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College Savings: Investing Your Child’s 529 Savings

by | Jan 30, 2019 | College Planning

Saving money for a child’s college education is a big deal for many families. In fact, I’ve run into a number of parents that prioritize their child’s college funding over their own retirement!

It’s very important to invest these savings intelligently. Your son or daughter will be going to college in a short 4-year window. If you’re not careful, an ill-timed stock market correction can wreck years of hard work saving these funds.

Disclosure Note: I’m not making any specific recommendation about how you should invest money in your child’s 529 account. The information here is intended to educate you about an important topic. If you need help investing your child’s 529 account, you can contact me or find another financial advisor to help you. Please see my disclosures here.

Saving for College: The Basics

As a financial advisor, I really enjoy helping people plan for college. Of all the financial goals a family has, this is one that seems to elicit the most emotion.

The reason is simple: we want to best for our kids. We want to give them every opportunity that we had – and more – so they can be successful in life. Giving a child a college education (i.e. paying for it) is often seen as one of the best things we can do for them.

The two aspects of college planning that we can count on, in most cases:

  1. There is an 18-year window to save for college: from the time they’re born until they turn 18.
  2. They’ll go to college for 4 years.

Beyond this, college planning gets trickier. For example, we don’t know:

  • What kind of college our child will want to go to (less-expensive community/technical colleges or a big-name state university)
  • What future tuition will be (tuition inflation is higher than general inflation)
  • Whether our child will even want to go to college!

As you can see there are a lot of uncertainties with college planning. The good news is that the time horizon is well-defined. This gives you a good idea for how you should invest these savings.

Time Horizon is the Key

As I discussed in a recent post, time horizon is an important element in determining how much investment risk you should take. A short time horizon generally means a conservative portfolio (i.e. more bonds & cash vs. stock). Longer time horizons allow you to take more investment risk so you can earn better returns.

It’s the same philosophy for college savings. When your child is young and several years away from going to college, you can invest more of the portfolio into stocks. The idea here is that by investing in stocks, you have a chance to let those funds grow. It doesn’t always work out that way, but that’s the theory (read disclosures).

But as the child gets into middle and high school, you’d want to gradually cut the exposure to stocks and invest more into bonds. As they enter junior year of high school, it’s good practice to have most of your child’s college savings in bonds & cash.

You can visualize how this works here:

You don’t want to risk too much of your child’s college savings in the stock market as they get closer to going to college. Imagine spending 18 years saving money for college and then the stock market goes down -38% as it did in 2008. The cost of college wouldn’t drop because the stock market dropped, right? That’s why you invest more conservatively as your child ages.

Age-based Funds Can Help

In my post about Target Date funds last week I also talked about Age-based funds. These age-based funds are found in many 529 plans depending on which state’s 529 plan you are saving in.

Age-based funds automatically reduce your portfolio’s exposure to stocks as your child grows older. They make sure you’re invested conservatively as your child gets to heading off to college.

As I mentioned in that post, these funds aren’t foolproof. And each state’s age-based funds are different. That’s why I’d recommend speaking to a financial advisor about the investment options available in your state’s 529 savings plan.

Conclusion

Saving for college is a very important goal for many families. It takes a lot of hard work and saving to help a child afford college these days.

That’s why it’s important for you to invest these savings wisely. It’s smart to shift your child’s portfolio towards more conservative investments as they get closer to going to college. That way you know the funds will be there when your child needs them.

If you haven’t yet started saving for college and aren’t sure where to begin, I wrote a post called Saving For College: Time to Think Differently. Given the cost of college these days, it’s a good idea to work with a financial advisor on a comprehensive financial plan that balances your college savings goals with other important goals, such as retirement. Yeah, yeah. You’d expect me to say that as a financial advisor. But these goals are too important to leave to chance.

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