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Transcript
- Lucas: Inflation is cooling — the June CPI came in at 332.6, down from last month — but it's still quietly eating into something most parents don't think about every day: their child's 529 college savings plan. Luna: Wait, I thought 529 plans were specifically designed to outpace tuition inflation. That's the whole pitch. Lucas: They can, but only if you invest aggressively enough. The default age-based options in many state plans are too conservative, especially when the kid is young. And tuition inflation is running between 3 and 5 percent annually, depending on the type of school. Luna: Right. So even if you're getting a 5 percent nominal return, after tuition inflation you're barely keeping up. What does that look like in actual dollars? Lucas: Let's say you put ten thousand dollars into a 529 the day your child is born. If the plan earns 5 percent on average over 18 years — which is reasonable for a balanced portfolio — and college costs rise 4 percent annually, your real gain is only 1 percent. That ten thousand becomes about twenty-four thousand nominally, but in today's college-cost terms it's only worth around sixteen thousand six hundred. You've lost nearly a third of your purchasing power. Luna: That's brutal. But the earnings are tax-free for qualified expenses, so that helps offset some of the hit. Lucas: Absolutely, the tax advantage is real and valuable. But inflation doesn't care about tax status. If your investment mix is heavy on bonds yielding 3 percent while inflation is averaging 2.2 percent and tuition inflation is higher, your after-inflation return is negligible. The Fed's holding the funds rate at 3.63 percent, so money market and short-term bond options are paying around 3 to 4 percent — barely treading water. Luna: So what are you telling listeners? Go 100 percent equities for the first decade? Lucas: Not all-in, but you should match your asset allocation to your time horizon. A baby has an 18-year runway — historically, a broad equity portfolio has returned 7 to 10 percent nominal over that span, which handily beats college inflation. Most plans offer an aggressive option with 80 to 90 percent stocks for children under 10. The trick is to gradually shift to bonds and cash as college approaches, to protect against a market downturn right when you need the money. Luna: And fees matter too. Even a 0.4 percent fee can compound into a noticeable drag over 18 years. Lucas: Exactly. The average 529 plan fee ranges from 0.15 to 0.6 percent annually. That's another small leak. But the bigger issue is that inflation is silently reducing the spending power of every dollar you withdraw. If you've saved one hundred thousand dollars by the time your child is 18, but college costs have risen 30 percent over those 18 years, that hundred thousand buys what seventy-seven thousand buys today. You have to plan for that. Luna: So you're saying the target savings number needs to be higher than the current cost of college. Lucas: Right. If a four-year private university today costs two hundred thousand dollars all-in, you probably need to aim for three hundred thousand or more in your 529 to cover the real cost eighteen years from now. And that requires disciplined saving and a return that beats tuition inflation. The new Roth IRA rollover provision — starting in 2024, unused 529 funds can be rolled into a Roth IRA up to thirty-five thousand dollars lifetime — is a nice backstop. It means even if over-save, you can repurpose the excess for retirement without penalty. Luna: That's a great safety net. But the ideal scenario is to use the money for education. So what's the single best step a listener can take today? Lucas: Log into your 529 account and check your current investment mix. If your child is under ten and you're in a conservative or moderate allocation, consider switching to an age-based aggressive or even an aggressive static portfolio. Just remember to re-evaluate every two to three years. Also, increase your monthly contribution by 2 or 3 percent annually to keep pace with cost inflation. That small escalation can make a huge difference over time. Luna: And don't forget to check if your state offers a tax deduction for contributions — that's free money against inflation too. Lucas: Exactly. Some states offer a deduction up to ten thousand dollars per year. Factor that into your after-tax cost. So, inflation is cooling — the breakeven rate is down to 2.26 percent — but it's not gone. And college costs are stickier than consumer prices. Parents need to stay proactive. Luna: It's a good reminder that inflation isn't just a macroeconomic headline. It directly impacts family budgets and long-term goals. Lucas: Absolutely. And if today's conversation was worth a coffee to you, we'd love your support at buy me a coffee dot com slash fexingo. That's what keeps the show ad-free and focused on practical advice. Luna: Yeah, it truly helps us keep doing this. Lucas: So to wrap up: don't let inflation quietly eat your 529 plan's value. Review your allocation, adjust for risk, and keep an eye on those education cost trends. Your future college student will thank you. Luna: Well said. That's all for today. See you next time.