Since we’ve been covering college savings and 529 plans here lately, I thought it made sense to have a quick discussion about how you might consider investing your funds with your 529 savings plan. Let’s discuss how to achieve a proper asset allocation within your 529 plan.
What is Asset Allocation?
Asset allocation is spreading your money over different types of asset classes. The three types of asset classes are stocks, bonds, and cash. If you’re investing for the long-term you can reduce your risk by allocating your funds across these different assets. Each asset responds differently to the various changes to the economy/market. Therefore, you’re less likely to see all your investment money go down because all three asset classes are unlikely to go down at once.
Two things typically affect your asset allocation decision: your own time horizon and your own risk tolerance. This is very personal decision.
Should Asset Allocation Be Different for a 529 Plan vs Retirement Savings?
It may not be. But typically since the time horizon for needing college funds is tied to the age of your child, and because your risk tolerance for those funds may be different, the asset allocation is different. You may not be retiring for 25 years, but your 5 year old child will need his college savings in 13 years.
Likewise, you may be more willing to risk your retirement savings vs risking your child’s education savings. Only you know. But, there are some suggestions out there. I stumbled upon these suggested asset allocations percentages while sorting through my mail from CollegeAdvantage 529 Savings Plan:
Suggested Asset Allocation for Your 529 Plan
|5 and Under||50% Stocks / 50% Bonds||75% Stocks / 25% Bonds||100% Stocks|
|6-10||25% Stocks / 75% Bonds||50% Stocks / 50% Bonds||75% Stocks / 25% Bonds|
|11-15||75% Stocks / 25% Cash||25% Stocks / 75% Bonds||50% Stocks / 50% Bonds|
|16-18||75% Bonds / 25% Cash||75% Bonds / 25% Cash||25% Stocks / 75% Bonds|
|19 and Up||100% Cash||75% Bonds / 25% Cash||75% Bonds / 25% Cash|
Remember that your own asset allocation decisions could vary greatly from this. These are just suggestion.
Mrs. PT and I just opened our 529 savings plan and we have the contributions going to a Vanguard aggressive age-based fund (0.23% expense fee). We’re along way from needing the funds (17 years) and we are comfortable investing 100% in stocks, so we felt like this was a smart option.
See the third column below for how our asset allocation will change over time. Of course, we’re just getting started and so we may adjust and invest directly in funds to have bit more control.
How do you have your assets allocated in your 529 savings plan portfolio? Is it similar to the chart above?