It’s that time of the year again. I need to make a new contribution to my niece’s 529 plan for her future college expenses. When I looked for a plan for her last year, I came to the conclusion that the typical age-based options don’t make sense.
The typical age-based options in a 529 plan invest too much in stocks. They are not appropriate for a 529 plan because a 529 plan has a much shorter investment lifespan than an investment portfolio for retirement. You build up the assets in 18 years (versus 40 for retirement) and you deplete them in four years (versus 20 or more for retirement).
I’m still going with the Ohio CollegeAdvantage plan because of its low cost Vanguard index fund options. Last year I put my contribution in the Vanguard Moderate Growth Index Portfolio, which invests 50% in stocks and 50% in bonds. The fund gained 10% so far in 2010.
This year, I came up with a systematic asset allocation for all future years. I start the allocation at 50% in stocks and 50% in bonds. I would reduce the allocation to stocks by 10 percentage points every three years and increase the allocation to bonds and/or CDs by the same amount.
|Age||Stocks||Bonds and/or CDs|
|15 and above||0%||100%|
Under this allocation plan, by the time the child reaches 15, the money will be completely out of stocks. Because the money is expected to be used up in the next 3 to 7 years, it’s no longer appropriate to invest in stocks at that point. I would then divide the money into roughly equal parts and put them in CDs maturing when the money is needed.