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.
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.
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Graphic by Colleen Kong-Savage.