529 Plan Investment Strategies Based on Your Child’s Age

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Kathryn Flynn

By Kathryn Flynn

December 27, 2022

A 529 plan is one of the best ways to save for college: this type of account lets your savings grow over time, with generous limits and a range of tax advantages. To make the most of your plan, it’s important to implement the right 529 investment strategy by age. The right mix of investments, as well as how much you should contribute, will depend on how old your child is and how close they are to going to college.

Before you can choose the right investments you’ll need to find the right 529 plan for you. We have ranked all of the 529 plans and you can see which is best for the state where you live. Find the right one for you and you could open your account seamlessly. 

*Keep in mind that the below is intended as general information on 529 asset allocation recommendations, and is certainly not investment advice. You should always consult an expert for advice specific to your own situation.

How 529 Plan Investments Work

A 529 plan is essentially an investment savings account: you make contributions to the plan, which are then invested on your behalf. One of the big advantages of a 529 plan is that your earnings grow tax-deferred, and you can make withdrawals at any time to pay for education costs such as tuition, fees, and room and board. You can actually use the funds to pay for whatever you want, but if you don’t use them for qualified education expenses you’ll incur a 10% penalty and need to pay tax on them.

Almost every state has its own 529 plan and there’s one authorized private plan. Each plan works differently, but you’ll typically always have a say in how the funds are invested within your 529 accounts. Once you fund your 529 plan, you get to choose what types of investments to invest in. Depending on how your plan works, they may do this on your behalf, but you’ll be able to direct them on the type of investment strategy you want.

For most plans, you can specify both the level of risk you prefer, as well as whether you want your portfolio to have age-based or objective-based asset allocation. Under age-based allocation, the fund will automatically adjust the asset allocation based on your child’s age, whereas an objective-based approach allocates assets according to a set investment goal. You can usually also opt for a custom strategy where you specify your asset allocation.

Picking the right investments for your 529 plan is vital, as this can greatly impact how much your money grows over time, and therefore make it easier or more difficult to pay for college.

You can usually choose between conservative, moderate, and aggressive portfolios and parents may make two 529 plan investment changes per year. We’ll take a look at the different investment approaches in the next section.

Risk Breakdown of 529 Investments

As with any type of investment strategy, you can choose a more aggressive or more conservative approach:

  • An aggressive approach has the potential to yield higher returns but is a higher risk.
  • A conservative approach is safer but isn’t likely to match the same yield potential as an aggressive strategy.

When considering your 529 investment options, there’s a direct relationship between the level of risk and your child’s age in order to maximize their future savings and make paying for college more affordable.

This will depend somewhat on your appetite for risk, as well as your family’s individual situation. In general, however, investments should typically be more aggressive when your child is younger, in order to maximize returns and build up your funds. Then, as they get closer to college, the investment strategy should be progressively more conservative to grow their already substantial funds more slowly without risking losing everything just before the college bills start to come in.

You can think of this like saving for retirement: the closer you get to retirement, your investment approach should probably be more conservative. Any investment choice, though, should be talked over with a professional who is qualified to help you with your unique financial situation.

Types of 529 Plan Investments

529 plans offer a range of different types of investments, and each has its own level of inherent risk. Common types of investments available are:

  • Stocks, or equity, are shares in a company and are generally high-risk, high-return as they depend on the performance of that company as well as that of the stock market overall.
  • Bonds are generally low-risk, lower-return. These are fixed-income investments where you essentially loan money to the government or a company that agrees to pay it back in a set timeframe with a pre-specified amount of interest.
  • Mutual funds are portfolios that combine equity and debt. The level of risk as well as returns can vary depending on the level of equity.
  • Short-term reserves are investments that will be returned within a year or less and include bank deposits, US Treasury bills, and short-term bonds. They typically offer low risk and lower returns.

You may or may not be able to choose between all of these types of investments, as this can depend on the plan administrator. Note that stocks are also sometimes referred to as equity in this context: although equity and stocks aren’t exactly the same thing, if your funds are allocated to equity in your 529 plan, this means your investments are stocks-based.

Breakdown of a 529 Investment Strategy by Age

In general terms, your 529 investment strategy should have a higher proportion of assets allocated to high-risk investments like stocks (equity) when your child is younger, and gradually shift to an emphasis on low-risk asset allocation as they age and get closer to college. Once they reach college age, short-term reserves also come into play, as you’ll be looking for a quicker payoff from your investments.

Again, this will depend if you prefer more aggressive or conservative investment options, but here’s an example of 529 asset allocation based on moderate overall risk:

Age Group
Example Breakdown
Newborn – 5 years old
80% stocks, 20% bonds
Elementary school age
60% stocks, 40% bonds
Middle school age
35% stocks, 65% bonds
High school age
20% stocks, 80% bonds
18 years and older
75% bonds, 25% short-term reserves

New Born to 5 Years Old

Starting a 529 plan as early as possible, even as soon as they are born is a great idea, as this will give your money as much time as possible to grow. It also gives you the opportunity to grow your investment more aggressively, with around 80% of funds allocated to stocks, with plenty of time still left to save for your college education.

If you want to go for an aggressive strategy at this stage, you could even choose a 100% equity portfolio for the first few years of your child’s life. According to a 2018 study by Mark Kantrowitz, increasing the equity allocation from the typical 80% (found at the start of many age-based portfolios) to 100% yields greater returns without adding significant investment risk.

Elementary School Age

For this age group, you can continue to pursue a relatively aggressive portfolio, but with a slightly higher emphasis on low-risk investments such as bonds.

Having said that, this will depend on how much you’ve saved so far and whether you’re on track to meet your college savings goals. When your child enters elementary school is a good time to benchmark your progress. If you find that you’re coming up short of your goal, you may consider increasing the equity allocation in your 529 plan portfolio to invest more aggressively.

Middle School Age

It’s important for parents to be more risk-averse as their child gets closer to college. If the stock market were to drop significantly within the next four years, they may not have enough time to recoup the losses in their portfolio and could fall short of their savings goal.

By the time your child reaches middle school, the optimal 529 investment strategy should switch to a majority of low-risk investments, but still with a significant proportion of equity to yield high returns.

High School Age

With a shorter investment time horizon, parents of high school students should be more risk-averse when selecting 529 plan investments. Consider lowering your equity allocation to 20% or 30% and investing the remaining 70% to 80% in fixed-income portfolios consisting of bonds, CDs or money market funds.

18 Years and Older

It’s never too late to start saving for college, even if your child is about to go to school or is already studying. However, at this age, the strategy should shift to a majority of funds in bonds, with around 25% invested in short-term reserves. Some 529 plans offer FDIC-insured investment options, which are a good option for families who are looking to protect their principal investment within a short time period.

How a Static 529 Plan Investment Strategy Works

A static 529 plan investment strategy doesn’t adapt fund allocation as your child gets older. Rather, the strategy is geared towards a specific investment objective, and therefore fund allocation remains consistent over the life of the plan in order to meet that goal.

Static plans may be designed around a certain level of risk or an individual portfolio that mirrors a foundational investment like a mutual fund. On the other hand, under a risk portfolio, the investment goal could be geared towards aggressive growth, or it may follow a more low-risk, conservative approach.

This doesn’t mean that you can’t change the division of investments, you’ll just need to do it manually and choose your own asset allocation. For this reason, this type of investment plan is usually better for experienced investors, while beginners may be better opting for plans with age-based allocation.

How to Pick the Right 529 Plan

As a parent, you have a wide range of choices of not only 529 plans but also the type of investment portfolio offered by each plan. Here are some factors to consider when choosing a 529 plan in order to maximize your investment.

Age-Based Asset Allocation

Parents with young children may find age-based asset allocation the best strategy. Most direct-sold 529 plans offer age-based portfolios, which generally start out invested in equities (stocks) and automatically shift toward more conservative fixed-income assets as the beneficiary gets closer to college.

Age-based 529 plan portfolios appeal to parents who prefer to “set it and forget it.” They are a good place to start for parents who are new to saving and investing since the investment risk is managed by the 529 plan.

Expense Ratio

New parents should also look for 529 plan investments with a low expense ratio, which is an annual fee based on a percentage of the assets in your 529 plan account. For example, if you have $10,000 invested in a 529 plan with a 0.50% expense ratio, you would pay $50 in fees. But, if the 529 plan had an expense ratio of 0.15% you would only pay $15 in fees that year.

The initial $35 difference in fees may not seem like a lot at first, but it will add up over time. As your account balance grows, the annual amount you pay in fees will be higher since fees are based on a percentage of your assets. By spending less on 529 plan fees, you are able to invest more in college.

Share Class

If you are using an advisor-sold 529 plan, pay attention to the share class that your financial advisor recommends. Most advisor-sold 529 plans are sold as Class A shares or Class C shares. According to FINRA, Class A shares are a more cost-effective option when the beneficiary is under 12 years old since they have an upfront sales charge with a lower annual expense ratio.

Class C shares do not have an upfront sales charge, but they have a higher annual expense ratio. Class C shares are more suitable for parents with children in high school or parents who are using a 529 plan to pay for K-12 tuition. These families should avoid paying the upfront sales commission since there is less time over which to amortize the cost of the commission.

State Income Benefits

Parents of high school and college students should contribute to an in-state 529 plan if their state offers a state income tax benefit for 529 plan contributions. For older students, a state income tax benefit offers a greater benefit than lower fees offered by an out-of-state 529 plan.

Target 529 Savings By Age

It’s important to regularly revise your 529 investment strategy based not only on your child’s age but also on how much you’ve saved so far. This will help you to determine your ideal fund allocation, how aggressive you should be with your investments, and how much you should contribute to your 529 savings plan.

Here’s a quick formula that will give you an idea of your target savings. To determine how much you should have saved, multiply your child’s age by:

  • $3,000 for an in-state public 4-year college
  • $5,000 for an out-of-state public 4-year college
  • $7,000 for a private non-profit 4-year college

For example, if your child is 14 years old and you’re planning on sending them to a private, non-profit college, the calculation would be:

7000 x 14 = 98,000

Therefore, you would ideally have around $98,000 in your 529 plan savings at this point.

The Bottom Line

It’s never too early or too late to start saving for college, but your mix of 529 plan investments should depend on your child’s age. Parents with younger children can focus on growing their college savings by investing more aggressively since they have enough time to absorb risk. As the beneficiary gets closer to college age, 529 plan investments should steer toward lower-risk investments, such as bonds, CDs and money market funds. 

In general terms, an 529 investment strategy by age involves more aggressive fund allocation when your child is younger, and shifts to a more conservative approach as they get closer to college age. Parents should review their 529 plan investment options periodically to make sure they are still on track to meet their goals. With only 18 years from birth to college, your investment objective may change quickly from growth to preserving capital.

Frequently Asked Questions (FAQs)

Should I do an age-based portfolio in my 529 plan?

Age-based 529 plan portfolios are designed to adapt the investment approach as your child gets older to balance risk and return, starting with a more aggressive strategy and becoming more conservative. This is a solid strategy, especially for parents of young children.

How much will my 529 plan be worth in 18 years?

The expected returns on your 529 plan will depend on a number of factors, including when you start, how much you contribute and how aggressive or conservative your investment approach is. 

If you open a 529 account when your child is born, make monthly contributions of $250, and follow a moderate-risk approach, according to our 529 savings calculator, you can expect to have around $100,000 to $120,000 in college savings by the time they reach 18. More aggressive strategies have the potential to generate higher yields, but they’re also higher risk.

How fast does a 529 plan grow?

This also depends on the type of investment strategy you choose, as well as a range of external factors. 10 years ago, 529 plans were averaging a return rate of around 3% per year, but in recent years this rate has increased to up to 12%. You could perhaps expect a moderate-risk strategy to have a rate of return of around  6 to 7% per year.

A good place to start:

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