer necessary (partly because I have not died yet, and our finances have advanced to the point that my wife and son will be fine if I died). I actually surrendered one of the policies for the cash value, which was like 15-20 years of premium, and was told it was not taxable — which means it was worth less than I had put in! It hadn’t grown long enough, post-commission, to exceed the dollars contributed or something. I was told the other two policies would show taxable income on distribution of 25 or 30% of the total – meaning I’d pay like 30% tax on 30%, so 10% tax. And those policies are oooold, the one almost 30 years.
So I’ve obviously soured on these “whole life as investment” arguments, driven by my own realization that the up-front commission puts you so far behind that it takes literally decades to make it up.
My agent got all defensive by asking “Who is telling you to do this?! Did somebody get to you? Did another agent tell you to get out of my policies?!” I just told him I had evaluated my financial needs and felt this was prudent. I left it ambiguous whether another agent was involved, just to leave that in his head. Maybe that was mean. The truth is that I looked carefully at one of his new pitches to add more money, and realized how catastrophic the up-front hit is (between premium and cash value) if you really are comparing stable competing bonds vs. whole life — i.e. whole life as investment.
We funded our only son’s 529 generously from birth to about ten, because I wanted to be sure that whatever else happened, I had provided for his education (my parents could not for me, I had lots of loans by the standards of 1989 when I started working). So today, with him in 8th grade, he has a 529 of $375,000. He does NOT know about it, and I think he will not until the nitty gritty of college finances are upon us in 4 years.
If there’s money left over, it’s for grad school, or somebody eats the penalty tax, no big deal given the peace of mind it provides.
So having that worry off my shoulders means using whole life is all the more UNnecessary.
One thing not addressed in the article, if you or your kid does have a huge 529 starting college, it would pretty much rule out getting any financial aid, even if you have little or no income those years. Colleges expect you to drain your savings to pay the full rate. So unless the kid is particularly bright or has a special talent, it really would be a 200k+ bill for USC.
It would still be a tremendous amount, but you’d realistically have to immediately deduct that tuition cost from what the kid gets (assuming you would pay off the loans immediately).
That’s a great point. I think we’re passed the point of getting financial aid. I guess we could manipulate our income for the last two years to earn little-to-no money, but that feels bad, and I also don’t what the future will hold. Sure, having no 529 plan would help with getting financial aid, but unless the aid is in the form of grants, no thank you. We won’t be getting out loans to pay for education that is declining in value due to the internet. It’s like buying a car with a loan.
I’d rather focus on what I can control.
Sam, wondering if you went with a target date fund for your son’s 529? I did for the first 7 years for both of my kids and found that the performance was dismal compared to the S&P index option (not to mention the fees) so made the switch a few years ago with good results. Plan is to do this and then manage the re-balancing myself as they get closer to college age. Just curious about how you’re approaching it. Thanks.
Good point you’ve brought up. I chose a target date fund from Fidelity that has a low fee. And I didn’t go as aggressive as I could have.
I may decide to do a hybrid investment strategy now that one year has passed.
My goal has been to just be responsible for contributions and not worry at all about asset allocation since there is such a long way to go.
We funded our kid’s 529 up to the max tax benefit available last year and will do so again this year. We’ve also deployed the grandparent strategy which I recently wrote about. If the grandparents are able, this is a great tool. Furthermore, depending on the state they live in, there are some good incentives. We’re also setting aside funds in a separate after tax account for college, or perhaps world travel. Now the trick is to not raise a spoiled little brat…
It’s certainly a great gift that you’ve established for your son. Even with modest additional contributions, 130k is going to grow substantially over the next 15 years. I wouldn’t worry too much about your son not being productive. The apple typically doesn’t fall too far from the tree.
He should develop a decent work ethic given your plan to have him work a minimum wage job and volunteer. Even if he’s only half as driven as you, he’ll still be far ahead of most people.
That said, I still wouldn’t let him know about the money. Knowing that he has a large cash reserve will likely lower his motivation to achieve great success.
I’ll definitely continue to follow the story to see how it shakes out.
I think it’s a bad idea. Kids are dumb and they’ll spend that money stupidly. If I had a $1,000,000 education fund, I’d go to the best college I could and live it up. YOLO, right? I guess there could be a few kids who are wise with money. It’s gotta be rare.
BTW, great job with the 529 plan. Not many toddlers have $130,000 earmarked for college.
I agree 529s are useful accounts that anybody should take advantage of (even with balances as little as $100!) But what I gathered from your article is that you are still not sure yourself whether making your child a young millionaire is a good thing. How will it affect the child’s work ethics and appreciation for the world around him/her? You’d like to believe you can rise above all the temptations to lead an unproductive life, but we all know that people behave according to their environment.
Personally I find it ironic that you advocate for a young millionaire to pursue professions thay they love, because they are freed from financial constraints.
Quote:
“Think about how many more young adults would become teachers, non-profit workers, journalists, and volunteers”
Two reactions:
1. These are exactly the kind of jobs that very very rarely would lead to financial independence – your child may be a millionaire because you put in the hours in Investment Banking, but what about your grandchildren?
2. Only in the previous post you decided that you should never make “what you love” to be your profession (volunteer all you want, but don’t accept responsibility that comes with paid line of job)
I’m a long time reader, first time posting and I love almot all of your articles, but this one felt like a hodgepodge to me. Love to see you follow up in a few more years, with another piece on what exactly you want to achieve by providing financial security for your child from an early age.
The points seem very clear to me:
1) Private school cost is ridiculous. Consider public school, then you don’t need to make your child or 529 plan Millionaire.
2) But with regular contribution and discipline, You can make your child will laugh if you save and invest for them. And if you don’t want to make them well-off, you will become well off by the time they reach college.
3) If your children have a financial safety net once they become adults, then they have more options to do what they want thanks to your planning. And you have the option to help them if they are good kids or not.
4) To show what’s possible.
I think it’s important to think different layers.
Do you have kids?
I do, Andrew, two pre school-aged ones as a natter of fact.
As a matter of fact, I am one half of a dual-income household that equally contribute to an annual income of $450,000, my husband and I both grind teeth in financial services to afford a house in one of the leafy suburbs of NYC (and a rental condo property). We are still young and far from financial independence, but I identify some of my own journey in Sam’s stories and look for his perspectives as a source of inspiration.
What I attribute my (and my husband’s) career success is the tenacity or grit that comes from our humble-to-average upbringings and I think that’s the biggest struggle:
What if our “success” was largely a product of a “less-than-perfect” upbringing?
We as parents can supposedly provide the “best” environment for our children but what if that good intention was in fact, counterproductive? By “spoiling” our children with the best education (pubpic or private, it won’t make much difference when the town’s school system is supported by tax revenues from property taxes from houses whose median values price is roughly $1.5M) and amenities (Tata motors, for example)? What use would a $1M check be except to be wasted, if our children end up ungrateful brats and not productive members of our society?
We only have one childhood and have the comfort of knowing we turned out ok. But we can only speculate how being raised in a different environment would do to another person, like your children. I do intend to max out 529 and pay for college tuition (and maybe grad school too), but I’m skeptical that anything beyond that would be helpful.
Recognizing your kids only have one child hood, have you considered taking some time off to spend more time with them instead of work?
I’d also like to read a guest post from you regarding your trials and tribulations as a parent.
No, I have never wanted to take time off to spend time with a child. It’s a personal decision for sure but in my mind, quality parenthood =/= amount of time spent with the child. Perhaps because I was raised in a dual income household as well but I honestly think during the weekdays kids are happier playing / going to school with other kids. We are lucky that we both work essentially a 8 to 9 hours a day job (not banking hours) with no spillover into the weekends, so that’s where I try to make it up. We don’t have nannies and try to manage things ourselves with occasional help from the grandparents. I don’t feel relaxed most of the times but also not overly stretched, so we like to think we’re finding ways to make it work as parents. If you think there is some value to a guest post I’m happy to coordinate that with Sam. The biggest things on my mind right now is the lifestyle creep of living in a high cost area and whether that would have any effort on my children’s ability to learn appreciation.
Thanks Andrew!
Reading LH’s response to you, there seems to be some frustration (“grinding teeth in financial services to afford”) about costs.
I think this is a feeling many families feel on the coasts if they feel they must go the private school / expensive college tuition route.
Sounds good. The hodgepodge aspect is to make you think about various underlying meanings in the article.
I welcome a guest post if you’d like to make your clearer point.
College tuition is soaring out of control. Vanguard estimates that the cost of a 4?years of college will be between $200,000 – $600,000 in 18 years from now.
It’s more important now than ever to start saving big and early for higher education to avoid your child from having crushing student loan debt
My daughter was just born and I will be opening up a 529 account as soon as I have a Social Security number for her!
I hope some people come to this realization from my post that it seems ridiculous to need to make your child a millionaire to be able to afford tuition that is now free thanks to the internet.
But, I suspect people won’t get my underlying message.
I plan to send my daughter to public school through high school and have no intent of making her a 529 millionaire.
However, I do plan to fund her college education so she does not have crushing debt when she starts her career.
College is a necessity in many professions, like mine as an attorney.
When I set up my daughter’s 529 plan, my state estimated her 4 year expense would be $500,000 for out of state tuition. My immediate reaction was firstly panic, then I figured out I would need to save approximately $1000 per month for 22 years at a 6% return. Our family is fairly well off so the number is quite doable, but then I got to thinking how much money could be generated from investing $500,000 in cash, and I cannot help thinking that she would be massively better off if I put her to work in our family business to develop a strong skillset while taking advantage of free education. If she is not business inclined, perhaps she could get into a vocation such as plumbing/electrical and get paid for her job training while simply investing the $500k into stocks.
Glad you said that. Was about to point out that once online certification and accreditation starts catching up with the learning available for free, or almost free, it’s going to be the sudden death time for a lot of colleges and universities. Some folks are predicting less than fifty of them, all with extensive online learning available will be left after the shakeup in a couple to a few decades. Additionally, some employers are starting to show less interest in applicants having college degrees, especially in fields where it’s mostly just an indicator of perseverance and little else. My grandfather was a master architect who built beautiful homes and buildings all over the east coast, but he never had or needed a college degree. The insane costs of traditional college are going to stampede us all back that way.
My father was an Air Force pilot who rose to high rank; he got his bachelors degree about two months before I graduated with my own . . . and probably only because it “filled a square” he needed for his last promotion. These days you need a master’s degree just to make major, that was the main reason I got my MBA (that and the fact the Air Force picked up the costs and scheduled me to work on weekends and stuff so I could get to some of my classes during the weekdays).
As for giving twenty-somethings a million dollars? Whether they know about it in advance or not, this seems like a very bad idea. And I’ve got some kids that age that are pretty tight with their pennies . . . their hard-earned pennies.
I don’t have kids so I don’t know how much my comment is worth, but I was a kid once. I think it would be dangerous to make your kid a millionaire, and purposely let him or her know it. Perhaps stealth millionaire status and revealing it later would be the better road.