PFFAP-PYP-23-0719-New Baby College Planning
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Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money you need for retirement in college.
Nate: Hello, physician moms and dads. I am Nate Reineke, certified Financial Planner and primary advisor here at Physician Family Financial Advisors.
Today we are going to talk about planning for college. We're gonna do things a little different today in that we're actually gonna do some planning. Usually we answer a question Today we're actually gonna do it. Uh, and to accomplish this, we brought on an advisor of our own, who's been on the show recently, Chelsea Jones.
Hi Chelsea. Hi. Thank you for being here. How's it going? It's going good. [00:01:00] So it really wasn't that long when you were here last, and the audience probably knows you as the retirement fund planning advisor, but we're not talking retirement today. You have some college planning to do, is that right? I do.
Chelsea: Cause I'm about. Oh, seven and a half months along pregnant, due it early October. So it's coming in quick. So the college planning, yeah, early October is also October.
Nate: Yeah, I know. So, uh, I recently heard of a, uh, physician dad tell me that he, he did some college planning on his phone, uh, when, while his baby was being born.
And I thought that was a little, um, I thought that was a little extreme and then I realized that we tried to do the college planning before the, before the baby's born. So he, he fits right? Yeah. So October then I'm writing this down, so, oh, by the way, for the audience, um, [00:02:00] if you hear me typing, it's cuz I'm actually doing real planning, so I'm gonna type that in.
So October, 2023. Great. Do we have a name yet? For this baby we do.
Chelsea: Yeah. What's the name? We're having? A little girl. Her name is Anastasia. Anastasia or
Nate: Anna for short. Anastasia. Terrific. And f Uh, I think it's obvious, but First Baby, right? First baby. Yep. First baby. Okay. So I know you could probably reach into your memory banks, into all your certified financial planning, uh, studies and do this college planning yourself, but you agreed to let me do it for you in front of, in front of our audience.
Um, and so what I'd like to do today is set a goal for college, which as you know, It's probably the hardest part about any planning is [00:03:00] nailing down a real goal and then, um, talk a little bit about investment strategy and then probably give you a real number. We might have to pause the recording or something so I can run the numbers, but, uh, actually get you a number out the door today for how much you need to be saving.
Sound good?
Chelsea: Okay. Yeah,
Nate: sounds great. Okay, so Anastasia and born in 2023, but late 2023. So that's probably 2024. Is it gonna be, uh, due late October or early? Early. Early. Okay. So we'll say 2023. So Anastasia's off to college in 2041. Okay. And tell me about, um, how your. Your college, uh, experience. So did you go to state school, private school?
How did college go for you?
Chelsea: Yeah, I went to state school. Um, [00:04:00] I basically applied to all of the in-state schools in Kentucky where I grew up, and, um, pretty much went to the one that gave me the most scholarship
Nate: money. Nice. Cool. And, um, Connor's, your husband's name, um, how did, or where did Connor go to school?
Chelsea: We both went to school at Western Kentucky University. Okay. Which is a state school in Yeah. Western Kentucky as you'd imagine.
Nate: Okay. Yeah. So, um, normally. If in my experience when I hear people that I went to state school, they, they had a reasonable experience going and so they sort of have that vision for their child.
Is that the same for you? Do you think state school is what you plan to save for?
Chelsea: Yeah, I think so. Cause I think too, if. I mean, you never know what kids are actually gonna do, but, um, scholarships are always a [00:05:00] reasonable option, I think. Mm-hmm. At least pursuing them and trying to get the cost down if, if they end up going to a private school.
Nate: Yeah. Yeah. It's important to know that with the trajectory of sort of your and Conner's career, you probably won't get any need based aid. Yeah. Um, and that's the same for every person I speak to about college, but there's a lot of merit based aid that you can get. So I think that's what you're talking about.
And, um, yeah, you know, also a lot of private schools, um, they're pretty competitive. If you have decent, decent grades, you know, they, they try to lower their costs. But when you start talking about the most expensive private schools, you know, on the East coast, they kind of don't. They don't try to be competitive, they're just expensive.
So I think when you say private school, you're probably talking about one that would, I wouldn't call it negotiate, but would lower their price if you had, uh, good grades. Mm-hmm. [00:06:00]
Chelsea: Yeah. Like maybe a non IV private
Nate: school. Yeah. Okay. Good. Um, let's see, and in grad school, I know Connor, um, It went beyond undergrad.
Um, and you, you went the same route as I did. So we got our sort of after college certifications and certified financial planning. Do you plan on paying for any grad school for your children
Chelsea: at this point? No. Um mm-hmm. The grad school that I'm familiar with and what. What Connor does is in the sciences, which mm-hmm.
Don't actually have tuition that you pay, you work, and then that covers it. And so it's not an out-of-pocket cost. So maybe if they go to grad school, it'll be in the sciences.
Nate: Okay. Yeah, makes sense to me. Um, my spouse went to a private school and she also, her grad school was [00:07:00] mostly paid for through working.
So there's definitely options. Um, the question that you really have to ask is, are you gonna. Sort of push your children into grad school and if they, if you do push them, are you also gonna push them to work? So you're sort of forcing that on them at a pretty late age. I don't really see you doing that, but, uh, many of our listeners, I think that they're, they value education so much that they push, they can push really hard on the school front and then they end up sort of pushing their child into debt or, um, Pushing themselves into saving a ton of money for college, which I try to prepare them for.
So, sounds like you have your head on straight where if, if they're going to grad school, it's gonna be really well thought out with, um, some work study involved. Right. Okay. So, um, right now in [00:08:00] state. Under, uh, in state public school is running about $25,000 per year. So, um, it's probably doesn't feel I. Uh, to me that sounds like a lot from when I went to school, but, uh, that also includes room and board, and then once you take that out, it doesn't sound like that much more.
Um mm-hmm. So, I, I want it to be clear that your goal includes tuition, fees, room and board. Makes sense.
Chelsea: Gotcha. It does. Okay. Does, um, I do have a question though. Mm-hmm. Books and stuff. Is that when you say tuition fees, room and board, I. I guess that does not include books.
Nate: It actually does. And it does. It does.
Nice. Yeah. And what I've looked really close into the books, the amount that they predict seems like it's almost not enough. Like when I say they are, uh, [00:09:00] Planning software predicts. Seems like it's not enough. And then I dug into it and I realized it is enough. I just have PTs d from buying books. They were so expensive, right?
I spent all my money on books. Um, but no, it's actually pretty, uh, pretty well documented number and it does include books. So that's part of the fees. Gotcha. Okay. Just feels more expensive than anything else. Cause a lot of students will just pay out of pocket, um, rather than somehow getting money from their loans to do it.
So you, you have to be on top of it with your financial aid department. Mm-hmm. Okay, let's see here. All right, so let's talk about investment strategy. Um, you know this all too well, but you're going to, uh, hear me out for the audience. So you have two options when it comes to investment strategy inside of your college fund.
And it's really two options similar to any other goal, [00:10:00] but you have a target date strategy, much like for retirement, and you have a target risk strategy. A target date strategy is exactly what we said at the top of the call. 2041 is the date. So Anastasia's gonna school in 2041 and the investments that make up that fund, the 2041 fund, they know.
What your goal is. They know Anastasia's going in 18 years, going to spend 25% because there's four years of college, of her college fund. And then the next year gonna spend another chunk, another chunk until it's gone after four years. And so the investments inside of that have a very specific glide path that start relatively aggressive and then drop off as you get closer and closer to school.
Does that make sense? It does, yep. Okay. So similar to retirement, which you're really familiar with. The, the big difference [00:11:00] is that, um, college, you spend all your money in four years in retirement. You hopefully never spend all of your money. And what that means is as you get closer to college, you take far less risk than you ever would probably in your retirement accounts.
You have to essentially be in cash as they're in school. Okay. The reason I point this out is that this is why it's so important to invest early for college. If you invest too late, it's, you're already so close to your goal that there's really not a ton of benefit of putting stuffing money into these accounts.
Right. Okay. All right. The other option is target risk. This is the old school way of investing as, as our, as our colleague Kyle Helsley would put it. Um, target risk is to say that you decide how much risk you'd like to take. Um, and to be [00:12:00] honest, that is sort of based on a gut feeling, how much risk you would like to take.
Um, And you just invest in that much risk and you rebalance every year. So let's imagine you wanted to be 80% stocks and 20% bonds. You would just keep it 80 20 until you felt like you should lower that amount. We don't necessarily recommend that for most people just because it's, uh, you have to manage it pretty closely.
And you also have to take stock of your risk tolerance pretty often, or you should, if you're in that, um, If you're going down that route, the target risk route. So we generally recommend target date and nowadays target date investing is really inexpensive in these five 20 nines. So, um, does that work for you and are you target date in retirement?
Chelsea: I am target date in retirement. Yeah. And I think it yeah, makes sense to do the same thing with college.
Nate: Okay. All right. Does it feel a little [00:13:00] strange to be, uh, when you look at that college, uh, glide path and how, how, uh, quickly the, the stocks drop off into bonds and, and really how conservative it gets when your child's like 14?
How, how do you feel about that?
Chelsea: About It is a little strange to see just because I'm so used to looking at retirement glide paths, which are much more gradual. Um, yeah. But you know, as you explained it, it makes sense why, why it drops off like that. Um mm-hmm. Cause you don't want, you know, you don't want your portfolio to go down right before college because you're invested too aggressively.
Nate: That's exactly right. Like, like imagine your, you know, a hundred percent stocks and the, and the, the market drops 25%, which is. Totally conceivable. I mean, it could drop 50% or it has in the past and you gotta pay for school. I mean, you just lost a year's worth of college. [00:14:00] So, um, that, that is a good way to put it.
It's, it's not that you're giving up opportunity, which you sort, you sort of are, but the, the real benefit to it is that you're locking in all the hard work you've done all those years and it just feels early because we're all used to investing pretty aggressively. Yeah. Not to mention, yeah, cuz at that age you will still be relatively aggressive in retirement.
Right. Because unless you plan on retiring when you're 50.
Chelsea: Exactly. I don't plan on retiring when I'm 50. I don't know what I would do either, but,
Nate: but, um, me either. Okay, great. So target date. Um, and then I want to tell you about the, the organ. Uh, The tax deduction rules. So with five 20 nines, which is the account that I will recommend that you use. So five 20 nines are specifically for saving for college.
[00:15:00] Oregon sponsors a 5 29 that gives you tax credit when you contribute to this account. So I'll take a step back here, um, in using five 20 nines, uh, we've talked about that on this show several times, but you get an enormous. Uh, benefits toward college. So there's, it's an account. You put money in it, and if the money is used for college, you get huge tax benefits.
The tax benefits, uh, uh, do include a deduction every year, or an Oregon's case. It's a credit tax credit. But the main goal and the reason to use five 20 nines is that all the money inside that account grows. And if the money's used for college, you get to use it tax free.
That's a, uh, I, that's a huge deal, especially for doctors. Yeah. No joke. Right? Because
Chelsea: tax free is a big deal for anyone,
Nate: I think. Yeah. Well, and, and it just, the [00:16:00] numbers get bigger and bigger, the, the bigger your income is. So if you, if you pay 40% in taxes, And you have all the money you need for, you know, public in-state college.
Essentially, you'll probably have maybe half that in growth, which is, is, uh, if you were paying for college today, that'd be a hundred thousand. So half that 50,000 in growth, uh, of your investments, 40% in taxes, you just saved $20,000, which is almost a year's worth of college. Wow. And tax savings. So another way to put that is if you don't use the five 20 nines early, you have to pay for an extra year in college in the form of taxes.
Wow. It's a lot of money. I'd never thought about it that way. Mm-hmm. So it, it's sort, a lot of people will think. That they're giving up so much in order to save for college. And if you [00:17:00] reframe that and know that you're probably gonna foot the bill no matter what. Saving for college saves you a lot of money if you do it early on and do it through five 20 nines.
So that's my public service announcement today. Use five 20 nines and use 'em early. So, uh, in Oregon though, the, the, the thing that people think they're contributing to 5 29 for is this, this tax deduction or tax credit. So for you, um, you can get $340 back on your taxes, which a credit is different than a deduction.
$340 is probably equivalent to a $3,500 deduction. Something like that. Um, but in most states that have a deduction, it's, you can deduct it against your state income tax. So we get a credit here in Oregon, most people get a state income tax, uh, deduction. Other states you don't get anything. And so [00:18:00] the question that people ask a lot is, if I don't get a state income tax deduction, um, should I be using my state's plan?
Right. And the answer is probably not because unless you're in one of the states where your five 20 nines has extremely low fees and really good investment options, you can just go anywhere you like, right? So we, we like Utah. Some people like New York or Ohio. Um, but low fees and good investment options is what you're looking for if you don't have a state income tax deduction.
Yeah, makes sense. Sense. Okay, cool. All right, so I have a few questions for you and then I'll be ready to sort of tell you how much to save. Um, can you tell me, are you paying for anything right now? I. That you won't be paying for when the, the kiddos are off to college. I can't imagine. [00:19:00] Like, I know, you know, there'll be childcare later on, but what are you paying for now?
That, uh, an expense that will go away soon. I,
Chelsea: right now, because we haven't started daycare yet, cuz obviously she's not here yet. Mm-hmm. Um, there's not really anything that's gonna go away. Okay. I mean, Maybe a car payment,
Nate: but that's it. Yeah. Okay. I see. All right. And are you counting on anyone else this is, uh, in your family or Connor's family to help pay for school?
No. No. Okay. All right. And is there any money that you have that we should consider as part of your college fund already? Like do you have any money that's specifically for college set, set aside? Um, this early on?
Chelsea: Yeah. It's not a lot though. It's like 500 bucks. [00:20:00]
Nate: Okay, got it. Well, it's something. 500 this early on is worth a lot. All right, so give me a second here. That's the information I need. Okay. So your aim, this is your goal, is to cover the cost, that's tuition fees, room and board of sending Anastasia to a four year public in-state college?
Yes, that's correct. All right. That still feel good? Have you talked to Connor about this in the past?
Chelsea: We've talked about it a little bit. Not in uh, great detail cause it is so early on, but Sure, yeah. We both agree that we wanna save to send her to college.
Nate: Okay, got it. It's a lot easier when you both had the same college experience, um, just because you think to yourself, well, You know, we turned out all right.
But, um, it sounds like also you're, you're sort of, uh, [00:21:00] the, you, you think about this the most, cuz obviously the nature of your job, so you probably get slightly bigger, say, um, but yeah, so, so you're, you're comfortable with him that he also wants to do public school? Yeah. Okay, great. Okay, so that's the goal.
Um, your college fund currently contains some cash that you've set aside and, um, Oregon offers a tax credit for contributing to the Oregon College savings plan. Um, given your situation, you would need to contribute, I believe, around $4,000 to get the full credit per year. Um, something important about 5 29 plans you're using, or you will be using a 5 29 college savings plan.
If you make non-qualified distributions from this account, you'll be required to pay income tax and a 10% penalty on the portion of the withdrawal that represents [00:22:00] appreciation. So taxes and penalties on that, on that account, which essentially means unless you're in really hot water, this money is off limits until college.
Are you comfortable with that? Yeah, I am. Okay, got it. So then here's my advice, and it's really simple, um, because you have a really straightforward plan. It's just, it's public school, it's four years. Um, And you, you basically, since you're starting so early, uh, normally I think I quote people about a thousand dollars a month, but I think you'll need to start contributing $850 a month, uh, until Anastasia enters school.
A lot of people think about contributing to college as college is being a part of those years where you contribute, and I disagree with that because there's no time for growth when Anastasia's in school. So the time has passed. But what that [00:23:00] also means is that $850 a month, right, which is, let's call it $10,000 a year, will be freed up as soon as anesthesia goes to school.
So if you're just a little bit behind, you'll have that money available to, to pay the difference at the end of the year. Does that make sense? Gotcha. Okay. Yeah, it does. Yeah. So, um, You're, you'll be a bit ahead of the curve there. So the, so contribute $850 to an Oregon College Savings Plan account, which means you need to open one and you can open one as soon as you get a social security number.
And then inside of that account, you would want to pursue an age-based investment strategy or years to college investment strategy. And that means that when you go in there and it says which, which. Uh, investment option. Do you wanna choose? You choose the 2041 fund and then just start throwing eight 50 a month at it.[00:24:00]
Chelsea: Okay. Sounds, sounds scary, straightforward, A little.
Nate: Yeah. Yeah. Eight 50 a month, that's like a ton of money to send one child to college, but then when you realize it's really not that far away, you're like, man, retirement's easier because it's. 30, 40 years away. Yeah. You're also spending on yourself. I have a question.
Retirement question. Yeah, go ahead.
Chelsea: What happens if my college, college fund, which for me it's just this 5 29, what happens if it's overfunded?
Nate: Hmm. So, If you get to the end of school and you have too much money in this account, um, then, and let's imagine, so there, there's lots of different ways you'd go with this one, if it's overfunded because you have scholarships, like you talked about, you can submit to get that money [00:25:00] refunded to you without penalty.
Oh, okay. So scholarships are great. No need to hope and dream for any type of scholarship, and that save the day, you can do both and you won't get hit with penalties. Two, if you have another child, you can transfer the money to them. Okay, so that's second. Um, third is if you basically. I, I don't, if you do your planning correctly, you'll be looking at this plan every year and for college sometimes that's a lot because it's just so straightforward.
But the reality is sometimes the market goes way up. Sometimes it goes way down. And if you can stick. Close to where you should be year over year over year. The time college actually comes, I don't usually see people have extra money in their accounts because we run it so close to zero for this exact reason.
We don't want too much money in here. [00:26:00] Right, right. So with retirement, it's never a bad thing to have a little bit extra. Because it's a little more security college, we'd plan a little different. So the last thing would be that if you just simply had too much money in this account. So I want you to imagine you chose a really inexpensive school and we know that, you know, maybe that's like a community college, but if, if it's not a community college, then schools don't get that much more inexpensive than.
Public school. So at the, at best you're gonna save maybe $5,000 a year, right? By choosing a really inexpensive school. And so that's 20,000 bucks and I just told you of your money in the account, you can, general rule of thumb is half is growth. Makes make sense. It does. Yep. Okay, so you have 20,000 in there, 10,000 is [00:27:00] your contributions.
10,000 is the growth of your investments, and when we're talking about taxes and penalties, we're only talking about the growth. So imagine you had to just take all that money out because you didn't spend it and you didn't wanna give it to grandkids or to another child for any, you didn't have a way to use it.
Um, you would take all the 20,000 out, you would pay taxes, let's call that 30% on the 10 plus penalties of 10%. So you would pay 40% on 10 grand. So it's be four grand. And, and fees, our taxes and penalties. But the big difference here is, or the big thing to consider is that you would've paid the taxes either way, right?
I mean, if this was in any other investment account, you'd be paying taxes. So when I look at that, I think the, the opportunity to not pay any taxes on this money saves you th you know, the 3000 versus the potential of having to pay [00:28:00] $1,000. In fees. So that's 10% penalty on the growth. So you're saving three for the chance that maybe you, you lose one in fees.
Does that, does, did you follow that? I did. Yeah. Okay. So, um, what I'm trying to say is that it's this chance that you could pay some small amount of fees, but the chance is so slim and even if you did, the fees are so small in comparison to the taxes that are saved. So some people can get discouraged to not using five 20 nines.
And I, I don't think there's any merit to that.
Chelsea: Yeah, that does make sense cuz really it's just, I. Well, first I feel like it's, unless you're just shoveling money in, it would be kind of difficult to overfund with a 5 29. Yeah. Right. Because mm-hmm. The cost of college is kind of outrageous, but
Nate: Agreed. [00:29:00] Yeah.
Yeah. Most people don't show up to college over-prepared.
Chelsea: Yeah, yeah. But what I heard you say was that the potential cost, if it ends up being overfunded, is really just. 10% of the growth because without the 5 29, the taxes would've been paid anyway. So that's kind of a wash, right? Yep,
Nate: exactly. Exactly. And you forget about all the money you saved by using the account to lead up to that situation too.
So five 20 nines are the best. I love them and I want everyone to use them. Um, I don't see a real reasonable, um, line of thinking. That, that shows you shouldn't, you know, put, put in quite a bit of money in these accounts every month from the day your child is born.
Any other questions? Yeah, agreed.
Chelsea: No, I think that's it for me.
Nate: Okay. All [00:30:00] right. Well, the, I think the big takeaway for today is just, is just that, uh, for the sake of your taxes, start investing for college as soon as possible. As soon as you get that Social security number. But other than that, that's all for today.
Until next time, remember, you're not just making a living. You're making a life.
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