“How the hell do we plan for this when we have no idea who our kids are going to be, or what the world is going to look like by then?”
A client asked me that a few months ago. They didn’t grow up with money. And they’ve spent years making sure their own kids aren’t going to carry the debt they did. They want to pay for whatever opportunity comes for their kids: an affordable state school like West Chester if that’s the fit, University of Pennsylvania if that’s the fit, a trade if that’s the fit.
They wanted a precise number they could save for. I told them the honest answer: there isn’t one. Not one that survives fourteen more years of their kid becoming someone none of us have met yet.
But there’s an approach. I use it for my own three kids, ages 3, 6, and 8. I gave it to that client the same afternoon.
Here’s the math, and what I told them to do about it.
Funding for the wrong number
Most parents in that seat do the same math I did. If there’s any chance your kid ends up somewhere expensive, and you can afford to plan for it, why wouldn’t you aim the fund your 529 account as high as possible?
Here’s the range for this family:
West Chester (in-state): $31,752 a year, all in
Penn: $94,582 a year, all in
Call the space between those two the West Chester-Penn Gap. It’s the range a family is actually planning inside for a kid who is in kindergarten.
Nobody sitting across from me with a 6-year-old can tell me which end of that gap they’re going to land on. Not because they haven’t thought about it. Because it hasn’t happened yet.
Fund a 529 aimed at the Penn number, and the account only makes sense in one specific future. Underfund it, and you’re short if that future is the one you get. Either way, you’re guessing at a number you can’t know yet. And a 529 punishes a wrong guess specifically: ordinary income tax, plus a 10% penalty on the earnings, the moment the money comes out for anything else.
The financial industry calls it the “lockup effect” and the “overfunding trap.” A problem common enough to earn its own vocabulary.
The question I’d actually ask
The question that client asked me wasn’t really “which school.”
It was how much certainty they were requiring from a plan that has to survive fourteen more years of their kid becoming someone none of us have met yet.
Morgan Housel put words to this better than I can:
"A plan is only useful if it can survive reality... The more you need specific elements of a plan to be true, the more fragile your financial life becomes."
A 529 sized to the Penn number needs one specific element to be true: an expensive four-year degree and no scholarship. That's a lot of weight for one number to carry.
That's why I don't think every dollar belongs in a 529 account. Some of it needs somewhere else to go, somewhere that doesn't need that specific future to happen.
This approach doesn't remove the uncertainty.
There's a real chance the 529 isn't enough if a kid ends up at the Penn number anyway. There's also a real chance I overshoot, and some of it never gets touched for school at all. Both are genuine problems with how I'm doing this.
But the plan was never supposed to remove the uncertainty. It just supposed to be flexible the moment something doesn’t go as planned.
Maybe one of my kids gets a scholarship and most of the flexible money never touches a tuition bill. Maybe none of them go to a four-year school at all. I don’t think that changes the approach.
It changes what the flexible money ends up paying for instead.
What I actually do
1. Capture the state deduction first. Pennsylvania lets you deduct contributions to any state’s 529. Take it every year. Most other states allow this too.
2. Put roughly a third into the 529. Sized between West Chester and Penn, not anchored to the number that scares you most.
3. Send the other two-thirds somewhere flexible. I use a brokerage account. If a kid needs it for school, it closes the gap between the 529 and the real bill. If a kid doesn’t need it for school, it doesn’t sit around waiting on one. It becomes a head start on whatever they need instead.
4. Treat the Roth rollover as a backstop, not the plan.
$35,000 lifetime cap
Five years to move it, because of annual Roth limits
Account has to be open fifteen years
Requires real earned income on the kid’s end
A decent out if I guess a little wrong.
What I told that client
I still don’t have a clean answer to that client’s question.
I don’t think one exists.
What I have is a split that doesn’t ask me to know which of my kids ends up at West Chester, at Penn, at a trade school, or somewhere none of us have thought of yet. A third goes toward the version of their future I can actually picture. Two-thirds stays flexible enough to cover whichever version I can’t.
It’s not a perfect plan. My oldest is 8. I’ve got ten more years to find out how wrong I am.
I still don’t have a better answer than that. But I hope this helps.
— Ryan
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