529 Plans - At what age do I move to conservative?

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Golfalot
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529 Plans - At what age do I move to conservative?

Post by Golfalot » Tue Nov 14, 2017 9:14 pm

Hello All,

I have a quick question that I was hoping to get some insights on from fellow Bogleheads.

We have 2 children...one is a Freshmen in high school and the other is in 8th grade. We have 529 Plans in place for both kids and through aggressive contributions over the years and significant stock market gains, both plans have grown to sizable balances. Knock on wood, but I don't think I will need to contribute to them much more to fund 4 years of their college (assuming $50-60k/yr of tuition per kid).

I currently have both kids' assets in the Plan's Aggressive Age-Based Investment vehicle. Given they are 4-5 years away from starting college, when does it make sense to start to move some of their $$ to something more conservative?

I'm tempted to take a large chunk of each of their Assets and put them into a Stable Value/Guaranteed Investment option. I sort of feel like I've won the college funding game and it's time to take some of my chips off the table. If the market tanks and doesn't recover in time while they are in high school, I'd hate to have lost some of their college funds.

Has anyone been in a similar position? If so, at what Age did you start to move your 529 investments to something more conservative, like fixed income or cash? Just curious if there is a general rule of thumb out there.

Thanks.

theplayer11
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Re: 529 Plans - At what age do I move to conservative?

Post by theplayer11 » Tue Nov 14, 2017 9:32 pm

If you can fund their tuition, why keep any in stocks at all? Cash out, you won.

MikeG62
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Re: 529 Plans - At what age do I move to conservative?

Post by MikeG62 » Tue Nov 14, 2017 9:32 pm

What is the current asset allocation of the age-based investment vehicles they are in?

What will it be when your kid(s) enter college?

Reason I ask is that age-based investment vehicles should be getting more conservative over time.

Remember as well that you don’t pay the full amount for four years on their first day of college. Expenses will be spread out over four years, So if there is a dip in the market, you may well have time for it to recover.

Atgard
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Re: 529 Plans - At what age do I move to conservative?

Post by Atgard » Tue Nov 14, 2017 9:46 pm

I would start leaning toward more conservative once the kid is in high school. But I see you're already in an age-based plan, so it should do this for you automatically, but in an "aggressive" way (maybe the "aggressive" is 100% stock --> 75% --> 50% and the "conservative" is 80% --> 50% --> 20% or something?).

I mean, the whole point of being in an age-based plan is to let it adjust for you automatically. Are you also asking if you should switch from the Aggressive Age-Based to Normal Age-Based or Conservative Age-Based? (I forgot exactly what the options are & what they're called.) I guess you can look at the different glide paths & choose which one you're most comfortable with.

If you have enough to cover their anticipated costs, it would be a good reason to go more conservative, since both big losses (for obvious reasons) or even big gains (since you'd pay a penalty if you have more than enough) are sub-optimal results. So then you'd pretty much just want to maintain.

Golfalot
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Re: 529 Plans - At what age do I move to conservative?

Post by Golfalot » Tue Nov 14, 2017 9:47 pm

Great point about the Aged Based vehicles getting more conservative over time.

They are both in the 13-14 Age Band of the Aggressive Age Fund which is roughly 50% Equity / 45% Fixed Income / 5% REIT.

At the Age 18+ band, this allocation is roughly 23% Equity / 75% Fixed Income / 2% REIT.

I'm leaning towards taking a chunk off table and moving the remaining into their Conservative Aged Fund which will reduce some of the equity exposure (since at this point I'm not so concerned with the Growth).

letsgobobby
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Re: 529 Plans - At what age do I move to conservative?

Post by letsgobobby » Tue Nov 14, 2017 10:03 pm

I’ve wrestled with this and tentatively arrived at shifting to 75/25 (from 100/0) around 5 years out... then 50/50 when they start. Not scientific, just a gut feeling. I reserve the right to change my mind especially if stocks get more and more expensive.

Outafter20
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Re: 529 Plans - At what age do I move to conservative?

Post by Outafter20 » Tue Nov 14, 2017 10:21 pm

I just switched my daughters 529 account to 50/50 from 100/0 this past week. She is in 8th grade.

fourwheelcycle
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Re: 529 Plans - At what age do I move to conservative?

Post by fourwheelcycle » Tue Nov 14, 2017 10:29 pm

I currently have 100% of my grandchild's 509 account in Vanguard's Total Stock Market Index. When he is six years from college I plan to move 25% of his freshman year money into Vanguard's Intermediate Term Bond Index. Then I'll move another 25% of his freshman year money into bonds each following year.

My goal is to have 100% of his money for each year of college in bonds two years before the start of that college year.

Grt2bOutdoors
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Re: 529 Plans - At what age do I move to conservative?

Post by Grt2bOutdoors » Tue Nov 14, 2017 10:41 pm

When you've won the game, take your chips off the table.
Ask yourself this, are you willing to kick yourself if the value of the account declines by 50% tomorrow and does not recover by the time the first child is 18? If you have 100% at risk, that is exactly what can happen and it can happen faster than you can click "sell". When you've got the money, stop playing. If it were me, I'd make the allocation 30/70 - tomorrow. You can re-evaluate as you get closer to college whether you are short or not.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

MikeG62
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Re: 529 Plans - At what age do I move to conservative?

Post by MikeG62 » Wed Nov 15, 2017 7:45 am

Golfalot wrote:
Tue Nov 14, 2017 9:47 pm
Great point about the Aged Based vehicles getting more conservative over time.

They are both in the 13-14 Age Band of the Aggressive Age Fund which is roughly 50% Equity / 45% Fixed Income / 5% REIT.

At the Age 18+ band, this allocation is roughly 23% Equity / 75% Fixed Income / 2% REIT.

I'm leaning towards taking a chunk off table and moving the remaining into their Conservative Aged Fund which will reduce some of the equity exposure (since at this point I'm not so concerned with the Growth).
Based upon this additional information (including the fact that the conservative portion of the age-based AA is in fixed income and not necessarily stable value) and that fixed income is arguably as richly valued as equities these days, I would likely do the same thing you are leaning toward - moving maybe 1/2 of the current account value to stable income (and if you are so inclined to move the rest to a more conservative age-based investment vehicle option, go for it). It hard to argue with your logic here.

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DaftInvestor
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Re: 529 Plans - At what age do I move to conservative?

Post by DaftInvestor » Wed Nov 15, 2017 9:47 am

If I were you I'd move it all to conservative now. If you have the funding you need why keep up the risk - I'd go 0/100.

Da5id
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Re: 529 Plans - At what age do I move to conservative?

Post by Da5id » Wed Nov 15, 2017 9:54 am

[Edited to update my thoughts a bit]

Not sure I totally agree with dialing it back to the conservative setting at 14-16. That gets you to 0% stock, not much inflation protection (and higher ed inflation may be more than CPI) even though you are mostly there. Moderate age based has you at 20% stocks at 15, 10% stocks at 16, 0% stocks at 17, which is pretty small exposure. But not sure in the end it makes a huge difference. If stocks go up 10% when your child is 16, your 529 goes up merely 1% from the stock component. If they fall 30% you lose 3%. Probably not game changing either way?

That said, I personally dialed back to conservative for my kids at 16-17 myself, just felt better at the time.
Last edited by Da5id on Wed Nov 15, 2017 10:50 am, edited 1 time in total.

letsgobobby
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Re: 529 Plans - At what age do I move to conservative?

Post by letsgobobby » Wed Nov 15, 2017 10:36 am

DaftInvestor wrote:
Wed Nov 15, 2017 9:47 am
If I were you I'd move it all to conservative now. If you have the funding you need why keep up the risk - I'd go 0/100.
Because with several years to go and continuing higher education inflation, it’s highly likely the OP will fall behind the rising costs of education, even if he has enough now. It’s the dilemma of conservative investing in a low yield (but not low inflation) world.

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DaftInvestor
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Re: 529 Plans - At what age do I move to conservative?

Post by DaftInvestor » Wed Nov 15, 2017 11:04 am

letsgobobby wrote:
Wed Nov 15, 2017 10:36 am
DaftInvestor wrote:
Wed Nov 15, 2017 9:47 am
If I were you I'd move it all to conservative now. If you have the funding you need why keep up the risk - I'd go 0/100.
Because with several years to go and continuing higher education inflation, it’s highly likely the OP will fall behind the rising costs of education, even if he has enough now. It’s the dilemma of conservative investing in a low yield (but not low inflation) world.
low yield, low inflation, but a high-valuation equity market ... the OP needs to decide how much risk he wants to take with only 5 years to go. If it were me - I would take none at this point.

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UpsetRaptor
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Re: 529 Plans - At what age do I move to conservative?

Post by UpsetRaptor » Wed Nov 15, 2017 11:32 am

+1 for moving to more conservative once you're all set. Congrats on the successful college planning strategy, OP.

Just a couple extra thoughts if your 529s still end up looking heavy in a few years: They can also qualify for covering most postsecondary education (grad/nursing/med/dental school). And of course, maybe grandkids eventually...

WhiteMaxima
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Re: 529 Plans - At what age do I move to conservative?

Post by WhiteMaxima » Wed Nov 15, 2017 11:45 am

529 is medium term investment. You will make sure the money is there when needed. I started 529 when my 1st kid was born. I choose 100% static option. During bear market, I see it drop and barely move up until this bull run. My oldest kid will attending university next year. So I moved to 20/80 to be more conservation. So be brave when your kids are still young but be conservative when they reach the age. It's hard to predict. Market is random and inrational.

letsgobobby
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Re: 529 Plans - At what age do I move to conservative?

Post by letsgobobby » Wed Nov 15, 2017 1:20 pm

DaftInvestor wrote:
Wed Nov 15, 2017 11:04 am
letsgobobby wrote:
Wed Nov 15, 2017 10:36 am
DaftInvestor wrote:
Wed Nov 15, 2017 9:47 am
If I were you I'd move it all to conservative now. If you have the funding you need why keep up the risk - I'd go 0/100.
Because with several years to go and continuing higher education inflation, it’s highly likely the OP will fall behind the rising costs of education, even if he has enough now. It’s the dilemma of conservative investing in a low yield (but not low inflation) world.
low yield, low inflation, but a high-valuation equity market ... the OP needs to decide how much risk he wants to take with only 5 years to go. If it were me - I would take none at this point.
I also have enough saved to pay for kids college at this point, but they are 8 and 10. Should I be 100% conservative? That will basically ensure I will not have enough when they actually need the money, since there is no safe investment that will keep up with the inflation rate of higher education.

If you show me a TIPS-like instrument which is indexed to higher education inflation, your argument would be more persuasive.

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DaftInvestor
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Re: 529 Plans - At what age do I move to conservative?

Post by DaftInvestor » Wed Nov 15, 2017 1:26 pm

letsgobobby wrote:
Wed Nov 15, 2017 1:20 pm
DaftInvestor wrote:
Wed Nov 15, 2017 11:04 am
letsgobobby wrote:
Wed Nov 15, 2017 10:36 am
DaftInvestor wrote:
Wed Nov 15, 2017 9:47 am
If I were you I'd move it all to conservative now. If you have the funding you need why keep up the risk - I'd go 0/100.
Because with several years to go and continuing higher education inflation, it’s highly likely the OP will fall behind the rising costs of education, even if he has enough now. It’s the dilemma of conservative investing in a low yield (but not low inflation) world.
low yield, low inflation, but a high-valuation equity market ... the OP needs to decide how much risk he wants to take with only 5 years to go. If it were me - I would take none at this point.
I also have enough saved to pay for kids college at this point, but they are 8 and 10. Should I be 100% conservative? That will basically ensure I will not have enough when they actually need the money, since there is no safe investment that will keep up with the inflation rate of higher education.

If you show me a TIPS-like instrument which is indexed to higher education inflation, your argument would be more persuasive.
No - I wouldn't fully shift being 10 years away - but being 5 years away after such a long running bull-market I certainly would.

WhiteMaxima
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Re: 529 Plans - At what age do I move to conservative?

Post by WhiteMaxima » Wed Nov 15, 2017 2:36 pm

In some state, they have option to lock the tuition rate for state schools. So you could swtich your saved 529 into located plan. One short coming: Financial aid. Money in 529 count about 5% while in locked plan count 100%. I would choose a balanced plan: 33% US 33% Intl 33% Bond plus Tip plan. During last 10 years, the 100% US option out perform all others by big margins. It's hard to predict the market.

letsgobobby
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Re: 529 Plans - At what age do I move to conservative?

Post by letsgobobby » Wed Nov 15, 2017 3:32 pm

Washington is reopening their prepaid tuition plan, however there is a circa 15-20% upfront premium (ie, guaranteed loss) to gain entry. There is no free lunch.

Golfalot
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Re: 529 Plans - At what age do I move to conservative?

Post by Golfalot » Wed Nov 15, 2017 4:51 pm

Thank you for all of the replies. They were very insightful and provided me with some good information which validated some of my thoughts.

I ended up taking a nice chunk off the table (roughly 45%) and put that in the Guaranteed Income/Principal Plus Interest option (roughly 1-2% interest), and I put the remaining 55% in the Moderate Aged-Based Allocation option. At their current Age-Band, the Moderate Aged-based option has about 36% equity exposure and it will adjust down as my children get older. Net-net, I'll still have some money exposed to the market while my kids are in high school, but nothing that makes me lose any sleep at night. I feel comfortable that I have enough in the 529s to fund their 4 years (if a small amount in the 4th year needs to come from taxable...so be it).

I do appreciate the replies regarding the cost of higher education and related inflation. It's crazy to think what college costs these days and what it will be in the future. The out of state tuition at my alma mater (a public university in Ohio) is about $45k/year. I think it was like $10-12k when I went there 25+ years ago.

Thanks again for all the insights.

Cheers.

David Scubadiver
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Re: 529 Plans - At what age do I move to conservative?

Post by David Scubadiver » Wed Nov 15, 2017 4:58 pm

For others considering the same question, is it also important to consider your other investments? I have always viewed the 529 accounts as part of my overall investment portfolio. So, if I were inclined to become more conservative because I wanted to protect my tax advantaged money for education expenses, I would do so. But, I would likely make a counter-move outside the account (i.e., increasing risk in my taxable account while decreasing risk in the 529 account).

Golfalot
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Re: 529 Plans - At what age do I move to conservative?

Post by Golfalot » Wed Nov 15, 2017 5:32 pm

David Scubadiver wrote:
Wed Nov 15, 2017 4:58 pm
For others considering the same question, is it also important to consider your other investments? I have always viewed the 529 accounts as part of my overall investment portfolio. So, if I were inclined to become more conservative because I wanted to protect my tax advantaged money for education expenses, I would do so. But, I would likely make a counter-move outside the account (i.e., increasing risk in my taxable account while decreasing risk in the 529 account).
For what it is worth, I've always treated my 529 plans separately. Not sure whether that is right or wrong. I've always viewed them as not part of my Investment Portfolio and have excluded them from my Asset Allocation percentages. I guess I've always viewed them as funds earmarked for my Kids education while my Investment Portfolio are funds that I'm managing for my Retirement (and my 529 assets will be gone by then).

Interesting to hear whether others view their 529 assets as part of their Investment portfolios?

WhiteMaxima
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Re: 529 Plans - At what age do I move to conservative?

Post by WhiteMaxima » Wed Nov 15, 2017 6:01 pm

529 is an educational investment. education bring more income. So the effect is not just the merely 5~7% gain every year. Also it is an estate tool. It is tranferable to your relatives with no tax. And their can pass your legend for generations to come. It will through many recessions and bear market. In that sense, I would choose more aggressive approach. You can establish an 529 for anyone in this world or even unborn. I might go back to college after I retire. I might go to any EU university (of course very low tuition) plus room and board all covered by 529. Image it is not just a education fund, it is also a retirement fund. Tax free growth.

Nate79
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Re: 529 Plans - At what age do I move to conservative?

Post by Nate79 » Wed Nov 15, 2017 8:54 pm

Remember that they will likely be in college for at least 4 years. The asset allocation not only needs to be selected for the start date but at least 4 years more. Going too conservative when the student starts college ignores that you need to handle the increase in cost over the 4 years of college.

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