It’s very rare that you hear the phrase “risk-free return” these days without it being tied to an FDIC-insured CD yielding south of 3%. Heck, even US Treasuries are no longer considered risk-free by S&P following the recent credit downgrade and there are only 4 AAA companies left in the S&P500. So, you’re probably thinking there’s some sort of gimmick here, but the reality is, I really DID earn close to a 9% return in a single month in a risk-free investment. Here’s how!
Stacking Returns in 529 Plans
On top of selecting a top 529 plan, I’ve been taking a dual approach to saving for college. Aside from the market-based option which is subject to the volatility of equities (and bonds!), I put half of all my monthly 529 investments into the tuition credit purchase programs. The way I look at it, if the market outperforms, great. If the market tanks, then at least I purchase credits along the way while we’re seeing above-inflation tuition increases for years on end.
So, the way I got my 8.9% risk-free return is the following:
Once per year, the tuition increase takes effect in a step-wise fashion. The value of college credits basically jumps by the annual rate (index based) all in a single month in as a step function. This alone allows one to kinda of “cheat the system” and load up on credits the month before the increase takes effect, right? Well, since college tuition inflation has been through the roof, this year, we saw a 5.8% increase in the cost of credits for the tier I chose – State college credits. So, any credits I bought in August immediately saw their value increase by 5.8% by September. But it gets better! On top of that, I get a state tax deduction for all 529 contributions (up to $13,000 per working parent). With a state tax of 3.1%, I’m now looking at an 8.9% return for any investments made in the month of August.
While I didn’t foresee this completely and load up on as many credits as I should have, moving forward, I fully intend on doing so.
You might say, “Oh come on, that’s not really an investment”. Well, yes, it is. See, I have always planned on putting my kids through college, at least a state school equivalent. I have three kids. So, I’m looking at the equivalent of $300,000 in today’s dollars (see how to convert future dollars back to present value). This is $300,000 I’d have to save and invest one way or the other, money that isn’t being invested elsewhere. This is a substantial financial commitment for a single-earner family like ours. So, yes, this is an investment – and rather than blindly putting money aside in a CD or savings account, I’m purchasing credits to ensure that by age 17, each kid has a fully funded college education. Given the rate of college tuition inflation and this state tax deduction, I’m earning close to 9% with NO volatility. This is a guaranteed return, right? I know what the credits are worth in August and they project what credits will be worth when the benchmark changes in advance – and it’s not a leap of faith to say we’ll continue to see 5-7% college tuition inflation as far as the eye can see, especially given the dire straights states and the federal government are in from a debt standpoint. That means that much LESS aid going to colleges.
I am aware that if the state 529 fund loses money and can’t keep up with tuition redemptions, participants may not be “guaranteed” all their funds but I can’t imagine the political fallout in allowing this to occur. The Illinois plan already ran into this once and the legislature used funds from the general tax base to cover the difference. So, for all intents and purposes, I’m considering the credits purchased as “guaranteed” for now.
Are You Ready to Go Get Your 9% Return?