Investing questions

[BleedBlueGold]

Put the first $2,000 per year in a Coverdell ESA. These other guys will have better advice for anything above that.

Curious why you always push the Coverdell ESA? What's wrong with 529s? I know you have more investment choices with the ESA, but is that it? What else am I missing?

 

[wizards8507]

Curious why you always push the Coverdell ESA? What's wrong with 529s? I know you have more investment choices with the ESA, but is that it? What else am I missing?

That's the main benefit, but it could be a substantial one. Lots of 529 investment choices are overly conservative, especially if you start when the child is young.

 

[BleedBlueGold]

That's the main benefit, but it could be a substantial one. Lots of 529 investment choices are overly conservative, especially if you start when the child is young.

I did notice the more conservative investment approach. Currently it's a Target 2036 account. Inception return is only 1.8%. Considering changing it to 80:20 US Equity Index and Bond Index respectively. Cheaper expense ratios and better returns. Thoughts?

 

[Ndaccountant]

Generally speaking, what would you suggest to someone who is interested in some sort of investment for a child? I just opened a separate brokerage account for my son where I deposit his monetary gifts and a my own monthly contributions - roughly $7,000 per year. I'm open to better ideas, though.

The brokerage accounts are perfectly acceptable, but I would think about what you hope to get out of the situation.

For example, when do you want your child to have access to the funds? Are the funds intended mainly for education expenses? How will the $7k annual contributions change? Increase or decrease?

Depending on the above, your approach may change.

 

[wizards8507]

I did notice the more conservative investment approach. Currently it's a Target 2036 account. Inception return is only 1.8%. Considering changing it to 80:20 US Equity Index and Bond Index respectively. Cheaper expense ratios and better returns. Thoughts?

How old is your kid? Unless they're already in high school, I think any bonds whatsoever is too conservative.

 

[BleedBlueGold]

How old is your kid? Unless they're already in high school, I think any bonds whatsoever is too conservative.

She'll be three in August.

I agree. I just feel more peace of mind with some bonds. Even if it's 90:10.

 

[Wild Bill]

I did some digging into UGMA/UTMA accounts for kids a while ago. Ultimately decided against it for various reasons. Worth looking into though just for an option.

How old is your son? Do they offer brokerage accounts for minors that aren't UGMA/UTMA type accounts?

He just turned 1 the other day. I have the account in my name but separated from the accounts I intend to keep.

The brokerage accounts are perfectly acceptable, but I would think about what you hope to get out of the situation.

For example, when do you want your child to have access to the funds? Are the funds intended mainly for education expenses? How will the $7k annual contributions change? Increase or decrease?

Depending on the above, your approach may change.

If he wishes to attend college, I would assume he'll need the funds around the age of 18. If current college trends continue, I'm not so sure "higher education" will be the best path for him, or anyone else, but that's a different discussion. Maybe he'll take a different path, and I would have no issues with him using the funds to invest in himself however he sees fit, provided it's a productive endeavor, and he demonstrates a level of responsibility and ambition that I find acceptable. The contributions should stay relatively consistent over time. At least that's the plan for now.

I do not wish to give him absolute access to the funds whether it's for college or any other venture. I have no interest in paying a quarter million for a degree not worth the paper it's written on nor do I wish to have a teenager spending money like a fool. That may sound controlling to some but the average 18 year old is ill equipped to make difficult financial decisions. I prefer controlling the funds and working with him to make decisions on how the funds are used.

 

[RDU Irish]

$7k/year put into a kids name starting at age three - you are looking at over $100k of contributions, not including growth by the time they are 18. That is a lot of scratch to have in a kid's name, especially if the intent is to pay for college. For one, colleges will look at that and apply 33% to the kid's "need" versus 5% for parent assets (generally speaking - ballpark figures). For another - the kid can run off to Europe and spend it all on hookers and blow once they reach 18/21. In practice - the kids are usually oblivious and you can keep it out of sight/out of mind for longer than that. The issue still remains - if the kid flakes out you have probably compounded the problem.

UTMA accounts are necessary to have investments for kids as they are not old enough to make those decisions for themselves - an adult needs to be responsible. Beyond pushing some investment tax onto a kid's taxes (which use to be pretty limited anyway until it rolled over to the parent's taxes) I don't see much reason to plop any more money than you have to in the kid's name. Keep it in your name, invest it for the future and you can always gift a lot down the road. Exception would be maxing out Roth IRA contributions on their behalf when they start having earned income - the value of compounding that investment tax free is off the charts. $2000/year from 16-20 (five years) would grow to $400,000 by age 63 at 8%. Get 9% and that number goes up to $600,000. Tons of kids don't go to college - jump start their retirement with the tuition savings and you can make them a millionaire (as long as they leave it alone to grow).

Short answer - don't put any more in the kids name than you have to.

 

[RDU Irish]

He just turned 1 the other day. I have the account in my name but separated from the accounts I intend to keep.



If he wishes to attend college, I would assume he'll need the funds around the age of 18. If current college trends continue, I'm not so sure "higher education" will be the best path for him, or anyone else, but that's a different discussion. Maybe he'll take a different path, and I would have no issues with him using the funds to invest in himself however he sees fit, provided it's a productive endeavor, and he demonstrates a level of responsibility and ambition that I find acceptable. The contributions should stay relatively consistent over time. At least that's the plan for now.

I do not wish to give him absolute access to the funds whether it's for college or any other venture. I have no interest in paying a quarter million for a degree not worth the paper it's written on nor do I wish to have a teenager spending money like a fool. That may sound controlling to some but the average 18 year old is ill equipped to make difficult financial decisions. I prefer controlling the funds and working with him to make decisions on how the funds are used.

Buying your kid a food truck instead of a college education is probably a better value than most of us would like to admit. Either way - I think they need skin in the game and need to make some mistakes with their own money before you throw a bunch of dough at an 18 year old. In my example - work in food service building some management experience, figure out the lay of the land, take some online or CC business courses, show initiative and figure out the market. All kinds of trades, landscaping, various services that can be learned on the job and a nice capital infusion can go a long way to making them quite successful.

Or they may not be an entrepreneur - destined for a more menial job that will never be high paying. Make them live off their wages and you max out their Roth IRA for a decade - cheaper than college and damn near guaranteed long term success if you can make them leave it alone to grow. $5500 for 10 years (age 20 to 30) grows to $1M by 63 at 8%. Comfortable position for someone used to making $30k-$50k/year.

Show up on time and sober with any work ethic and you can do quite well in this country.

 

[Ndaccountant]

Agree with RDU.

There are a couple different options for you, but I would agree that putting that much $$ in your child's name without the safety of UTMA is risky. Depending on the state, that still might not give you the control that you are looking for, so an incentive trust might be a better option.

I would still put a little into a 529 or Coverdell, especially if you think you will have more than one child. Tax free compounding benefit along with the option to transfer to a sibling if not used.

 

[BleedBlueGold]

Great advice from RDU and NDAccountant.

IF you do go UTMA/UGMA, you need to know your state's "age of majority." I agree with above that giving an 18 yr old kid a huge chunk of money may not be a good idea. And you can't legally keep it from them if they know about it and demand access to it. That's where a trust comes in to play, but as my research lead me, they're not cheap. Ultimately, it's cheaper and easier to keep the money in your name and just gift it down the road utilizing the lifetime gift limits.

With that said, I think it's great that you're doing this for your kid. Well done.

 

[RDU Irish]

Remember you can gift up to $14,000 per year, double that if you and spouse are giving to a kid. Unlimited payments for college do not count as gifts so education will not be limited by gift taxes. You also have a life time gift exemption that essentially allows you to use your estate exemption while living (over $5M per person, double that with spouse). Keeping full control is highly advisable until you are down the road and have confidence the kid can handle it.

Trusts are expensive - not just to set up but to manage going forward. Need to have some scale in place to make it worthwhile too. I would only use that as a tool written into my will to keep my full estate out of kids hands until 35 or so with someone doling out income and keeping it invested properly.

 

[Whiskeyjack]

Remember you can gift up to $14,000 per year, double that if you and spouse are giving to a kid.

It's now $15k per individual per year.

You also have a life time gift exemption that essentially allows you to use your estate exemption while living (over $5M per person, double that with spouse).

It's now $11.2m per individual/ $22.4m per married couple. It's a great problem to have, but only a few of my very wealthiest clients have to worry about estate tax now.

Trusts are expensive - not just to set up but to manage going forward. Need to have some scale in place to make it worthwhile too. I would only use that as a tool written into my will to keep my full estate out of kids hands until 35 or so with someone doling out income and keeping it invested properly.

Getting a proper trust drafted is almost always less expensive than going through probate. That's the most common reason people spring for a trust, and avoiding probate is often difficult without one. If your kids are already grown and you're able to place beneficiary designations on all of your assets (which often isn't possible with corporate interests), then a simple Will plan can work well. But if you've got a significant estate, a family history of dementia (trusts deal with incapacity much better than will plans), or at least one of your kids is still a minor, then a trust is generally going to be a much better fit.

 

[BleedBlueGold]

IE lawyers:

What's the going rate for drafting a basic partnership contract within a LLC?

*Buddy of mine has his own LLC and is looking to invest in a project. He asked me if I wanted to invest myself (and since I'm not an accredited investor, it needs to be through him). So basically, I wire money to his LLC, he invests it, then the LLC pays out the return to me. Just need this all in writing. That is, unless someone knows of a better way to do this.

Thanks.

 

[BleedBlueGold]

Baby #2 on the way!

With that said, the thought of doubling my investments for my kids' college is freaking me out. How's everyone else handling the idea of trying to pay for college? College projector estimates the cost of a 4-year degree at an in-state public school to cost almost $225k in 15 years when my oldest heads off to school. Do you guys honestly think that sort of increase is sustainable?

I know there are a lot of schools of thought on this topic: get a job and pay their own way, get scholarships, don't go to college at all, don't go to a 4-year college, etc. But if our goal is to put two kids through a 4-year school, how is anyone supposed to save over $1000/month for EACH kid to cover that cost?

Someone please talk me off of this ledge. The jagged rocks at the bottom look more appealing than paying for college at the moment.

 

[Veritate Duce Progredi]

Baby #2 on the way!

With that said, the thought of doubling my investments for my kids' college is freaking me out. How's everyone else handling the idea of trying to pay for college? College projector estimates the cost of a 4-year degree at an in-state public school to cost almost $225k in 15 years when my oldest heads off to school. Do you guys honestly think that sort of increase is sustainable?

I know there are a lot of schools of thought on this topic: get a job and pay their own way, get scholarships, don't go to college at all, don't go to a 4-year college, etc. But if our goal is to put two kids through a 4-year school, how is anyone supposed to save over $1000/month for EACH kid to cover that cost?

Someone please talk me off of this ledge. The jagged rocks at the bottom look more appealing than paying for college at the moment.

Assuming you put the money in a broadmarket fund, you can expect average of 6% compounded interest each year for the 18 years, of course that's not completely accurate since you'll likely be transitioning money into money market funds as it gets closer to college time.

I believe education will continue undergoing a huge overhaul and tuition will be a part of it. Best to put back what you can and not stress yourself out. If you can't pay every cent for your child, they'll still be ahead of the curve.

 

[pumpdog20]

The Army will pay for school.

 

[wizards8507]

Baby #2 on the way!

With that said, the thought of doubling my investments for my kids' college is freaking me out. How's everyone else handling the idea of trying to pay for college? College projector estimates the cost of a 4-year degree at an in-state public school to cost almost $225k in 15 years when my oldest heads off to school. Do you guys honestly think that sort of increase is sustainable?

I know there are a lot of schools of thought on this topic: get a job and pay their own way, get scholarships, don't go to college at all, don't go to a 4-year college, etc. But if our goal is to put two kids through a 4-year school, how is anyone supposed to save over $1000/month for EACH kid to cover that cost?

Someone please talk me off of this ledge. The jagged rocks at the bottom look more appealing than paying for college at the moment.

If you're going to take tuition inflation into account that drastically, you also need to inflate your future projected income. If you're making $90,000 today, you'll be making something like $150,000 18 years from now. Assuming your biggest current expense is a fixed rate mortgage which won't increase over that span, you'll have a lot more disposable income to use to pay the tuition with then-current-year earnings.

Assuming you put the money in a broadmarket fund, you can expect average of 6% compounded interest each year for the 18 years, of course that's not completely accurate since you'll likely be transitioning money into money market funds as it gets closer to college time.

Gross, no way. Invest aggressively and get 12%. Never ever ever transition to a money market.

 

[BleedBlueGold]

If you're going to take tuition inflation into account that drastically, you also need to inflate your future projected income. If you're making $90,000 today, you'll be making something like $150,000 18 years from now. Assuming your biggest current expense is a fixed rate mortgage which won't increase over that span, you'll have a lot more disposable income to use to pay the tuition with then-current-year earnings.


Gross, no way. Invest aggressively and get 12%. Never ever ever transition to a money market.

Average tuition increase has been roughly 5% with the exception of the last few years being around 3%. My average yearly salary increase has been between 1%-2% over the twelve years I've been working for the Catholic Hospital system.

I just find it a bit intimidating to try and come up with that kind of money (times two now). We put $5,000 into the Indiana 529 plan each year and have been getting around 10% return. I usually do my calculations with a 6-7% return. We'll end up with a shortage for both kids in that scenario. And our budget would be pretty tight as well. No room to YOLO.

In the end, I'm just going to do what I can. Like VDP said, at least my kids will be ahead of the curve with savings. Part-time jobs never killed anyone to help offset costs too.

 

[Ndaccountant]

Average tuition increase has been roughly 5% with the exception of the last few years being around 3%. My average yearly salary increase has been between 1%-2% over the twelve years I've been working for the Catholic Hospital system.

I just find it a bit intimidating to try and come up with that kind of money (times two now). We put $5,000 into the Indiana 529 plan each year and have been getting around 10% return. I usually do my calculations with a 6-7% return. We'll end up with a shortage for both kids in that scenario. And our budget would be pretty tight as well. No room to YOLO.

In the end, I'm just going to do what I can. Like VDP said, at least my kids will be ahead of the curve with savings. Part-time jobs never killed anyone to help offset costs too.

You nailed it with your last comment. Whatever you can give will go a LONG way. If more people were like you, the world would be better off.

Many schools of thought on this and it really depends on you and what you want. Just a couple of thoughts on some tactical things....

1) Think about only having one account. Remember, you can transfer 529 assets to another child of yours tax free. Helps protect you in the event one of the children elect to not go to college, especially if you feel you will good savings for one, but not both

2) Don't sacrifice your own retirement for the kids. While this sounds incredibly selfish, it's more about time. You have less time to "recoup" the loss of retirement investments compared to your child having to take out a loan for college.

3) If you are adamant on providing full cost, who says you need to have 4 years at a state or private university? Doing a year or two at CC can provide transferable credits for "core" classes at a fraction of the cost.

4) Drugs and porn are always an option.

 

[RDU Irish]

You nailed it with your last comment. Whatever you can give will go a LONG way. If more people were like you, the world would be better off.

Many schools of thought on this and it really depends on you and what you want. Just a couple of thoughts on some tactical things....

1) Think about only having one account. Remember, you can transfer 529 assets to another child of yours tax free. Helps protect you in the event one of the children elect to not go to college, especially if you feel you will good savings for one, but not both

2) Don't sacrifice your own retirement for the kids. While this sounds incredibly selfish, it's more about time. You have less time to "recoup" the loss of retirement investments compared to your child having to take out a loan for college.

3) If you are adamant on providing full cost, who says you need to have 4 years at a state or private university? Doing a year or two at CC can provide transferable credits for "core" classes at a fraction of the cost.

4) Drugs and porn are always an option.

#2 cannot be stressed enough. The best gift you can give your kids is to not be a burden. They have their whole life to pay off college.

With those escalating costs of college - alternatives will become more prudent for pretty much anyone who is not accountant/engineer/doctor track. You could buy a taco truck for half that and make a damn good living for example. Trade school with some business courses - out earn those ELA baristas by a large margin. You also have the element of who pays full retail. Save that much in dedicated college accounts and, IMO, you are a lot more likely to pay full retail than if you saved all that money in a traditional investment account in your own name (401k/IRA/Roth are even it is less accessible for FAFSA calcs).

Wiz is beyond wrong in the "never get out of the market" philosophy. There is a big difference between retirement planning that is almost a perpetual time frame and spending an entire sum within a defined four year construct. Apply that logic to a kid going to college in Fall 2008 for example. Their nut gets cut in half just as they need it! You go from fully funded to spending it all in two years before the market recovers. Insane would be an understatement.

From a budgeting perspective - think of some ways to free up cash flow during those college years.
- Max out your 401k and get use to living that way - when they hit college you can reduce your deferral to use the extra cash flow for college.
- If paying off the house is a possibility before they hit college - think of the cash flow that would open up. - same thought process for any debts you have out there
- ROP term life insurance (return of premium) - cost more today but you get your entire premium back at the end of the term. A 20 year ROP policy would inject a lot of cash sophomore/junior year of the new born. That is a tax free return of every dollar you paid in - the insurance company covers your life insurance for providing that "float" for 20 years. ROI isn't remarkable but from a forced savings, cash flow and FAFSA standpoint it has some intangibles. Not unlike a tax refund - few people whine about cashing that check.

Also look at Room and Board - those costs are well above what a kid can live off campus pretty much everywhere. As long as it isn't ND where they are requiring kids to live on campus anyway.

 

[BleedBlueGold]

Thank you the input and advice.

Paying off the house early is a great idea. We pay a tiny extra towards the mortgage, but that's a budget item I could probably really start to hammer if I put my mind to it.

 

[IrishinTN]

So a few weeks ago I decided to start making a few stock investments. Piss poor timing might be telling me I was wrong, however I am marginally investing right now, so its not huge losses.

Initially I got in on the cannabis train. spread it out over a couple and hoping for the best with a known long-term commitment. That being said and the stock market down and the fed continuing to pressure it with more interest hikes promised next year, do any of you investors believe now is more of a commodities investment time?

I'm leaning towards to precious metals mining companies. Just wondering if any seasoned investors have thoughts in the volatility of things right now.

 

[wizards8507]

That's not investing, it's gambling. Individual investors should never try to beat the market with specific companies or even industries because individual investors don't have the knowledge, clout, or computing power to beat the investment banks at their game.

If there was value to be found in commodities, the big guys would already have their money there and the value would be "priced in" to the cost of securities, meaning you can't beat them. Individual investors who beat the market do so out of sheer luck, not any kind of sense of the market.

Said another way:

An investment is priced at $8. You think it will rise to $10. One of two things is true:

1. You're correct. But JPMorgan and Goldman Sachs also know you're correct so they move money into that investment a lot faster than you can, the price rises to $10 immediately, and you're unable to obtain it in the first place, OR;

2. You're incorrect. The investment is properly priced at $8.

 

[matman4593]

the best investment you can make is to liquidate all of your assets and throw everything you have on the irish +13.5 next Saturday.

 

[wizards8507]

the best investment you can make is to liquidate all of your assets and throw everything you have on the irish +13.5 next Saturday.

Quality post, rookie. Pithy and well-executed. Welcome to the boards.

 

[IrishinTN]

That's not investing, it's gambling. Individual investors should never try to beat the market with specific companies or even industries because individual investors don't have the knowledge, clout, or computing power to beat the investment banks at their game.

If there was value to be found in commodities, the big guys would already have their money there and the value would be "priced in" to the cost of securities, meaning you can't beat them. Individual investors who beat the market do so out of sheer luck, not any kind of sense of the market.

Said another way:

An investment is priced at $8. You think it will rise to $10. One of two things is true:

1. You're correct. But JPMorgan and Goldman Sachs also know you're correct so they move money into that investment a lot faster than you can, the price rises to $10 immediately, and you're unable to obtain it in the first place, OR;

2. You're incorrect. The investment is properly priced at $8.

Thanks. Makes sense. Can I ask what you think is a better place to put it? Mutual funds? bonds?

 

[wizards8507]

Thanks. Makes sense. Can I ask what you think is a better place to put it? Mutual funds? bonds?

Total stock market funds, either mutual funds or ETFs. Look for something with no load and low expense ratios.

I split my money six ways:

20% Total US stock market benchmark fund
20% S&P 500 benchmark fund
20% US mid-cap fund
20% US small-cap fund
10% International
10% Emerging markets

What brokerage do you use?

 

[Whiskeyjack]

So few brokers end up beating the market that it's hard to justify using anything other than an inexpensive ETF. Vanguard and Schwab both have target retirement funds that automatically reallocate as you age. Just set up the direct deposits to save as much as you comfortably can and forget about it.

 

[IrishinTN]

Thank you both. I dont think I can "liquidate" my vast holdings yet as I would lose $70.00 (lol), but I will make sure to spend it wiser in the funds you both have suggested moving forward.