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. Let us dig deep into the recommended 529 plan amounts by age.
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 2021 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 2021, 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 2021, 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.
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. They could have had better lives if they weren’t so burdened by student loan debt and had more enjoyable occupations.
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.
Now that we have these assumptions in place, let’s look at the recommended 529 plan amount by age.
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:
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 to pay for college until the 529 plan goes to 0 at age 25.
Those who should follow the Medium column:
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.
Each column represents the appropriate amount based on your goals and your child’s educational goals. All columns are great goals to follow. The amounts should align with your goals and beliefs.
If you’re behind, contribute more. Or convince a grandparent or relative 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. Understand your child’s intelligence and work ethic. Know your beliefs about higher education.
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 amounts 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 The beneficiary can be reassigned 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%. This compares favorable with the 10-year-bond yield at under 0.7%. 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, what is the right 529 plan amount by age you’re going to follow?