How long does it take to accumulate $80000 in a 529 College fund?

When I defined what Financial Independence means to me (here), $80000 dollars in a college fund for my kid seemed good to me….how I came up with that number is listed here. I did not have any notion of how to get there apart from creating a 529 fund and regularly depositing money into it.

The next question for me now is: how long before I get $80000 in the 529 College fund? This post will talk about how to come up with a time estimate.

Savings Calculator

There are two nice calculators that we can use to estimate how many years it will take to accumulate a certain sum of money, if we know the monthly investment that one is ready to invest.

  1. Savings Calculator from FINRA
  2. Bankrate.com’s Savings Calculator

The college fund for my kid is invested in a Vanguard 529 plan. I am going to assume that this fund returns about 3% average over the next 9 years. This is when my kid will be ready to enter college. I am going to use the Savings Calculators listed above to estimate when the 529 plan will reach a target amount of $80000.

Parameters for the Calculator

The input that the calculator needs is as follows:

  1. Initial Savings Balance: $25,310
  2. Deposit Interval: Monthly
  3. Deposit Amount per interval: $400
  4. Number of Deposits: 108 (12 months * 9 years = 108)
  5. Annual Return: 3.0% and 5% (conservative and average growth rate for the 529 Plan)
  6. Inflation Rate: 3.0%

Now, lets calculate the time required to reach $80000 at two growth rates: 3% and 5%.

Case 1: Calculator Results at 3% Return

By inputting the above parameters to the calculator, here are the results after 104 months of investing $400 at appx 3% average rate of return per year.

  • Ending Balance: $82,576
  • Inflation Adjusted Balance: $59,030

No   Period        Deposit      Balance           Inflation Adjusted Balance
1     Jan-2015  $400.00     $25,773.41     $25,693.43
13   Jan-2016  $400.00     $31,424.26     $30,179.91
25   Jan-2017  $400.00     $37,244.63     $34,460.31
37   Jan-2018  $400.00     $43,239.62     $38,542.51
49   Jan-2019  $400.00     $49,414.46     $42,434.08
61   Jan-2020  $400.00     $55,774.54     $46,142.32
73   Jan-2021  $400.00     $62,325.42     $49,674.25
85   Jan-2022  $400.00     $69,072.83     $53,036.64
97   Jan-2023  $400.00     $76,022.66     $56,236.01
98   Feb-2023  $400.00    $76,611.14     $56,495.46
99   Mar-2023  $400.00    $77,201.07     $56,753.83
100 Apr-2023  $400.00     $77,792.46     $57,011.12
101 May-2023 $400.00     $78,385.30     $57,267.33
102 Jun-2023  $400.00     $78,979.61     $57,522.46
103 Jul-2023   $400.00     $79,575.38     $57,776.53
104 Aug-2023 $400.00     $80,172.62     $58,029.53

Case 2: Calculator Results at 5% Return

By inputting the above parameters to the calculator, here are the results after 90 months of investing $400 at appx 5% average rate of return per year.

  • Ending Balance: $80,050
  • Inflation Adjusted Balance: $60518

No Period         Deposit       Balance          Inflation Adjusted Balance
1   Jan-2015     $400.00     $25,814.75     $25,734.64
13 Jan-2016     $400.00     $32,034.51     $30,766.00
25 Jan-2017     $400.00     $38,565.27     $35,682.22
37 Jan-2018     $400.00     $45,422.57     $40,488.33
49 Jan-2019     $400.00     $52,622.72     $45,189.15
61 Jan-2020     $400.00     $60,182.89     $49,789.36
73 Jan-2021     $400.00     $68,121.07     $54,293.46
85 Jan-2022     $400.00     $76,456.15     $58,705.82
………………………………………………………
90 Jun-2022     $400.00     $80,050.93     $60,518.23

Conclusion

From the calculator’s results above, we can see the following results for investing $400 per month in a 529 plan.

  • At 3% annual return, it takes 104 months (approximately 9 years) of investing.
  • At 5% annual return, it takes 90 months (approximately 7.5 years) of investing.

Wish me luck that I can get this done within 7.5 years!!

How long does it take to get to $50000 per year in dividends?

When I defined what Financial Independence means to me (here), $50000 dividend dollars per year seemed good to me….how I came up with that number is listed in that link. I did not have any notion of how to get there apart from creating passive income streams (cash from bank interest + dividends from stocks). How I designed the passive income streams is explained here and here.

The next question for me now is: how do I get to $50000 per year OR roughly $4000 per month. This post will talk about the next steps for me.

Assumptions

  • Dividend Distribution Frequency
    • Dividends can be distributed with different frequencies i.e. monthly, quarterly, half-yearly, yearly. I have mutual funds with all the above frequencies.
    • So, for the entire portfolio, what distribution frequency should I assume?
      • Monthly is the most aggressive (most amount of money compounding) and Yearly is the most conservative (least amount of money compounding).
      • Most of my funds are either quarterly or less, one of them is half yearly and one is yearly.
    • So, I have decided to go conservative and assume a yearly dividend distribution.
  • Dividend Reinvestment Plan (DRIP)
    • If the dividends are re-invested into the same assets that produced the dividends in the first place, we call this the Dividend Reinvestment Plan.
    • The assumption is that I am going to use DRIP as I do not need to use the dividend money right away.
  • Dividend Tax Rate
    • Dividends are taxed at a different rate depending on the tax bracket.
    • I will assume that my dividend tax rate is 15%.
  • Average Annual Dividend Yield
    • I have assumed 3%….a reasonable, middle of the road dividend yield assuming a 2% to 5% spread.
  • Yearly Investment
    • I will assume a yearly investment of $12000 i.e. $1000 per month.
    • I will assume that I will not increase this investment money each year.
  • Investment Time Period
    • I will assume 10 years since my wish is to achieve financial independence in 10 years.
  • Tool used
    • I am going to use a wonderful dividend calculator from Dividend Ladder.
    • If I had known about this tool, I would have used this when I defined my goals…I just came to know about this recently.

Case 1: Base Case

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 3%
  • Yearly Investment = $12000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $12725
  • New Principal = $424176

This is a far cry from the $50000 per year dividends I need to reach. So, which of the above parameters do I need to change to get the dividends closer to $50000 per year?

Case 2:  Add 5yrs to the 10yr FI plan

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 15 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results, which is much closer to $50000 dividend dollars per year:

  • New Annual Dividend Income = $45483
  • New Principal = $909663

So, to get close to the $50000 per year, I need to do the following:

Contribute $24000 annually instead of $12000 as per Case 1.

  • If I buy a house, then this increase in money is impossible. If not, then this should be doable.
  • Bottom line is that for the next 15 years, $24000 per year => $360000 investment into passive income streams.
  • How this money is spread across 15 years I am not sure yet, but it is a target for me.

Work for 15 more years instead of the 10 years I had initially planned

  • This is not acceptable, but it seems like I have no choice.

Assume a dividend yield of 5% instead of 3%.

  • This is acceptable because….
  • Some of the funds I own distribute capital gains as well. This is also re-invested.
  • Some of the funds I own and federally tax exempt and one of the them is state tax exempt also. So, dividend gain of 3% and add no taxes to it, makes it equivalent to a higher yield.

Case 3:  Stick to the 10yr plan

Lets say I do not want to work an additional 5 years i.e. stick to the 10yr FI plan. If so, what numbers do I see?

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $31632
  • New Principal = $632657

So, if I can adjust my need for money from $50000 per year to $31000 per year, then I can stick to the 10yr plan.

 Conclusion

It is very hard to see 10-15 years ahead in life. Who knows what can happen in future? But, assuming that things go well (touch wood), I will continue to aim for $50000 dividend dollars per year and contribute money trying to reach it. If I reach somewhere in between $31000 to $50000 dividend dollars per year, I would be happy. If it is tending towards $31000, then I may think of increasing the yearly investment or reducing dollar requirements in future.

So, the plan is to do the following:

  • Invest $24000 per year
  • Work for the next 15 years (5 more years than my plan for FI)
    • i.e. $360000 over the next 15 years
  • Assume a 5% dividend yield instead of 3% (the safe number)

Wish me luck to finish in 10 years instead of 15!

How to fund my Retirement?

I learnt about Financial Independence in early 2014 (here). I spent a lot of time studying the different blogs that talk about Financial Independence and came to a definition of what Financial Independence means to me. I also realized that there are two different kinds of retirement…early and real retirement phases. Since I wanted to gain financial independence by year 50 (wish me luck), I decided that my retirement will have two phases.

  • Early Retirement (50-70yrs)
  • Real Retirement (70-100yrs)

Now, with my health issues, I am sure I will not live until 100. But, I do not want my family to run out of money. So, I am going to plan assuming retirement lasts until 100…if we have a few down years in the market, this additional planned period should help compensate.

The next question is: how do you fund the two retirement phases? Here is my high level design

  • Early Retirement (50-70 yrs)
    • Funded by Passive Income Streams
  • Real Retirement (70-100 yrs)
    • Funded by 401k and IRAs

Early Retirement Funding (50-70 yrs, $50000 pa)

Having decided that passive income streams will fund my early retirement years, the following questions come next.

  • Why Multiple Passive Income streams?
  • What kind of Passive Income?
    • My choice are Interest from cash and Dividends from stocks and bonds.
    • Details here
  • What are the core principles I should follow for my Passive Income Streams?
  • How should I implement the passive income design principles?

I established multiple passive income streams in 2014 and let them fly. In 2015, I would like to put the investments on auto pilot and let the investments compound from all the automatic investment amounts and the dividends that each investment produces. The progress of these investments are tracked here.

Real Retirement Funding (70-100 yrs, $30000 pa)

For real retirement, I wanted to use the traditional funding vehicles like 401k and IRAs. To support 30 years of $30000 pa, I would need at least $900K in my retirement fund. Since I had 401Ks from multiple companies, I decided to combine my previous employers’ 401Ks into one single Vanguard IRA. The next important question was how to invest the money inside the IRA.

There are a few main ideas I wanted to follow for my IRA investments

  • Automated rebalancing
    • I.e. Target retirement funds
  • Spread the risk across 5 year time periods
    • Lets take a 2030 Target date retirement fund.
    • This fund will get super conservative as it approaches 2030 i.e. sell stocks and move that money to bonds and cash.
    • If there was a 5 year bad stretch of the market preceding 2030, then all the stock investments sold will be at a loss.
    • So, I wanted to make sure that not all the money is invested in 2030…some in 2035, some in 2040, some in 2045, etc. This will spread the risk of a bad 5 yr market performance across many 5 year periods.
    • In addition, this will keep the IRA money in buckets with different conservative basis i.e. there will be a growth component as well for some of the funds.

Considering the above main ideas, I have spread the IRA money into different 5 year buckets:

  • Vanguard Target Retirement 2030 Fund (55 yrs of age)

  • Vanguard Target Retirement 2035 Fund (60 yrs of age)

  • Vanguard Target Retirement 2040 Fund (65 yrs of age)

  • Vanguard Target Retirement 2045 Fund (70 yrs of age)

The goal is that when I reach 70 years of age, the above four funds would have reached their most conservative state and be ready for consumption during the retirement years.

Conclusion

My expectation with the two pronged attack (early and real retirement funding) is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.