Page 1 of 1

Target Date funds for college savings plans?

Posted: Wed May 08, 2013 8:02 am
by 10106106
Hi everyone.

I live in Maine and I am looking at revamping our childrens college savings plans.

We have Coverdale ESA's set up for each child ($8000 in each) and they are in some growth stock mutual funds. My parents set up some 529 plans for my children ($10,000 in each). The 529's are in the Maine NEXT GEN account which I have not been pleased with at all, but that is what they want to keep them for the grandkids.

I was looking at switching my ESA's over to the Vanguard Target Date funds for diversity and greater protection as their college date grows closer.

I was also looking at opening Vanguard 529 plans for each of them, but I am unsure if it is wise based on the state I live in.

Could anyone provide any assistance? The kids are 13 and 11. We can now put $3000 into each account, then $500 a month in each account after that.

Thank you.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 10:02 am
by jjustice
I use Vanguard Target Date funds for my grandchildren's Coverdells. It seems to me that this is just what they are designed for--saving for a future goal that will arrive at a predictable time. I also like the fact that these funds will stay on automatic pilot if I die in the meantime. I don't want to leave college funds where they will need attention from someone. Of course, you still have to chose the particular fund. I started with 2025, but changed to 2030 last summer to get more equity.

John

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 12:20 pm
by inbox788
Are you talking about Target Retirement plans or Target Education plans? While ok in concept, I don't like the timing of Target Retirement plans. Haven't looked at specific Target Education plans, but they may not be any better match to my AA shift from investment mode to spending mode. You can shift the target date fund to use as some already did, which again is ok, but it isn't much more to just do the rebalancing yourself.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 2:17 pm
by jjustice
Vanguard uses the word 'retirement' in the names of these funds, but they can be used for any target. One of their benefits is that they are "set-and-forget" funds for those of us who cannot cound on being around for as long as needed to moniter and adjust them.
John

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 2:51 pm
by rkhusky
Retirement is different than college. Retirement can last for 30 years. It is rare for someone to remain in college as a student for 30 years. Accordingly, a target retirement fund's glide path near retirement is probably too shallow. One wants a steep drop in equities a few years before entering college. How steep depends on how many years one is planning to be in college.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 2:57 pm
by tonsofthorns
Vanguard does not allow new or rollover ESA's any longer. But, you could open a Vanguard 529 plan and roll the ESA's into that plan.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 3:02 pm
by inbox788
jjustice wrote:Vanguard uses the word 'retirement' in the names of these funds, but they can be used for any target. One of their benefits is that they are "set-and-forget" funds for those of us who cannot cound on being around for as long as needed to moniter and adjust them.
John
Yes, you can use them for whatever you like, and while I think they're great for a one step set it and forget it retirement, I don't think it's optimal for me and many others, hence the tweaking by advancing or retarding the actual target from the fund. Now when a purchase like home or college that spans 1 day or 4 years, versus an endless retirement need, I see a different path from high stocks to bonds to cashing out.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 3:13 pm
by rkhusky
Vanguard Target Retirement 2015 has 55% stocks, TR 2010 has 42% stocks, and TR Income (most conservative) has 30% stocks.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 3:17 pm
by jjustice
It's true that Vanguard is no longer starting Coverdells, which is unfortunate. There are other companies that can be used, such as T. Rowe Price.

The steeper the glide path, the higher the risk. I cannot see that one should prefer a steeper glide path for funds that will be spent over 4 years than for funds that will be spent over 30 years. I do see that people will differ in general about preferred risk. While you can't change a fund company's glide path, you can partially adjust for risk preference by the date you choose.

John

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 3:32 pm
by rkhusky
jjustice wrote:It's true that Vanguard is no longer starting Coverdells, which is unfortunate. There are other companies that can be used, such as T. Rowe Price.

The steeper the glide path, the higher the risk. I cannot see that one should prefer a steeper glide path for funds that will be spent over 4 years than for funds that will be spent over 30 years. I do see that people will differ in general about preferred risk. While you can't change a fund company's glide path, you can partially adjust for risk preference by the date you choose.

John
The glide path usually refers to the percentage of stocks, so the steeper the glide path the faster the amount of stocks is reduced, which seems to me to be safer.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 4:05 pm
by shashi
Basic question:- How about having a combination of TSM and I-Bonds instead of 529 plans? How much are you going to lose this way? I see it gives a whole lot flexibility in terms of future planning.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 5:19 pm
by rkhusky
shashi wrote:Basic question:- How about having a combination of TSM and I-Bonds instead of 529 plans? How much are you going to lose this way? I see it gives a whole lot flexibility in terms of future planning.
529 earnings are tax free when used for education. If you get a lot of earnings, you could be losing a lot due to taxes.

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 6:20 pm
by jjustice
rkhusky wrote:
The glide path usually refers to the percentage of stocks, so the steeper the glide path the faster the amount of stocks is reduced, which seems to me to be safer.
No, if a steeper path meant arriving more quickly at the final allocation, it would be safer. But the date of the final allocation is fixed. The steeper path means only that you have more equities over a longer time prior to the date of the final allocation.
John

Re: TARGET DATE funds for college savings plans?

Posted: Wed May 08, 2013 8:11 pm
by rkhusky
jjustice wrote:
rkhusky wrote:
The glide path usually refers to the percentage of stocks, so the steeper the glide path the faster the amount of stocks is reduced, which seems to me to be safer.
No, if a steeper path meant arriving more quickly at the final allocation, it would be safer. But the date of the final allocation is fixed. The steeper path means only that you have more equities over a longer time prior to the date of the final allocation.
John

The equity allocation for retirement funds at the time of retirement is higher than for typical 529 plans at the start of college, while the starting allocations are similar. This is because the retirement plans assume that the retiree will need to draw on the funds for 30+ years, rather than for the 4+ years for college. Therefore, the overall glide path slope is higher for 529 plans, considering the time period from initial contribution to the beginning of withdrawal.

Note that the Moderate Allocation for Vanguard's 529 goes from 75% stock at age 5 to 0% stock at age 16. The Aggressive allocation goes from 100% stock at age 5 to 0% stock at age 19. The 529 glide slope is about -7%/year. The TR 2050 is 90% stock, while the TR 2010 is 40% stock and TR Income is 30% stock. The TR glide slope is about -1%/year.

Re: Target Date funds for college savings plans?

Posted: Wed May 08, 2013 8:45 pm
by tigerman3
I moved my college savings plan from CollegeBound to Vanguard in 2012 and am glad I did. If you look at their materials, Vanguard has basic allocations which it recommends for kids who are a certain number of years away from college. As you get closer to college, the recommendation is to get more conservative. Right now, I have a blend of the moderate and conservative allocations. As we get closer to college age I will, per Vanguard's recommendation, move closer to an all conservative allocation.