Suzie on Oprah-college suggestion

[Snave]

Then you'd be violating a basic investing rule that money needed within 5 years shouldn't be in the stock market. I think that's the point Suze was trying to make. These folks were too aggressive. Had they dialed down their stock allocation as the kids got closer to college age, they wouldn't have lost 50% of their savings when the market plummeted.

I believe the younger son is a sophomore in high school, so he'll start college in 2011, just over 2 years away. Keeping the money needed for that first tuition payment in stocks is really taking a big risk.

I understand breaking the basic investing rule, but they ignored it in the first place and that is what got them in this mess. They were too aggressive with only a few years out. I guess I would play the odds with the market beat down like this and hope it doesn't drop further. In normal circumstances, I wouldn't, but since the market is so low, I think if I were to ever chance it, this would be it.

If all else failed, they COULD keep it in the 529 longer than those years and then pull it out and except the penalty once they got some healthy returns.

[jIM_Ohio]

I understand breaking the basic investing rule, but they ignored it in the first place and that is what got them in this mess. They were too aggressive with only a few years out. I guess I would play the odds with the market beat down like this and hope it doesn't drop further. In normal circumstances, I wouldn't, but since the market is so low, I think if I were to ever chance it, this would be it.

If all else failed, they COULD keep it in the 529 longer than those years and then pull it out and except the penalty once they got some healthy returns.

IMO they would be better off taking out the contributions now (those probably would not get taxed) and use the tax credits to offset their losses (hope credit or lifetime learning).

If they wait for the 529 to go back up, we could be talking about a 60% gain to recover a paper loss. Cut losses and use for education within next 6 years for sure, it appears putting all eggs in the 529 basket backfired.

Sucks to be them. If you take the risk, have a plan for worst case.

[Snave]

I guess it depends on where you feel the market would be in 4 years. I don't know if it will be up, but I don't think it will go down too much more. I could be totally wrong!

It is a crapshoot. They could pull it out now and not get penalized as bad, but then they lose the tax free earnings of the 529. If they pull it out today, they are still going to invest it some way (most likely). They will get hit with those taxes on the gains. If they are going to invest anyway, I would think the best way would be to stay in the 529 for the tax benefit.

[Investing First Steps]

I guess it depends on where you feel the market would be in 4 years. I don't know if it will be up, but I don't think it will go down too much more. I could be totally wrong!

It is a crapshoot. They could pull it out now and not get penalized as bad, but then they lose the tax free earnings of the 529. If they pull it out today, they are still going to invest it some way (most likely). They will get hit with those taxes on the gains. If they are going to invest anyway, I would think the best way would be to stay in the 529 for the tax benefit.

I think you proved Jim's point. Unnecessary risk is what got them into trouble in the first place, why take on more? You're putting a 4 year window on the recovery which is a fairly long window, but in this market stills sounds "speculative." Right now you may feel like your "getting your money back", but in 2 years, you may be wishing for the 50% that you had 2 years ago.

[disneysteve]

it appears putting all eggs in the 529 basket backfired.

No, Jim. What backfired was investing too aggressively within the 529. 529 plans are just like Roths and 401ks. They offer a variety of investment options from very aggressive to very conservative. Had they allocated their contributions in a way that was better suited to their investment timeline, they wouldn't find themselves in this mess. With the older kid already in college and the younger one just 2 years away, they should have been mostly or entirely out of stocks a few years ago.

My daughter's 529 is invested in an age-based portfolio that gets more conservative as she nears college-age, just like a target-date retirement fund. By the time she is 16, it will be 65% bonds, 35% stocks, and that is their aggressive portfolio. The moderate portfolio would be 75% bonds at 16.

[jIM_Ohio]

No, Jim. What backfired was investing too aggressively within the 529. 529 plans are just like Roths and 401ks. They offer a variety of investment options from very aggressive to very conservative. Had they allocated their contributions in a way that was better suited to their investment timeline, they wouldn't find themselves in this mess. With the older kid already in college and the younger one just 2 years away, they should have been mostly or entirely out of stocks a few years ago.

My daughter's 529 is invested in an age-based portfolio that gets more conservative as she nears college-age, just like a target-date retirement fund. By the time she is 16, it will be 65% bonds, 35% stocks, and that is their aggressive portfolio. The moderate portfolio would be 75% bonds at 16.

Steve 75% bond FUNDS is not appropriate for even a 2-6 year time horizon. If rates go UP then the bond fund will drop in value (depending on avg duration of the fund).

It is best to pay college (or a portion of it) with CASH (not investments like stocks and bonds).

A retirement plan probably has SS leg, Roth leg, 401k leg.
A college plan standing on a 529 leg is greatly unbalanced (a one legged plan will tip over).

[DebbieL]

Let me reanswer with I would keep the money invested because I'm not paying for any of my children's college upfront. We're doing loans. It might cost more but with kids today partying and dropping out, I'm not handing them college on a silver platter. It will be a grade based payout.

Meaning Bs and better get 100%. C might get 75%, D and F get ZERO%! That way if you are serious and college is my Child's job then they get a free ride!

But if not then forget about it. I don't believe in paying for college like these parents do NO STRINGS attached. No way.

I do believe like my DH did, going to school is a full time job, if you want to graduate like him with a 3.9 GPA in organic and physical chemistry honors. So my kids will get 100% paid ride like my DH. But it's gonna be tied to grades.

So I will likely not use a 529 that much and I will also be invested 100% in the stock market and not pull it out until absolutely necessary, meaning after the grades come home.

That is my plan EXACTLY LivingAlmostLarge. Are you sure we weren't separated at birth? I often find that you've typed exactly what I was thinking.

[disneysteve]

Steve 75% bond FUNDS is not appropriate for even a 2-6 year time horizon. If rates go UP then the bond fund will drop in value (depending on avg duration of the fund).

The 529 uses Vanguard Total Bond Market Index fund. Performance is:
1 yr: 5.05%
3 yr: 5.41%
5 yr: 4.56%
10 yr: 5.37%
Inception (1986): 6.87%

Average maturity: 6.1 years

Looks to me like they have a very consistent track record. Do you think that is an overly risky place to have money? They do offer a more conservative portfolio that splits between the bond fund and the Vanguard Short-Term Reserves account.

[disneysteve]

By the way, our college plan is not a one-legged stool. We aren't depending on the 529 for everything. As I've mentioned previously, my daughter will begin receiving annuity payments from a legal case when she turns 18. Some of that money will go toward college costs. And I plan to pay some expenses out of current income. I expect less than 50% of costs to come from the 529.

[LivingAlmostLarge]

Thank you debbie.

Jim, no go. Did your parents help your siblings out after college? I plan on NOT helping period. BUT unlike most parents my DH and I will preach that from BIRTH.

They are on their own after college. They have to get a job and WORK! There is NO FREE RIDE in my house. If they want to move home they have to pay rent. And if they need to buy food and rent then they need a job and should be HUSTLING before college is over.

Hello slackers! Everyone single one of my cousins and siblings had jobs before college ended BECAUSE their parents ALL Said you are on your own. FUNNY how fast you can find a job when you have NO MONEY TO LIVE ON???

That's going to be my kid. Now exceptions are made like my Sister's middle child who needs extra help because of a learning handicap. Thus they paid for worse grades than their other kids.

And since I've TA A LOT of classes, you basically have to be a turnip in class or NOT show up if you want to get a D or F. Like I said a C get 75% because they handout C for showing up in most universities.

The bell curve is how classes are graded with the top being a C+/B-. So you have to not show up to fail or be drunk off your behind. I TA in college and as a graduate student. I know what it takes to fail (D or F). And we don't hand them out easily.

So to me college is not a silver spoon that is to be taken for granted.

[jIM_Ohio]

The 529 uses Vanguard Total Bond Market Index fund. Performance is:
1 yr: 5.05%
3 yr: 5.41%
5 yr: 4.56%
10 yr: 5.37%
Inception (1986): 6.87%

Average maturity: 6.1 years

Looks to me like they have a very consistent track record. Do you think that is an overly risky place to have money? They do offer a more conservative portfolio that splits between the bond fund and the Vanguard Short-Term Reserves account.

You will soon find out (can the fed lower rates further?). Check fund performance numbers for 1997-1999 (when greenspan was raising rates) to see similar economic pattern). I am by no means a bond expert... but I know a long term bond (20 or 30 year note) will drop in value when rates go up (I believe it is the long term bonds which will vary more in value with changing of rates).

The 5 year avg maturity suggests you have some interest rate sensitivity. Less than a 10 or 20 or 30 year note. More than a 1 year duration (which is the "ultra short term bond fund").

I might google interest rate sensitivity to see how much of what I am suggesting is correct (and let me know what you find out .

[jIM_Ohio]

Thank you debbie.

Jim, no go. Did your parents help your siblings out after college? I plan on NOT helping period. BUT unlike most parents my DH and I will preach that from BIRTH.

They are on their own after college. They have to get a job and WORK! There is NO FREE RIDE in my house. If they want to move home they have to pay rent. And if they need to buy food and rent then they need a job and should be HUSTLING before college is over.

Hello slackers! Everyone single one of my cousins and siblings had jobs before college ended BECAUSE their parents ALL Said you are on your own. FUNNY how fast you can find a job when you have NO MONEY TO LIVE ON???

That's going to be my kid. Now exceptions are made like my Sister's middle child who needs extra help because of a learning handicap. Thus they paid for worse grades than their other kids.

And since I've TA A LOT of classes, you basically have to be a turnip in class or NOT show up if you want to get a D or F. Like I said a C get 75% because they handout C for showing up in most universities.

The bell curve is how classes are graded with the top being a C+/B-. So you have to not show up to fail or be drunk off your behind. I TA in college and as a graduate student. I know what it takes to fail (D or F). And we don't hand them out easily.

So to me college is not a silver spoon that is to be taken for granted.

My parents helped we switch the address on the loans from their house to my apartment- that was about as much help as they gave me. I know they enabled my younger brother and my younger sister to a lesser extent and refinanced house to bail out the older brother (major cc debt in college).

[Snave]

I think you proved Jim's point. Unnecessary risk is what got them into trouble in the first place, why take on more? You're putting a 4 year window on the recovery which is a fairly long window, but in this market stills sounds "speculative." Right now you may feel like your "getting your money back", but in 2 years, you may be wishing for the 50% that you had 2 years ago.

I still think it should be kept in the 529. Why penalize yourself at this point? They can put it into something safer in the 529 if they feel the need. I just wouldn't be pulling it out and getting hit with fees just to put it into another taxable investment outside the 529. That makes no sense. DS had some bond funds that looked reasonable. What are they going to do, pull it out, get hit with fees, and then put it in similar bond funds on the outside?

I will say this though, I would be just as aggressive with the market down so much and a 4-year time window. You said unnecessary risk is what got them into the mess and I agree. Now they need to take some necessary risk to try and get the money back.

It is the same reason I haven't abandoned my 401K, etc... I know the timing is a little different b/c there is a longer time frame. I just don't believe the market will be that much lower in 4 years.

[LivingAlmostLarge]

Ouch on the enabling. I know my parents would not have helped me if I had CC debt. They would have said pay it off or bankruptcy. I could have guessed they helped them out.

Anyone who gets a handout typically it's because the parents chose to.

A great quote from this PF blog I read, What's the difference between rich and poor folk? Well rich people can ask for help, but poor folk look for help and get none.

Truly the point. If I were dying and needed money for surgery my parents could afford it. But if my mom were dying in college, she wouldn't have gotten it because her parents were broke. She was working 3 jobs to support them along with her siblings.

So necessity fosters indepence.

[disneysteve]

Check fund performance numbers for 1997-1999 (when greenspan was raising rates) to see similar economic pattern).

1996 3.58%
1997 9.44%
1998 8.69%
1999 -0.65%
2000 11.54%
2001 8.55%
2002 8.38%
2003 4.09%
2004 4.36%
2005 2.53%
2006 4.42%
2007 7.07%
2008 5.05%

Doesn't look so bad to me. It was down slightly in 1999 but up every other year.