529s - Problem w/ age based plan?

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fundseeker
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529s - Problem w/ age based plan?

Post by fundseeker » Sun Dec 30, 2007 10:37 pm

This post is partly to see if I am understanding age based 529 plans correctly, and if so, partly to make others aware of this issue. In age based 529s, the portfolio reduces the stock percentage as college gets closer. The problem I see is that if you have a child near one of the breaks points where the portfolio is changed to be more conservative (less in stocks), which seems to be about every three years in some plans, you could be putting your money in stocks for just a short time period.

For example, if you have a child now in 9th grade, and you invest in a moderate plan for a child 6 to 4 years from entering college, the percentage in stocks might be 50%. An investment of $20,000 would be $10,000 in stocks. If you go with an age based plan that has the next group being 3 to 1 years from college, the portfolio would change in about nine months when the child enters 10th grade (three years out from college). All of a sudden, your 50% in stocks is cut down by 40% to only 10%, at least in the Alabama plan. It appears that the reduction from stocks to bonds in the Vanguard plan may only be 25% at each break point, but still a significant amount.

Am I understanding this correctly, that if I make a lump sum investment in an age based portfolio when the child is near a specified age break point, then there will soon be a significant drop in the portion of stocks held? Could this be a reason for self-directing the plan? Tom

livesoft
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Post by livesoft » Sun Dec 30, 2007 10:49 pm

I don't like nor use age-based plans. One thing is that when my kid enters college, they still have 4 years or so to go. I do not believe in putting that money into 100% money market fund as the Utah (for example) plan would do. For some of the money, the need is 4 years away, so why have it in cash?

Jadzia
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Post by Jadzia » Sun Dec 30, 2007 11:05 pm

I am in the Michigan age-based plan. He is 3 years old. I am happy with the asset allocation for the moderate 0-3 years old plan, but I think the 4-7 year old moderate allocation is much too conservative. I plan to change into the the agressive 4-7 plan once he turns 4 so I can still have an asset allocation I like.

I am pretty sure most plans allow you to switch your investment selection once a year. Much like target retirement plans, you can probably select the plan that most matches your desired allocation rather than the child's exact age as well.

Tramper Al
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Re: 529s - Problem w/ age based plan?

Post by Tramper Al » Mon Dec 31, 2007 7:13 am

fundseeker wrote: Could this be a reason for self-directing the plan?

Yes. By all means do it yourself if you have the interest.

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Kenster1
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Post by Kenster1 » Mon Dec 31, 2007 8:01 am

Fundseeker/Tom,

First of all, you definitely do want the fund to get more conservative as time moves forward (ie. hold less stocks at age 16 than at age 10) as you obviously don't have as much time for longer term investing as your child draws closer to college age.

But of course, what varies is how much stock versus bond to hold over these time periods and there are aggressive, moderate or conservative ways to go about doing it.

For example -- Take a look at Nebraska's 529 Plan which has some Vanguard funds:
http://www.planforcollegenow.com/invest ... ebased.htm

If you feel here that you can tolerate greater risk then you can choose the Aggressive Allocation Age-Based Plan. At the age of 16, this plan would offer 40% in stocks -- of course, take into consideration that at this age your child will be a year or two from hitting college and so I don't know why you would want a whole lot more stock allocaton than that.
SURGEON GENERAL'S WARNING: Any overconfidence in your ability, willingness and need to take risk may be hazardous to your health.

sprmario2k3
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Post by sprmario2k3 » Mon Dec 31, 2007 10:51 am

I looked at Iowa a while ago. They have a pretty agressive age based track that keeps you 100% in equities until the age of 10 and even keeps you in a good chunk of equities until 18. It is a vanguard based plan.

http://collegesavingsiowa.uii.upromise. ... Based.html

eye.surgeon
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Re: 529s - Problem w/ age based plan?

Post by eye.surgeon » Tue Sep 12, 2017 10:12 am

Just to revive an inactive thread....I have a child who is two years away from college and I have enough in a Utah 529 to pay for undergrad and I'm still actively contributing. He will probably go to grad/medical school also. I am using a 529 mostly as a tax advantage, I have a million+ net worth, high income, andI could pay as he goes for all of his schooling if I needed to. The glide path on these 529s is designed as far as I see for zero risk tolerance and zero capacity to pay as you go. Is it foolish of me to keep in 50% or so equities or even higher, perhaps 70, right until he starts or even beyond? We're talking 8 years of school and if I follow the glide path all that money will be in low yield cash equivalents the whole time. Seems like I'm missing out on 8 years of market gains. Right now it's 30% equities / 70 bonds/cash because the glide path is starting to kick in and even that I think is way too conservative for my situation. I'm a conservative investor but I don't want to match the investment path of someone living paycheck to paycheck either.

rkhusky
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Re: 529s - Problem w/ age based plan?

Post by rkhusky » Tue Sep 12, 2017 1:00 pm

Move the funds to the next lower age-based fund? Wonder if the 529 provider would allow a discrepancy between the child's age and the account name? Our provider automatically switches the child to the next band when they get old enough and creating a mismatch could cause problems with this process. On the other hand, we are in a moderate series, whereas there is an aggressive series that is essentially the next lower age bracket.

The other option is to invest in individual funds, matching the allocation of a more aggressive age-based fund.

Grt2bOutdoors
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Re: 529s - Problem w/ age based plan?

Post by Grt2bOutdoors » Tue Sep 12, 2017 10:40 pm

You can design your own asset allocation plan instead of using the cookie cutter age based allocation plan.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

letsgobobby
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Re: 529s - Problem w/ age based plan?

Post by letsgobobby » Tue Sep 12, 2017 10:49 pm

eye.surgeon wrote:
Tue Sep 12, 2017 10:12 am
Just to revive an inactive thread....I have a child who is two years away from college and I have enough in a Utah 529 to pay for undergrad and I'm still actively contributing. He will probably go to grad/medical school also. I am using a 529 mostly as a tax advantage, I have a million+ net worth, high income, andI could pay as he goes for all of his schooling if I needed to. The glide path on these 529s is designed as far as I see for zero risk tolerance and zero capacity to pay as you go. Is it foolish of me to keep in 50% or so equities or even higher, perhaps 70, right until he starts or even beyond? We're talking 8 years of school and if I follow the glide path all that money will be in low yield cash equivalents the whole time. Seems like I'm missing out on 8 years of market gains. Right now it's 30% equities / 70 bonds/cash because the glide path is starting to kick in and even that I think is way too conservative for my situation. I'm a conservative investor but I don't want to match the investment path of someone living paycheck to paycheck either.
Except for that final sentiment, I would have suggested staying in a much more aggressive allocation than the age-based paths take. In your position 529 money isn't sacrosanct; it's just another tax-advantaged account. You're probably saving in taxable accounts as well as tax-deferred so you have plenty of options to optimize your portfolio/investments across all account types, not just within the 529. Therefore I'd suggest keeping the 529s more or less in line with your total portfolio asset allocation from this point forward. If you are 70/30 in your primary portfolio, don't go less than 70/30 in the 529s. Then optimize - and that might look like 100% stocks in your 529 and taxable, and 100% bonds in your 401k - in order to keep the 70/30 while maximizing after-tax returns.

rkhusky
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Re: 529s - Problem w/ age based plan?

Post by rkhusky » Wed Sep 13, 2017 9:27 am

letsgobobby wrote:
Tue Sep 12, 2017 10:49 pm
it's just another tax-advantaged account.
If the intent is to fully fund the child's education no matter what, then I agree.

If the intent is that the 529 is all the child will receive for college from the parents, that would suggest a different asset allocation for the 529.

mega317
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Re: 529s - Problem w/ age based plan?

Post by mega317 » Wed Sep 13, 2017 12:23 pm

In your position I would also be concerned about over-funding. Things change in 6 years--he might not go to grad school. If you can already cover undergrad and are still contributing you could easily overshoot. What would you do in that case? I might dial back stocks in the 529 while increasing stocks in other accounts. Overall allocation remains the same but you don't end up with leftover in the 529.

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