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!!

College Funding for our kid

When it comes to college funding, there are a few main questions to answer.

  • How much to fund?
  • Where to fund?
  • What if unused for college purposes?

How much to fund?

College cost is soaring like crazy…looks like there is no end in sight. I wish I could fund the entire cost, but I am not sure I can. So, I have set a target of $20000 per year for 4 years. Anything more than this, the kid has to manage.

Where to fund?

I wanted a most generic college funding option. By generic I mean the following:

  • 529 plan
  • basic age based investment option
  • passive fund is okay
  • good set of low-cost investment options
  • acceptable in any college across the US
  • any state tax advantages
  • online acct management possible
  • automatic investment possible

Since I am a fan of Vanguard, I have a bias towards Vanguard 529 plans. But, I did dig into many articles on the web to find a good 529 options. Turns out, most of the good plans happened to be Vanguard ones. I picked Nevada 529 plan as satisfied all the above requirements.

What if unused for college purposes?

If unused, the 529 plan can be withdrawn but with a 10% penalty. The penalty is applicable ONLY on the earnings in the plan and not on the principal (because I am using post-tax money for investing into the 529 plan). There is a wonderful article from savingforcollege.com that I will refer to here for further reference.

Starting Status

07/25/2014        $22600        28.25% complete

09/29/2014        $23185         28.98% complete

….. (see Progress Report for more updates)