What is the maximum, reasonable amount one might put into a 529 college savings account for the benefit of a single future student?
529 accounts have maximum allowed balances between $235k and $400k depending on which state's plan is being used. Given that the most expensive college in the country only costs $61k per year, the former would fully cover four years, and the latter would cover it almost twice over. Unless you expect the student to pursue a master's or doctorate, funding up until the allowed max would be too much.
My question is about how much the account would need to be considered fully funded, so for instance you could make a ratio of what percent of fully funded you've got so far. There are already other questions on this site about whether a 529 is a good idea at all, how to prioritize it against retirement accounts, etc.
Of course the answer is going to depend on a lot of assumptions. If you're trying to fund the account as early as possible, so that the tax-free gains are maximized, you're just going to have to make some guesses. Of course you can't predict if your child will go to grad school before they've even entered kindergarten.
Here are some assumptions one might make, but they're just suggestions; feel free to contradict them.
- Four years of tuition, fees, books and supplies, room and board at an out of state public university.
- Only about 1/3rd of the US population have a Bachelor's degree or better. Of those, only about 1/3rd have a Master's degree or better.
- Covering all the costs of attending college.
- Out of state public school costs are a mid-point between community, in-state public, out of state public, and private colleges.
- According to http://trends.collegeboard.org/college-pricing/figures-tables/average-published-undergraduate-charges-sector-2015-16 the annual cost of a four-year out of state college is $34k
- College cost inflation and investment returns will both be the same over the next 18-20 years as they were over the last 18-20 years
- A simplifying assumption could be that future investment returns and college cost inflation will be equal. I haven't yet researched to know if this is a reasonable assumption or not.
- "Between 2005-06 and 2015-16, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.4% per year beyond inflation, compared to average annual rates of increase of 4.2% between 1985-86 and 1995-96 and 4.3% between 1995-96 and 2005-06." Source: http://trends.collegeboard.org/content/average-rates-growth-published-charges-decade-0 "Tuition and fees and room and board" grew slower, at 3.4% and 2.8% for the past two decades.
- Schwab estimates that large cap stocks will return 6.3%, bonds will return 3.3%, and inflation will be 1.8% in the long-term future.
- The after-inflation return of a 60/40 stock/bond portfolio is 3.30%, just 0.17% less per year than the historical college costs for the last two decades.
- Therefore, I conclude that it's not unreasonable to assume investment returns will about equal increases in costs.
- A simplifying assumption could be that future investment returns and college cost inflation will be equal. I haven't yet researched to know if this is a reasonable assumption or not.