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Maximize Your College Savings with the Right 529 Investment Strategy by Age
A 529 plan is a great way to save money for your child's college education in the future. With tax breaks and high limits on how much you can put in, these investment accounts help your savings grow over time. But to really get the most out of a 529 plan, you need to have the right investment plan based on how old your child is. In this article, we'll show you how to set up a 529 plan for your child that fits his or her needs.
Choosing an Investment Strategy for a 529 plan
Like any portfolio, a 529 plan gives you options for how to invest your money. Here are two common ideas about how 529 plans invest their money.
1. Aged-Based Portfolio of 529 plans
A "age-based" investment strategy takes into account how long it will be before the beneficiary needs to take money out to pay for qualified college costs.
When you first sign up for a 529 plan, you can choose how long it will be before you start taking money out to pay for qualified college expenses. You will also choose from different ways to invest, like:
- Aggressive
- Moderate
- Balanced and
- Conservative
Based on the account owner's choices (years until withdrawal, investment style, and management style), their account will be put in a 529 portfolio that invests in the way they want.
Using sophisticated investment models, your accounts will be put into portfolios with different asset allocations as their beneficiaries get closer to the year they expect to start receiving money.
The person in charge of the plan's finances will keep an eye on how each 529 portfolio is doing and may change the asset allocation or mutual funds used when they think it's a good idea.
You will be told about these changes, but you might not be able to change the way they invest.
2. Fixed Portfolio
Under a fixed portfolio strategy of 529 plans, you will select either a
- balanced 529 plan portfolio or
- aggressive 529 plan portfolio.
Most of the time, the asset allocation of a fixed 529 plan portfolio will stay the same over the life of the account.
You will also choose whether the "large cap equity fund" (a mutual fund that invests in the stocks of big companies) in the portfolio will be actively managed or not (a "management style").
The fixed 529 plan portfolio strategy is good for people who care a lot about minimising risk or getting the most out of their investments.
Age 0-5: Start With Conservative Investments
For kids this age, it's best to start with safe investments to lower the risk of losing money. This is because it will be a long time before the money is needed for college costs, so the investments will have plenty of time to grow. Money market funds or short-term bond funds are good choices for people in this age range.
Age 6-12: Consider a Blend of Stocks and Bonds
As your child gets older, you can start to mix stocks and bonds into their portfolio of investments. This will help to keep growth and stability in balance. Look for diversified index funds that are low-cost and give you access to both stocks and bonds.
Age 13-17: Focus on Stock Funds
With the goal of paying for college in mind, it's important to put your money into investments that will grow quickly in the last few years before college. Stock funds, especially those that focus on technology or growth stocks, can give you a chance to make a lot of money during this time.
Age 18 and above: Consider Bond Funds
Once your child turns 18, you should start putting their money in less risky investments and move them towards safer investments. Bond funds can be a steady source of income, which lowers the risk of losing money in the last few years before college.
Factors to consider when setting a college savings goal:
Cost of College: Estimate how much it will cost to go to the college(s) you are thinking about and take inflation into account.
Time horizon: think about how long it will be until your child goes to college.
Current Savings: Figure out how much you have saved for college so far and how much you can save each year.
Other Ways to Get Money: Think about whether your child will be eligible for financial aid, scholarships, or grants, and how that will affect your savings goals.
Which Strategy Is Right For you?
The 529 plan is set up so that you can pick the investment strategy that works best for you.
Most 529 plans have different investment strategies that depend on how risky you are willing to be.
Aggressive:
The goal of this 529 portfolio is to give long-term returns that could be much higher than the historical rate of tuition inflation.
In order to get higher returns, the portfolio is likely to go down in value often and often by a lot over short periods of time.
The aggressive portfolio is suitable for those who are:
- Willing to deal with a lot of volatility in order to get moderately high returns over the long term on their investments.
- Trying to get the most out of long-term investments. So, they are willing to let the value of their investments change a lot and sometimes in a big way.
Conservative:
A 529 college savings plan with a conservative investment goal usually has a lower level of risk and a lower rate of return. The goal is to keep the money invested and reduce the chance of volatility.
Investors who want to be safe usually choose portfolios with mostly fixed income investments, like bonds, and a smaller amount of equity investments, like stocks.
The conservative portfolio is suitable for those who are:
Looking to reduce the chance of big losses and get a more stable, predictable rate of return that would help make sure the money would be there when it was needed to pay for college.
It's important to remember that all investments involve some risk, and there's no guarantee that a conservative investment strategy will produce a profit or protect against loss. But a conservative investment objective for a 529 plan can be a good choice for people who don't like taking risks and want their savings to last as long as possible.
It's important to look at your investment plan every so often and make changes as your financial goals and situation change.
Conclusion
In the end, the best investments for your child's 529 plan will depend on their age and their own needs. You can make sure you are making the best decisions for your child's future by starting with low-risk investments when they are young and increasing the risk as they get older. With the right way to invest your money, a 529 plan can be a great way to save for college costs.
