Three life stage scenarios for 529 savings

http://www.savingforcollege.com/articles/20090731-three-life-stage-scenarios-for-529-savings

As any empty-nester parent will tell you, children grow up too fast. As they do, incomes shrink and expand, and markets fluctuate. As the years pass, it's important to continue to evaluate your investments and strategies for 529 college savings plans.

People choose to plop their money into age-based asset allocations that work essentially on autopilot and are adjusted by the plan administrator as your child gets older. The plans typically start out aggressively when a child is a baby and become more conservative as the child approaches high school graduation.

Anyone who does their own investing should review and rebalance their portfolio on a periodic basis, typically every year, says Joe Hurley, a certified public accountant and founder of Savingforcollege.com.

With the help of several experts in the field, we have mapped out three ideal college savings-plan scenarios, based on age and income.

Newborn -- $50,000 household income

This family has more than two decades for investing, considering that the family has some 18 years to prepare before the child goes to college for four years.

Cheryl Costa, managing director of AFW Wealth Advisors in Boston, recommends an all-equity portfolio.

When the child is very young most of the investments should be in stocks for maximum growth before they go to college, Hurley says.

"What they're supposed to do is have the more risky stuff from newborn to age 5," says Deborah Maloy, president of Wakefield, Mass.-based Maloy Financial Services.

But she admits that drops in 529 saving portfolios in 2008, and even before the historic market collapse, reinforced the fact that people need to consider whether they can deal with market volatility.

"They don't like seeing the plan go from $2,000 to $1,000," Maloy says. "Give some thought to, 'Who am I? What do I believe? Do I want to risk this?' Sometimes people think all 529 plans are created equal, but they're not. Some now have stable value and no equity exposure."

After maximizing their retirement contributions, these young families should try to contribute at least $10 to $15 a month as a start, Costa says. "You can revisit as you progress and earn more money," she says.

If you can afford it, Maloy, who's also president of the Financial Planning Association of Massachusetts, suggests putting in a large lump sum early in the child's life so it has a chance to grow, collect interest and accumulate.

"The sooner you start and more you can put in, the better," says Greg Wilder, Grant Thornton LLP partner in charge of the private wealth services practice for the southeast, based in Atlanta.

From there, Costa recommends monitoring the 529 every year or two to make appropriate changes in allocation and contribution levels.

8-year-old -- $75,000 household income

Near the halfway point to your child's high school graduation, Costa recommends moving toward this allocation mix: 70 percent equities and 30 percent fixed income. That's different from age-based portfolios, she says, which would be more conservative, with 55 in equities, 35 in bonds and some even in money markets.

Most people can expect to experience increases in their income and accumulate their savings over time, Hurley says.

"You don't have to assume the same amount being put in every month over 18 years," he says. "You can look to increase that over time."

It's wise to also encourage people to contribute to the plan, instead of, or in combination with, giving other gifts for birthdays, holidays and special events, Maloy says.

Although your contributions should have increased since the early years, advisers warn against overfunding if you only have one child. If you've saved based on the expectation your child will attend a private school ,and they decide later to go to a state school, you've oversaved, Costa says. The money, however, could be transferred to another family member or used for graduate school.

Choosing a prepaid tuition plan at this age can be risky because they are restrictive, Maloy says.

One option is to invest in a prepaid tuition plan that allows you to secure the current tuition at in-state public schools. Obviously that has pitfalls, considering that you don't know where your child will choose to go to school in 10 years, she says.

17-year-old -- $100,000 household income

Want to sleep at night? At this point, make sure your investments are no longer in stock market vehicles but are in more conservative, less volatile asset mixes, Maloy says.

This is the kind of goal that you really don't want to fall short on, she says. "I don't want to work with someone for 14 years, helping them, and I know college is their primary goal, and then say to them in year 12, 'We really thought the markets would do better than they did, so I'm really sorry.'"

In other words, don't get greedy.

Costa suggests having some equities in a portfolio at this age, possibly as low as 25 percent, with 75 percent in fixed income. Once children are in college, she recommends putting all in fixed income, or if you want to be a little aggressive, maintaining a 10 percent to 15 percent allocation in equities.

If families don't have other significant resources to pay for college, they need to be conservative, Hurley says. If they have other resources they can tap, they may want to stay at least partially in stocks to try to capture the most upside.

"They're gambling a little bit more, but they can afford to do that because they have other resources they can fall back on if necessary," he says.

But remember what happened to some people who had a child going to college in 2008 to 2009 and saw their funds, which had 15 percent to 20 percent in equities, plummet due to market conditions.

"A lot of people were caught off-guard or surprised with 2008 returns on their accounts," Costa says. "You really need to just be honest about your risk tolerance throughout the whole process."

Posted July 31, 2009