A 529 Plan Is Not Enough To Pay For College, We Must Save More

In 2017 and 2019, I superfunded two 529 plans for my two children. Since then, my wife and my parents have also regularly contributed to the two college savings plans. You would think with all this aggressive saving, I would feel confident we’ll have enough saved to pay for college. But I’m still unsure.

Given the pace of college tuition price increases, it seems like only three types of students and families will be able to pay for college without taking on massive student loans:

  1. The rich
  2. The poor
  3. Geniuses

The poor will get tuition adjustments, which is great. I’m always rooting for the poor to gain more education to break the poverty cycle. Geniuses will land enough free merit aid to make college affordable. Meanwhile, the rich will be able to pay for college through savings or cash flow without a problem.

The middle class or mass affluent class, which is most of us, however, are screwed unless our kids are geniuses or highly practical. We must pay for the full cost of tuition for four to five years. This expense will take a big chunk out of our retirement savings.

A 529 Plan Is Not Good Enough To Pay For Its Intent

Given my kids aren’t geniuses, we’ve only got two options if we want to comfortably afford college. We either need to be poor or be rich.

I’ve decided to select the rich route by saving as much as possible and forgo any chance my kids will get financial aid. We don’t get healthcare subsidies and we pay a boatload in taxes every year. So it would be foolish to assume any institution will ever give us any help with college tuition.

Yes, some middle-class families try to game the FAFSA application by reducing their income a couple of years before their kid attends college. However, unless there’s a way of legally hiding assets from the FAFSA, we can’t make ourselves look poor.

The main way we are saving for college is through 529 plans. However, after almost seven years of contributing to one, I don’t think a 529 plan is enough to pay for college.

Given the all-in cost for attending a private university for four years will likely cost $1,000,000 by 2044, each kid needs to become a future 529 plan millionaire to pay for college from savings. Pretty absurd, right?!

Saving $750,000 For College For My Son By 2036 Is The Target

In 2036, twelve years from now, my son will likely attend college. It currently costs about $90,000 a year, or $360,000 for four years all-in, to attend a private university. Therefore, if I assume a 6% compound annual growth rate for 12 years, the all-in cost in 2036 will rise to $725,000. Over his four years of college, prices will rise even further.

To be conservative, I’m assuming a worst case scenario for college costs. This means no community college for two years first, no public university, no free grants, and no working while in school. My hope is that by assuming the worst, there will be upside.

I’m an old and tired dad. By 2036, I will be 59 with zero desire to work to pay for college. By then, I want to live a life of leisure with the time that I’ve got left. My other goal is to give him the gift of a fully-paid for college education instead of just money.

College tuition inflation is absurd

Praying For Public College

If he goes to a public university, then the four-year all-in cost in 2036 will be closer to $320,000 versus $155,000 today. As a result, he’ll hopefully have a lot left over in his 529 plan. We will leave the remaining 529 balance for when his children go to college. A 529 plan is a great generational wealth transfer tool.

I’m a big fan of attending public university given that both my wife and I went to The College of William & Mary and did fine. We both could have paid for our tuition with minimum-wage summer jobs.

Our all-inclusive cost of $9,500 per year on average compared favorably to the $30,000 per year route for a private university. But I’m not sure I’ll be able to convince him of the merits of a public school education when the time comes.

529 College Savings Progress

With a target of $750,000 by 2036, below is how much we’ve saved in his 529 plan so far as of January 2024. This is after starting a 529 plan in mid-2017.

A 529 plan isn't enough to pay for college

$356,821 saved means $393,179 left to go to reach $750,000 by 2036. This means the 529 plan needs to achieve a 6.5% compound annual return for the next twelve years if no contributions are made. There are two problems with this goal.

  1. The 529 plan returned only 10.8% after the S&P 500 returned 24% in 2023. That is some serious underperformance because I chose a target date fund by Fidelity based on age. I can’t believe how much foreign stock (27.3%) the 529 plan holds. Ugh. And of course, bonds have done terribly since 1Q2022.
  2. In California, once the 529 plan reaches a balance of $529,000, I can no longer contribute. In addition, I no longer have the ability to superfund the account.

I did my best to build up my son’s 529 plan with contributions from three people. Yet, despite our best efforts, I assign only a 65% probability the plan will get to $750,000 by 2036.

In other words, after almost seven years of saving for college, I’m not confident we will save enough. In fact, I feel some despair since I also have my daughter’s college tuition to save for. Her college cost will likely amount to $800,000 for four years starting in 2038!

For those of you with more than two children, please tell me your secret for saving enough for college.

For those of you thinking of having kids, please be aware of the financial stress involved in raising them. College tuition is no joke. If you don’t plan accordingly, your relationship will your significant other will be negatively affected.

It is a difficult challenge to save for your own retirement while also saving for your child’s college education. This is why many parents can’t even think about retiring until after their kids graduate college. This also why many parents stop after having two children.

Here is my game plan to increase the chances we will be able to comfortably afford paying for two college tuition bills.

1) Invest new 529 money in an S&P 500 index fund

In a bid to potentially increase the likelihood of my son’s plan reaching $750,000, I’ve opted to adjust the 529 plan contribution percentage to 100%, directing the entire gift tax limit amount I’ll be contributing ($18,000 for 2024) into an S&P 500 index fund.

While contemplating whether to shift the entire 529 plan balance to the S&P 500 Index, I find myself hesitant about the associated risks. As a result, I like this hybrid approach.

Over the past decade, U.S. equities have consistently outperformed foreign equities, and I hold the belief that this trend will persist. Maybe I am suffering from home country bias, but I believe the U.S. will continue to lead the technology revolution due to artificial intelligence. Consequently, I am comfortable allocating approximately $100,000 of new 529 plan funds into the S&P 500.

Changing 529 plan allocation to more S&P 500 Index from target date fund

2) Increase 529 plan contributions sooner to hit the max

One strategy to increase earnings is to have more money invested. For instance, a 10% return on a $50,000 529 balance amounts to $5,000, while the same return on a $500,000 529 balance yields $50,000.

While the future performance of stocks and bonds remains uncertain, my plan is to swiftly reach the $529,000 limit for our son’s 529 balance. Achieving this involves encouraging my wife and parents to contribute $18,000 each annually. With three contributors providing a total of $54,000 per year and assuming a 5% annual growth rate, our son’s 529 balance should reach the contribution limit within two-and-a-half years.

Upon reaching the limit where additional contributions are no longer permitted, there should be a sense of psychological relief, as there will be no further actions possible from a 529 plan standpoint.

3) Get the kids to work to build up their Roth IRA plans

A Roth IRA stands out as the optimal retirement savings vehicle for kids and young adults. The objective for every eligible working kid is to earn an income falling between the maximum Roth IRA contribution limit and the standard deduction for the year, thereby paying no taxes.

Given that the standard deduction consistently exceeds the maximum Roth IRA contribution limit, contributing the maximum to a Roth IRA allows for tax-free contributions. The kid can then withdraw the money tax-free after five years if desired.

For 2024, with the standard deduction limit per person set at $14,600 and the Roth IRA contribution limit at $7,000, my plan is to engage my son in our online business, helping him earn some money for his Roth IRA. While he may not reach the full $7,000 at his age, any amount earned is a step in the right direction.

Fostering a strong work ethic and instilling the habit of saving and investing for their future is invaluable. Their Roth IRAs will serve as their skin in the game if their 529 plans fall short. It would be great if they could work for a decade and build up a $100,000 Roth IRA balance by the time they’re 20.

4) Teach kids practical knowledge and skills before going to college

Lastly, the more time I spend teaching my kids practical knowledge and skills, the greater the chance they’ll achieve a higher Return On Investment from college.

Consider the many college graduates who complete their education without acquiring practical skills. While they may possess extensive knowledge of American history, it’s challenging to build a career spitting facts about dead presidents.

Hence, my objective is to educate my kids on subjects such as marketing, writing, speaking, business, sales, business development, branding, and Mandarin. By doing so, they may graduate college sooner, like my wife did by six months, or feel more confident that a more affordable degree is sufficient for them to live a good life.

Teaching children not only benefits them but also enhances the ROI of my own college education. This is one of the reasons why writing books and articles on Financial Samurai brings a sense of fulfillment.

In addition to business knowledge, I will teach my kids everything I know about being a rental property owner. This includes buying property, screening for tenants, writing a lease agreement, painting, remodeling, plumbing, electrical, negotiating, and landscaping.

Going into the trades is a great option if they so choose.

Don’t Just Rely On Your 529 Plan To Pay For College

Relying solely on a 529 plan to cover a child’s college education would be a mistake. It’s essential to calculate the anticipated cost of your child’s college, assess the progress of your 529 plan, understand its investments, and estimate potential shortfalls based on different return assumptions.

Counting on substantial financial aid or assuming your child will attend a public or community college could also prove to be a mistake. In some regions, such as California, gaining admission to the UC system can be extremely competitive, even after years of paying property taxes.

Just as we acknowledge that no one will save us in retirement, we should adopt a similar mindset regarding college tuition – recognizing that no one will rescue us from the financial burden of higher education.

Embrace The Reality Of Being Average

Our children, like yours, are likely to be average, and average individuals often don’t receive grants or make optimal financial decisions. Given this reality, it’s prudent for us to proactively save a significant amount of money beforehand to prevent them from facing financial challenges post-college.

Throughout my time running Financial Samurai since 2009, I’ve encountered numerous highly educated readers who regret the substantial expenses they incurred for their education. Some feel a sense of guilt for not achieving more in their lives and are burdened by the fact that their parents had to sacrifice their retirement for their education. Some even find themselves still living at home, relying on The Bank of Mom & Dad well into their late 20s and 30s.

While I am currently frustrated by the exorbitant cost of college, I also feel trapped due to numerous unknown and uncontrollable variables in the future. Consequently, the only way to alleviate such concerns is to continue saving and investing. When the time comes to pay for college, I’d rather have enough saved versus too little. Alternatively, I could just revolt and bypass college altogether.

A big challenge will be to save enough for college while also not sacrificing too much of our lifestyle during the process. I’m facing a race against time. Unfortunately, time is currently winning.

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Reader Questions

Do you feel like saving in a 529 plan is enough to pay for your child’s college education? How are you planning to afford college, especially if you have more than two children?

Is it really only the rich, the poor, or geniuses that can afford to attend without taking out major student loans? Who else feels trapped by growing college expenses?

Recommendations To Help Afford College

Plan for college better by signing up with Empower, the best free financial planning tool. With Empower, you can track your investments, see your asset allocation, x-ray your portfolios for excessive fees, and more. 

For 99.99% less than the cost of college, pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life. 

Listen and subscribe to The Financial Samurai podcast on Apple or Spotify. I interview experts in their respective fields and discuss some of the most interesting topics on this site. Please share, rate, and review!

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