Best Child Saving plan?

[warpdesign]

Does anyone have any thoughts on the best plan for saving for a child? It seems like 529 is the best option if the money is going to be used for college, but if it turns out the child doesn't go to college or doesn't need the money due to scholarships then you end up paying a hefty fee plus taxes. So another option could be like a 15 year CD or something but if the money does end up being used for college you miss out on the tax advantage of 529.

So the question becomes is it better to do a 529 plan and risk paying the penalty and taxes (which you would have to pay anyway?) on the off chance that the money isn't used on college or to go with something else that would hopefully make up for the tax advantages and fees in higher interest or ROI?

[Seeker]

KissTrust: Giving the Gift of Savings

An alternative way of putting away money for a child to use at a certain age or for a certain purpose.

Home | Kisstrust

[jpg7n16]

You would need to speak to a lawyer/CPA about setting up a trust as you may get charged a gift tax on your gift. The $13k annual exclusion only applies to gifts of a present interest, which this trust may or may not qualify for. (as the child will not have access until college age, the child does not have a present interest - though there may be a workaround in the law for this type of trust)

If you are uncomfortable with the 529 - have you considered splitting the money between a 529 and a brokerage account?

But the main thing you should worry about is time horizon. If you have 15 years to go, equities are a much better option than CD's (expected return is MUCH higher). And if you invest in a fund with very low turnover (like an index fund) then you can avoid taxes along the way. As you get closer to the junior year of HS, start moving into more conservative investments and focus on safety of principal instead of growth.


So if you are that worried about the possibility of getting taxed + the penalty, I'd suggest saving 50% in a low turnover fund held in a brokerage account, and 50% in equities held inside the 529 plan (low turnover doesn't matter as it's tax free if used for education).


I don't like the jump from "well I might possibly, but not for sure, maybe get taxed with a 10% penalty on 7-11% growth over 15 years.... so I should instead invest at 1% for 15 years, and get taxed every year on earnings." That is assuming the worst and then a huge jump to the extreme based on the worst (which prob won't even happen).

[jpg7n16]

And here are some numbers to think about:

Assumptions:

• CDs will likely return 1-3%
• Equities will likely return 7-11%

Investing $150/month for 15 years (180*$150 = $27,000) at the following interest rates:

1%: $29,117.10 -------- earnings: $2,117.10
3%: $34,045.90 -------- earnings: $7,045.90

7%: $47,544.34 -------- earnings: $20,544.34 (with a 10% penalty = $18,489.91)
11%: $74,937.03 -------- earnings: $47,937.03 (with a 10% penalty = $43,143.33)


Just something to think about...

[jIM_Ohio]

Does anyone have any thoughts on the best plan for saving for a child? It seems like 529 is the best option if the money is going to be used for college, but if it turns out the child doesn't go to college or doesn't need the money due to scholarships then you end up paying a hefty fee plus taxes. So another option could be like a 15 year CD or something but if the money does end up being used for college you miss out on the tax advantage of 529.

So the question becomes is it better to do a 529 plan and risk paying the penalty and taxes (which you would have to pay anyway?) on the off chance that the money isn't used on college or to go with something else that would hopefully make up for the tax advantages and fees in higher interest or ROI?

The returns on money in a 529 plan will be low. College costs will be high. Think outside the box is my suggestion.

If you project college costs (which might be 40k per year now) to be 60k/year in 15 years, or 120k/year in 15 years, ask yourself these questions:

1) is the goal to fund 100% of kids education?
2) is the goal to pay more than half of kids education?
3) is the goal for you and whole family to have financial security over your lifetime?
4) is the goal a good returning investment, a guaranteed rate of return on investment, financial security, or funding all (or most?) of the kid's education?

For example, I would not advise you to invest in a 529 plan if your own situation was not successful or in good standing.

If you are looking at fixed income (guaranteed returns) over 15 years, then I would really suggest taking an out of the box approach to the money.

You mentioned ROI in your approach, here is my suggestion

1) get debt free in 15 years. That means no car payments, no credit card payments and NO MORTGAGE by time kid 1 starts college. The ROI on this can me measured, the value goes well beyond the ROI though as you will have a low risk profile (your worst case scenario would still be better than "best case" for many other americans).

2) Pay for college with CASH (meaning little to no 529 plan funds pay for college). If you spend $1500/mo now on car bills and mortgage payments, this means that $1500/mo (18k per year) is available to fund some or all of kid's education in 15-18 years as cash. Once college ends, you have 18k per year of free cash flow, if kid drops out or does not attend college, that 18k per year cash flow is available.

3) As far as ROI, the ROI you get is the interest rate (tax adjusted) on all debts. Probably about 4% average return (after taxes). The way to figure out the after tax return is to take the compliment of the tax rate and multiply it by the interest rate on the debt.

If tax bracket is 25%, the compliment is 1-.25=.75 (75%)
If tax bracket is 15%, the compliment is 1-.15=.85 (85%)

To figure the after tax return on the debt (ROI), take the debt interest rate and multiply it by the compliment.

If mortgage rate was 5%, then the after tax return in 15% tax bracket is 85%*5%=4.25%.
If car loan was 4%, the after tax return is 4% (car loan interest is not deductible).

[warpdesign]

And here are some numbers to think about:

Assumptions:

• CDs will likely return 1-3%
• Equities will likely return 7-11%

Investing $150/month for 15 years (180*$150 = $27,000) at the following interest rates:

1%: $29,117.10 -------- earnings: $2,117.10
3%: $34,045.90 -------- earnings: $7,045.90

7%: $47,544.34 -------- earnings: $20,544.34 (with a 10% penalty = $18,489.91)
11%: $74,937.03 -------- earnings: $47,937.03 (with a 10% penalty = $43,143.33)


Just something to think about...

JPG,
your numbers are very helpful. Thanks!

[jIM_Ohio]

Originally Posted by jpg7n16
And here are some numbers to think about:

Assumptions:
CDs will likely return 1-3%
Equities will likely return 7-11%

Investing $150/month for 15 years (180*$150 = $27,000) at the following interest rates:

1%: $29,117.10 -------- earnings: $2,117.10
3%: $34,045.90 -------- earnings: $7,045.90

7%: $47,544.34 -------- earnings: $20,544.34 (with a 10% penalty = $18,489.91)
11%: $74,937.03 -------- earnings: $47,937.03 (with a 10% penalty = $43,143.33)


Just something to think about...

JPG,
your numbers are very helpful. Thanks!

The numbers are good and tell 1/3 of the story.

1/3 of problem is knowing how much money you will have in 15 years and the penalty of that amount
1/3 of problem is knowing the risks of each path
1/3 of problem is the exact timeframe you make decisions with and the consequences of the risks not being understood or knowing worst case paths if the numbers do not work out.

For example...

the 7% return is a decent plan to take when using numbers route (if you use a 529 plan). Probably about 75% stocks and 25% bonds for 15 years will average an 7% return. Some might even get that return with a 40-60 allocation (40% stocks and 60% bonds). If you want an 11% return it is close to 100% equities for 15 years.

The risks of each path- the returns are NOT linear. An 11% return means one year might be 20% returns, the next year might be 2% returns, another year might be 30% returns and the next year might be -5%. The returns will vary by about 16 most of the time -meaning 11% is the average, but +27 (11+16) will happen as often as -5 (11-16). 16 is the DEVIATION, or risk, of that average return.

The risks of the 40-60 portfolio are less (when measured by deviation). Meaning 7% is the average, the deviation is about 6.5. That means +.5% happens as much as +13.5% (7-6.5=.5; 7+6.5=13.5).

The third part of that is the risk of each technique as it pertains to time. You might decide to shoot for 11% returns the first 5-10 years, then ratchet the risk down to 7% the next 5, then ratchet risk down to 3% expected returns (all CDs) last 5 years. 11+7+3/3 is not 7% average returns (you cannot just take the average returns and average the averages- does not work that way).

And more importantly, if you get 11% average the first 5 years, will you be willing to take less risk that 6th year? Those deviations I showed are relatively accurate FOR 75% of the years. Meaning if JPG gave an 11% return and I gave a deviation of 16, that means if you look at a 100 year period, 75 of the years have returns between -5% and +27%. The other 25 years are either below -5% or higher than +27%. This is where the risk lies- if you get that 11% average for 5-10 years and you see your 150/mo in 5 years grow to 15k, would you reduce risk? If you don't, it's possible (and it has happened before) that the 15k is reduced to 7.5k in about 1-2 months. See 2008 for last time that happened. If you keep 11% portfolio for 10 years (39k after 10 years of 150/mo growing at 11% per year), that 39k could shrink to 19k in 1-2 months (overnight) and 2008 is most recent example, 2000 also comes to mind when market dropped like that.

The consequence of that decision is "significant". If kid is 5 years from college, you do not KNOW what college they will be attending. You might have an idea (like engineering vs liberal arts) and that is it. You have most of the saving behind you (start when kid is 3, age 13 is 5 years from graduation). By age 16 (just 3 years later) kid is evaluating colleges. They NEED to know, within 10k or 20k (IMO) what the parents contribution per year is. That way they know if they choose state U vs Stanford or MIT (40k difference in price per year) what to expect cost to be.

Meaning the risks of saving for college show their colors fast. 5 years seems like forever when kid is 13 and is more interested in playstation, soccer games and facebook than in boys/girls, college, and a career. In 3 short years, that priority clearly shifts. You need to be able to change the risk of the investments BEFORE the kid's risk changes (don't wait for kid's priorities to be in line before shifting from the 11% portfolio to the 3% portfolio). If market is down 5 years before kid starts college, you have a problem, so I do not suggest waiting until college -5 years before changing 529 plan asset allocation (asset allocation is the mix of investments in 529 which give the deviations I showed above).


Most of investing and saving is about risk adjusted returns- if you take a risk, you want (and should expect) to be rewarded for taking that risk.

So my suggestion is if numbers look good using JPG's approach or my approach in post before it is to weigh the risks of each. If the risk looks to high using one approach, make sure you ask for alternatives.

College savings is a money losing proposition- the money you spend does not increase your own net worth (it might be the morally right thing to do, but it is NOT a decision which increases your net worth), so take the path which reduces your risk or lowers your net worth the least is my advice which is still morally right as the kid/college is concerned.

[financebanter]

Re: Best Child Saving plan?

In any bank fix deposit some amount for your child.

[jpg7n16]

The risks of each path- the returns are NOT linear. An 11% return means one year might be 20% returns, the next year might be 2% returns, another year might be 30% returns and the next year might be -5%. The returns will vary by about 16 most of the time -meaning 11% is the average, but +27 (11+16) will happen as often as -5 (11-16). 16 is the DEVIATION, or risk, of that average return.

The risks of the 40-60 portfolio are less (when measured by deviation). Meaning 7% is the average, the deviation is about 6.5. That means +.5% happens as much as +13.5% (7-6.5=.5; 7+6.5=13.5).

The third part of that is the risk of each technique as it pertains to time. You might decide to shoot for 11% returns the first 5-10 years, then ratchet the risk down to 7% the next 5, then ratchet risk down to 3% expected returns (all CDs) last 5 years. 11+7+3/3 is not 7% average returns (you cannot just take the average returns and average the averages- does not work that way).

That's why time horizon is sooooo important. I disagree with your risk analysis here Jim.

What you've done, is compare my 15 year projected average, with a 1 year standard deviation. Which is inappropriate. What you should do, is compare the 15 year average, with the standard deviation of prior 15 year periods - to determine if the risk is justifiable for the time horizon needed.

1 year Standard deviations are high (like you point out) but 10 and 15 year, not so much.

Using the information available at: CAGR of the Stock Market: Annualized Returns of the S&P 500

I created a spreadsheet to calculate the average return and standard deviation of 1 year, 5 year, 10 year, and 15 year periods since the market inception in 1871.


1st number is the average, 2nd is the standard deviation, 3rd is the lowest recorded return for that timeframe, 4th is the highest recorded return

1 year: 10.59, 19.01, -44.2, 56.79
5 year: 10.73, 7.68, -6.92, 29.82
10 year: 10.96, 4.84, .61, 21.56
15 year: 11.07, 3.97, 3.11, 19.78

Notice that there has never been a 15 year period with an average of less than 3.11% in recorded history, and that there is an 11.07% average with only 3.97 standard deviation.

Making my 7-11% expected very reasonable - and low risk, as it virtually ignores anything over the average. And according to statistics, on a normal bell curve, you should be over the average 50% of the time. Meaning that 50% of the time, you should actually make more than 11.07% for a 15 year period. And then investing in CDs would have been a terrible decision.


If the OP only had 1-2 years until college funding was needed, equities are clearly inappropriate as you cannot afford the risk of a 19.01% standard deviation on a 10.6 average. There are much safer short term investment vehicles available.

[jIM_Ohio]

That's why time horizon is sooooo important. I disagree with your risk analysis here Jim.

**snip**

Notice that there has never been a 15 year period with an average of less than 3.11% in recorded history, and that there is an 11.07% average with only 3.97 standard deviation.

Making my 7-11% expected very reasonable - and low risk, as it virtually ignores anything over the average. And according to statistics, on a normal bell curve, you should be over the average 50% of the time. Meaning that 50% of the time, you should actually make more than 11.07% for a 15 year period. And then investing in CDs would have been a terrible decision.


If the OP only had 1-2 years until college funding was needed, equities are clearly inappropriate as you cannot afford the risk of a 19.01% standard deviation on a 10.6 average. There are much safer short term investment vehicles available.

I agree with your numbers
I do not agree with how you apply them.


The main issue is when one of those "25 year" or "2-3 standard deviation" events occur. 2008 and 2000 are the big ones in recent memory. If a person does everything right those first 14 years, and that 15th year that big -50% return thing happens, they should not keep investing in equities.

You know this based on the blue quoted text above- when money is within 2-3 years of the need, you are advising OP to NOT be in equities indirectly, and that is my focus (whether they start investing 15 years out or 2 years out, the risk the last 2-3 years of the investment is still the same risk). That risk is a portfolio of 40k could be turned into 20k overnight, and that is too much risk to take, as some college costs are locked in 1 year before incurring those costs. Child commits to school around January of senior year and attends starting in August- lots of decisions are made when market can still wipe out 50% of the value.

The downside risk is too great to leave money in equities for 15 years regardless of past performance the last 13 years.

[nick__45]

I don't do 529 for that reason. Instead, I invest in my house so they can stay for free as long as they want and own it free and clear in the future. 529 always prevent them from getting grants and many scholarship because you are deemed too rich for it. Ask me how I know. Also 529 isn't always a good investment as there are so really bad ones out there and lost money due to bad management. I see it as another way of extracting money from the American working class. Why would I want to handle over my money for someone to manage and I can't touch it until my kids are old enough and there are restrictions on what I can do with it. My kids may say they are too smart for college and open up a Cash/Check or Bail Bond place and make more money than doctor and lawyer. If that is their route, I am sure they could use some initial fund.

[jpg7n16]

The main issue is when one of those "25 year" or "2-3 standard deviation" events occur. 2008 and 2000 are the big ones in recent memory. If a person does everything right those first 14 years, and that 15th year that big -50% return thing happens, they should not keep investing in equities.

Again, you're comparing bad 1 year returns with a 15 year period.

Those "1 in 25" years are already accounted for in the 15 year averages - and including them, no 15 year period has ever been lower than 3% (which is still higher than CD's)

For instance - the market fell 37.22% in 2008. That ended the 15 year period with an average of 8.71% (geometric average of 6.44% even after accounting for the 37.22% fall)

That means that 1 dollar invested in 1994 would have been $2.55 even after the 37% drop in 2008.

Which is still more than the investment would have returned in 1-3% CD's over the same period of time. (which is the best available rate at the moment)

You know this based on the blue quoted text above- when money is within 2-3 years of the need, you are advising OP to NOT be in equities indirectly, and that is my focus (whether they start investing 15 years out or 2 years out, the risk the last 2-3 years of the investment is still the same risk). That risk is a portfolio of 40k could be turned into 20k overnight, and that is too much risk to take, as some college costs are locked in 1 year before incurring those costs. Child commits to school around January of senior year and attends starting in August- lots of decisions are made when market can still wipe out 50% of the value.

The downside risk is too great to leave money in equities for 15 years regardless of past performance the last 13 years.

Now you're attempting to time the market - which cannot be done.

If the money needs to be withdrawn/reallocated because the time horizon has changed and the risk is no longer comparable to the time horizon, that's one thing.

If the money is only invested to grow to a specific sum, and that amount has been reached, then there is no longer a need for the growth potential of equities - as investment objectives have changed.

But if the money is withdrawn because you're attempting to time the market, and you feel "well it can't go up again, so I should withdraw while I'm up" that's bad.


So there are reasons to allocate out of equities, but not solely because "I'm afraid of those 1 in 25 years."



----------------------------------------------------------

I redid the calculations using Geometric average (accounts for compounding). And here is what I got:

(average, stand dev, low, high)

1 year: same
5 year: 9.34, 8.00, -11.51, 29.26
10 year: 9.39, 5.14, -1.47, 20.07
15 year: 9.45, 4.17, 0.73, 19.10

So in the worst period of recorded history for the stock market, over a 15 year period, you still would make .73% compounded. And the standard dev is only 4.17 (about 22% of the 1 year volatility).

And FYI - the best period ever was 19.10 compounded for 15 years = 13.75 times your original investment.


These numbers account for compounding, account for a terrible year coming after a huge run up, account for the great depression, and the recession in 2008. In virtually every scenario, you make several times what you would make in CD's, and in the worst 15 year stretch of all time gets barely beat out by 1% CDs.


Stocks beat 1% CD's 99.2% of the samples evaluated. That's almost as good as hand sanitizer.


I don't see how you think this is risky, when the money is left there for a long period.

[MonkeyMama]

I've never been a big fan of 529s, and am pleased to see more criticism of them in the media, etc. (Before the stock bust, to not like 529s felt like blasphame!)

Things to consider:

*How much will college likely cost?
*What are the odds that the money will be used for college?
*What alternatives are there if it is not used? (i.e. give 529 to nieces in exchange for cash? Save for grandchildren? OR are there no other beneficiaries to consider?).
*How will your savings choice affect financial aid?
*How expensive is your savings choice?
*How restirctive or limiting is your savings choice?
*Tax Consequences?

529s are good for wealthy people - for wealth planning. That is about the only reason I would recommend a 529. Maybe if you were planning to spend a fortune on college, and started saving for it when kids were very young. (I agree with Jim in that the time frame that most people invest in a 529 is not really long enough to get much benefit. 10 years of earnings tax-free doesn't mean much the last decade, that is for sure. This could be my bias of the times. But even in a good stock market, it's not a huge tax savings for all the hassle, cost, and restrictions. The average person does not start saving for their kids, Day 1).

What other alternatives are out there?

*ESAs (similar, but a little different).

*UGMA accounts - I understand why people don't like them - financial aid considerations and control of money reverts to child at 18/21. But, on the flip side, the taxes are easy to manage (or to completely avoid - you need a fair amount of earnings to get hit with the kiddie tax).

*ROTH - This is where people freak out, BUT, if you have ample retirement savings and room to max out a ROTH, a ROTH is a great place for non-retirement savings. You can pull contributions out at any time. The money is still in your name, and won't affect financial aid. For example, if you are contributing 15%+ to retirement, and are not maxing out a spousal ROTH, for example, consider maxing it out and considering that money for "college" or "non-retirement." If you don't need it, it stays in the ROTH for retirement. Win-win.

*We always figured we'd pay off our house before the kids started college. The mortgage payment would be more than ample to cash flow the kids through college.

The main reason I don't like the 529 for my needs is because I don't really feel I need to save much for college. Odds are we won't use near the money we are saving for our kids, for college. We chose to go to inexpensive colleges (there are plenty around the state) and use our "college money" for a "first home," instead. I want to pay that forward to my kids. Will most likely cash flow college, but want to give them a chunk of change when they turn 18. So, the UGMA has worked for us.

Interestingly, since I live in a region with high wages and low college costs, few in the middle class qualify for financial aid. Even with 2 kids over-lapping, I don't think we'd have a chance for any aid. (I've run the calculators and find this to be true). I wouldn't recommend UGMAs as a whole as I believe most people probably stand a better chance with financial aid. But I kind of feel like "financial aid" is a "yeah, right" kind of concept for us, so it ranks pretty low on our own consideration list. 529 plans, on the other hand, can be really helpful to maxinimize financial aid, and save money, if done right. You have to be careful who owns the account, etc., but I thought generally 529s worked well for financial aid reasons.

The more I think about it, I feel like more people should be getting more professional advice in this area. It can be really complex.

[jIM_Ohio]

Now you're attempting to time the market - which cannot be done.

If the money needs to be withdrawn/reallocated because the time horizon has changed and the risk is no longer comparable to the time horizon, that's one thing.

If the money is only invested to grow to a specific sum, and that amount has been reached, then there is no longer a need for the growth potential of equities - as investment objectives have changed.

But if the money is withdrawn because you're attempting to time the market, and you feel "well it can't go up again, so I should withdraw while I'm up" that's bad.


So there are reasons to allocate out of equities, but not solely because "I'm afraid of those 1 in 25 years."

**snip**

The comment about hand sanitizer was funny, thx for the laugh.

You assume me suggesting "getting out of the market" is "timing" the market. I suggest is it changing risk profile because the time table of the event is too close to risk any equity exposure. This is in reference to blue quote above.

You hint at this- if desired growth is achieved, you suggest getting out of market.
If that desired growth is not achieved 4 years short of kid starting college, I interpret your advice to be "stay in equities" for 4 more years, where as my advice would be that NO WAY should any college money be in equities within 3 years of when kid starts college. TOO MUCH risk. This is the red quote above. The focus should be on risks being taken at present time, not what the projected amount needed was 14 years earlier or 10 years earlier.

The risk is not with the money (directly), the risk is the consequence of the money not being the amount budgeted.

If college is "year 0" and year "0-4" is the student's freshman year of HS, and year "0+4" is the student's senior year of college, any reasonably smart person can make decisions on the economics of the situation starting at 0-4, with MOST decisions locked in at 0-2.

My logic is this:
At time 0-4 you have an idea what kids skills and ambitions are. If kid likes shop class or similar, its possible a trade school is all which is needed. If kid is proficient in sciences, you might need money for a 5 year or 7 year program which includes medical school or a masters degree in engineering. If student prefers liberal arts, you know that state U will provide enough good choices. I think most parents can make these guesses (correct) about 25-66% of the time at year 0-4.
At year 0-3, I suggest zero equity exposure with any money the student needs for any of the 4 years of college.
At time 0-2, the student is a junior in HS and taking the ACT/SAT tests. They are looking at specific colleges, and the costs of these schools are well known. Parents would be wise to look at a 529 plan, see $X in the 529, and then tell kid the parents contribution is $X/4 each year (1/4 of 529 spent for years 1-4). Then mention loans, scholarships or financial aid as sources for any "gaps" in costs. This implies at year 0-2 the decision is locked in. Growth of the 529 is no longer a factor in the decision making process, it is much more important to "lock in" the savings to make sure the decision making process has financial certainty. I would venture to say decisions made at time 0-2 have close to a 100% certainty assuming the kid applies to the right schools and gets accepted (the wildcard is the school accepting the student, not the monetary part of the decision).

Any investment of the 529 in equities past age 0-2 is unneeded risk- even if 529 did NOT have the projected amount in it (from 13 years earlier).

I agree it is OK to invest 529 money in equities when money has more than a 10 year time horizon. Once that time horizon is below 8 years, I would advise anyone to stop buying equities (equities within 8 years of need are a bad idea). Whether the existing equities position is sold within 8 years of need is a different issue (if market is down, waiting 4 years is OK for example). But once age 0-4 is reached, an exit strategy is suggested.

[jpg7n16]

The comment about hand sanitizer was funny, thx for the laugh.

Hey, I'm a funny guy! Just most people don't know it...

You assume me suggesting "getting out of the market" is "timing" the market. I suggest is it changing risk profile because the time table of the event is too close to risk any equity exposure. This is in reference to blue quote above.

I was more referencing your statements like: "The downside risk is too great to leave money in equities for 15 years regardless of past performance the last 13 years."

Which seemed to me as, "well if you've done amazing the past 13 years, you should get out because you're ahead of the average"

If that's not what you meant, then oops

You hint at this- if desired growth is achieved, you suggest getting out of market.
If that desired growth is not achieved 4 years short of kid starting college, I interpret your advice to be "stay in equities" for 4 more years, where as my advice would be that NO WAY should any college money be in equities within 3 years of when kid starts college. TOO MUCH risk. This is the red quote above. The focus should be on risks being taken at present time, not what the projected amount needed was 14 years earlier or 10 years earlier.

Oh - then I guess I should be more clear. My main point of the responses was the help OP determine "CDs, or 529??" Which it's pretty obv which one I'd choose. I wasn't doing a "this is the best path to saving for college"


But I think it'd be foolish to say, "well I've got exactly 5 years, so I should invest in stocks." Then the next month, "well now I'm just shy of 5 years, so my time horizon isn't long enough anymore" and cash out of stocks. You've gotta give it time to grow.

Once college comes closer, you'll have a better picture of what the exact costs will be, so you can better plan allocating the money, and are free to cash out if your money has grown to enough.

I agree it is OK to invest 529 money in equities when money has more than a 10 year time horizon. Once that time horizon is below 8 years, I would advise anyone to stop buying equities (equities within 8 years of need are a bad idea). Whether the existing equities position is sold within 8 years of need is a different issue (if market is down, waiting 4 years is OK for example). But once age 0-4 is reached, an exit strategy is suggested.

See but then you don't have a 10 year timeframe, you have a 2 year one.

And I also disagree on your "stop buying equities with less than 8 years to go" thing.

That would imply that for a 10 year old kid, the best college savings method would be bonds or cash - which I disagree with. 8 years is a good timeframe for a stock investment. Anything over 5 is good. 4 is okay. 3 is pushing it. 2 or less is inappropriate.