How do you invest the money you’ve set aside for a loved one’s college education? Many parents and grandparents wonder about this question.
The standard advice is to put money into a 529 plan. That’s sound, and I covered the basics of 529 plans here. But then what?
Investors face several investment choices. Typically, 529 savers can either build their own portfolio from a handful of funds or pick a “comprehensive” off-shelf solution. Last week, I covered the funds and solutions Vanguard has provided 529 savers.
Still, investors have to make a decision. The sticking point is that most investment commentary and advice is geared toward saving for retirement, and rightly so; it’s many investors' main priority. Frankly, I’m typically thinking of someone investing for retirement when I advocate for spending time in the market.
But for many parents and grandparents, saving for retirement isn’t the only priority—paying for a child’s college education is another “big” goal.
College isn’t the same as retirement.
Retirement is open-ended, can last for decades, and means different things to different people. College is a little more straightforward and defined. With college, the bill is due over four years (unless you take out loans). And you have a pretty good idea when that bill will come due. (For example, odds are my toddler will attend college in 2040.)
In short, if you’re setting aside money for a youngster, you need to think long-term. But, as college nears, you must adjust your thinking and portfolio.
As you’d expect, Vanguard (and the mutual fund industry) have some products to do this for you, but you can also manage the process yourself. So, let’s roll up our sleeves and dig into how you, as a Vanguard investor, should approach investing your college savings.
Key Points
- Generally, you should hold more stocks when your beneficiary is young and more cash and bonds as college nears.
- More important than following an “optimal” path is finding the path that works for you.
Rules of Thumb, Not Written in Stone
If you haven’t read my article discussing Vanguard’s 529 plan options (or just want a refresher), now would be a good time to pause and read it—see here. But if you’re familiar with the concepts of glide paths, age-based targets and the Target Enrollment series, carry on.
Long-time readers may be surprised to hear this, given I’m generally not a fan of one-size-fits-all solutions, but I don’t have an issue with you handing the ball to Vanguard through the age-based tracks or the Target Enrollment series. Your investment options within the 529 plan are limited.
Plus, there is value in keeping it simple and freeing up your capacity to focus on other (potentially larger) parts of your portfolio. And, as I said last week, the Target Enrollment glide path is quite clever.
Of course, you don’t have to put your 529 plan on autopilot—I haven’t!