While many 529 college savings plans offer standardized glide paths that reduce risk as the child gets closer to college, these paths are one-size-fits all.
There are other approaches parents can consider. Instead of choosing a standardized portfolio, parents can manage 529 fund asset allocations to achieve a better fit for their educational savings goals and risk tolerance, as their child grows closer to college age.
529 plan savers can do so in two ways:
- Follow a traditional 529 plan glide path that changes the asset allocation at critical intervals during the beneficiary’s journey from pre-school to his or her senior year in high school.
- Or, add as much as 8% to a 529 plan’s performance over its entire 17-year timetable by merging an aggressive, stock-heavy portfolio strategy with an age-based portfolio model that curbs investment risk the closer the child gets toward his or her first day of college
Let’s examine the glide path college savings model, with a closer look at both of the strategies listed above.
College 529 Glide Paths Defined
What’s a 529 plan glide path?
To understand glide paths, you must first understand age-based college savings plan portfolios.
An age-based portfolio flips the script on college investing, changing a static investing mindset into a dynamic one. In real-world terms, an age-based portfolio model shifts the mix of investments as the college-bound child advances in ages and inches closer to the day he or she walks onto campus as a first-year college student.
The “glide path” portion of an age-based 529 plan starts with the opening of the account, with a preset estimate of what the college saver will need when his or her child turns 18 and goes to college.
In general, a 529 glide path has three larger phases, shifting from asset appreciation to asset balance to asset conservation:
- Pre-school and the first half of grade school. The asset appreciation phase is designed to emphasize growth when the beneficiary is very young. This involves a heavy emphasis on stocks and very little emphasis on bonds.
- Second-half of grade school/middle school. The asset balance phase is designed to emphasize balance between growth and safety. This involves a roughly equal mix of stocks and bonds.
- High school: The asset conservation phase involves a gradual shift throughout high school, ideally on a yearly basis, to a heavier emphasis on bonds, and a lighter emphasis on stocks.
As the child ages, the 529 savings plan portfolio adjusts, as well, to accommodate the additional assets now in the portfolio, and to reduce the risk of losing that money, while still seeking to keep the 529 plan growing.
The battle plan with an age-based 529 portfolio is direct – it starts with a heavy dose of equities, to build assets, and gradually shifts to a more balanced mix of stocks and bonds as a son or daughter inches close to college, at age 18.
Glide Path Timeline
Glide path investing does have checkpoints, such as intervals that occur every three years until high school, and then every year until age 18.
Here’s an example of how a glide path looks using an interval model:
Ratio of Stocks to Bonds
16-to-19 years until college
Stocks at 100% and bonds at 0%
12-to-15 years until college
Stocks at 90% and bonds at 10%
8-to-11 years until college
Stocks at 70% and bonds at 30%
4-to-7 years until college
Stocks at 50% and bonds at 50%
0-to-3 years until college
Stocks at 25% and bonds at 75%
Zero-years to college
Stocks at 20% and bonds at 80%
The idea is to build assets early, then protect those assets as the 529 plan beneficiary inches closer to his or her first day on campus. Following this glide path in a disciplined and efficient manner can get the job done.
Holding off on Age-Based 529 Investment Models
Parents can tweak the traditional glide path strategy and earn even more cash for college.
In fact, there’s an emerging school of thought that traditional age-based asset allocation portfolios may move off of the asset appreciation phase too quickly. Considering college savings plans in the context of the family’s other investments, college savers can tolerate a higher level of risk during the asset appreciation phase. If the family starts an automatic investment program when the child is very young, less money is at risk of loss and there is enough time to recover from investment losses.
College savers can gain an extra 1% in the annualized rate of return by investing aggressively in stocks in a 529 plan for a longer initial time period, and then moving to an age-based savings model for the remaining years of the plan.
One study that tracks a “holding pattern” 529 investment approach for a 204-month period from 1950 to 2017 shows that delaying the onset of an age-based asset allocation by up to 10 years can increase the annual return on investment by as much as one percentage point.
It does so without significantly increasing the investment risk, primarily by conservatively inching portfolio performance forward by 0.1% in each year where the shift to conservative assets is delayed.
Over time, this delay in implementing an aged-based portfolio model can result in an 8% rise in total savings over the 529 plan’s entire 17-year time period.
This strategy, while highly effective, is best deployed with the assistance of a professional money manager – preferably one who specializes in creative college financing strategies.
He or she can walk you through the specific steps to get on your own 529 glide path, and maximize your college savings experience.