Managing 529s through the volatile market

Parents Forum
1

I’m trying to figure out how to best continue saving for my S26 and protect assets for my D22.

Their 529 accounts have performed decently over the last 17 years but this market mess has definitely taken a toll, right when we are starting to need the money. We stopped contributing to D22’s in January and are cash flowing her college costs this year (because we can and because maybe it will give the 529 more time to recover).

S26 is a different story. These are major contribution years for him. We deposit a good chunk of bonus money into the 529 accounts every year and save monthly. I’m starting to think maybe we should keep it in cash. It’s tough to put a bunch of money in and see it wither away. He’s going to need it in 4 years.

1 Like
2

Does your plan offer a short-term government or highly rated notes option (90 days maturities or less)?

3

I have no idea :slight_smile: I can try to research. We aren’t terribly investment savvy, and set the accounts to an age-based risk tolerance program the 529 plan offers. We have always been “set it and forget it” sorts…

4

If you’re in age based targets, they automatically adjust. My daughter is down 5% this year - she’s in a 2022 with vanguard. I took a little out. But I’m counting on a market return. Hoping :slight_smile: so I only withdrew half her semester costs.

For ‘26, you have time so you are getting in at a cheaper price. If you believe history, you’ll be recovered and then you’ll be lucky you bought in at lower prices.

You should try to learn more about investing. The brokerages all have great online education tools.

If you are buying a tv, you learn about all the features. If you have thousands and thousands of dollars in the market, you should understand - at least the basics. After all it’s worth many times more than a tv !!

But if you’re in an aged based program, the investment firm is already handling the strategy for you based on the age. However, some like Vanguard, have different levels of risk. Their 2022 plan is conservative but not ultra conservative. They do have an ultra conservative option. But if you go there now you’ll protect more downside but not share in upside.

The other thing. Assume you have less - like 25% - and only choose schools you know you can afford…tons of schools have great merit aid. This way you take away that fear and that constant stress. You’ll know you’re in a good place no matter what.

3 Likes
5

Great advice and love the TV analogy.

6

Our 529s are with the NY state program, which we opened when we lived there bc NY state has a tax break for 529 contributions. We left the accounts there when we moved to CA because CA has no such tax break and the costs of the NY state program are low. It was doing well, in an age-based program that I picked because I don’t believe I can manage investments better than a professional and because I don’t want to be terribly hands-on.

That said, I haven’t had to worry much over the years with the age-based approach. However, our D22’s is down 13 percent this year—way more than 5 percent.

As for my S26, it seems like your advice would be to stay the course. I can see the virtue in that and it’s been our approach thus far. I appreciate your push to learn more. The 529 has a number of investment options so I will check them out.

7

U should check with the company managing your daughters - you may be in their aggressive choice.

I’m with Fidelity in NH and Vanguard in NV. In fidelity for 27 I’m aggressive. For vanguard I’m the 2nd of 5 levels in conservative. In my case I don’t have a kid in 27 but I have enough cash flow that I’ll leave the money in for a future generation if the markets don’t come back. Or for grad school. Also my kids chose much cheaper colleges than I planned for so that’s an option for you too. …go less expensive, then don’t worry.

You have to decide now - if I need the money, do I want to take it out ? So I want it in a money market to eliminate downside risk ? But then know that if the markets come back you won’t share in the growth. In a lot of ways investing is gambling.

As for ‘26, I’m not making a recommendation. It’s why I never became an investment advisor. Don’t want to be responsible if somebody does badly.

Most experts would say that with a 4 year timeline to hold…that investing is long term. Your investment company should be managing that risk you should go on your site - see what they are invested in and call and ask why and make the decision as to what to do with your money.

At least over time it sounds like you are well ahead but this is my fear of everyone overspending on college…not saying you are but when I read the different chats of people spending everything and taking loans. We’ve had gains for so long that no one contemplates the scenario we are in now.
The difference today Vs b4 - the fed is trying to diminish growth due to inflation.

Good luck to you.

1 Like
8

Thanks—I’m sorry, I didn’t mean to say you were giving advice. I think it’s a helpful reminder that 4 years still fits within a long-term view, per most experts. I think I’m getting skittish because I don’t like seeing the overall total in a free fall. Four years doesn’t seem that far away to me.

My D’s account is in the conservative fund—all the more reason that the 13 percent drop has bothered me. My S26 is in moderate—and is 14 percent down. I think I will give them a call and ask for some advice.

As for the price of college—indeed, my D22 is at her public flagship (UCLA) and it’s probably possible for us to cash flow it the whole time. She’s thinking about law school so she could tap the 529 then. Not sure what my son will do, but no, we don’t plan to take any loans for anyone’s undergrad. We are very fortunate to be able to do that.

Thanks again for your perspective.

1 Like
9

Our financial advisor suggested we move to those options for the time being as there is significant principal downside risk in the medium to long term bond markets as interests rise to uncertain levels, which is where age-based primarily was for our kids at the beginning of this year. The accounts stopped bleeding right away and have been about flat over the last six months (prior to that we had on age-based which in our case included longer bonds and some stocks).

10

What we found from our research is that they manage stock/bond (medium term) mix, but are not really set up or managed to go short term during periods of interest rate volatility that carry depressed stock and bond markets at the same time. Even the Vanguard conservative age based had medium term exposure for last year’s goal date fund, when we looked.

11

If you use age based you are correct. That’s why it’s down 5% or so this year. You have to request the money market or aggressive. As they told me, they have 5 levels of risk and the current age based is set up for second most conservative. Mostly bonds - domestic and Intl but some stock and some cash.

Even bonds fall as rates rise.

But mainly if someone has investments they need to understand them.

I know that’s not easy for everyone but I remember in 2008 when all these near retirees were dying that their 800k 401k was now 400k. Didn’t know the difference between a stock or bond. Never changed any investments.

At least today we have age based. It helps but everyone wants to sell high and unfortunately that’s not reality.

We’ve been here b4 and always recover but with the fed trying to eliminate growth, it does sort of feel differently this time. The really good jobs reports aren’t helping. They are looking for bad data, not good
I think we r headed up but I’m no better than a professional picker, who also typically aren’t that great. Hence an s&p fund.

But yeah to your point - you have to look under the hood to see what you actually own.

12

There’s a difference between needing the money to pay for college and preferring to have it.

If you need the money you really can’t afford to take risk, esp. with the ‘22. There’s no reason the stock market couldn’t drop another 30% and stay there for a decade. I don’t think it will but investors don’t care what I think.

So, if I needed the money I’d be going mostly to cash—money market, t bills, I bonds—for any money I plan to use in the next 3-5 years. You could keep 15-20% in a broad based stock index fund if you want.

There’s more flexibility with the ‘26 as you’re looking at a 4-8 year timeline. Conservative age-based portfolio is probably fine for that.

If you’re worried about FOMO in the stock market you can shift your retirement funds to a more aggressive allocation. There’s likely a longer time horizon there.

If you can pay for college even with heavy losses then the downside risk isn’t as concerning and you can be more aggressive.

Btw, no financial advisor I know considers 4 years long term. The market can drop and stay down longer than that easily. You just need to decide if you can still pay for college if it does.

I-bonds are a pretty good cash option right now given the inflation rate and especially if you’re in an income bracket where gains aren’t taxed if used for education. You can put in 10k/year per person through treasury direct (ignoring the tax return option, which does allow additional investment but isn’t as straightforward).

2 Likes
13

It still makes sense to pay eligible undergrad expenses from the 529 even if you immediately replenish the balance with what you could have paid in cash. That way you get to access the investment returns tax free and the amount left in the account shifts more towards principal, which is never taxed even if used for non-qualified expenses. Otherwise a future withdrawal (say your kid gets a scholarship for law school) will incur extra taxes and in some circumstances a penalty.

2 Likes
14

OP- it’s hard to answer this question without a fuller picture of your entire financial life.

Do you have life insurances? Do you have disability insurance? How old are you?

Start there. I’ve got friends who are fretting over a 10K or 15K dip in the 529 (which is of course troubling) but they can’t be bothered sending an email to their HR rep at work to make sure that they’ve got adequate protection on the BIGGEST risk to their family- i.e. that one of the breadwinners will die or become disabled, leaving the family without a safety net.

If you are cash flowing college this year- is it a tremendous and painful sacrifice, or just some belt-tightening? How has your lifestyle been effected by inflation; do you have equity in a home, do you pay off your credit card bills every month, do you have other consumer debt (car loans)?

Agree with the I-bonds suggestion above (good call, Politeperson) since they are a no-brainer. Otherwise, recognize that moving to cash and cash equivalents for your younger child means more to get eaten up by inflation… so you get to “lock in” the value of what is in a cash equivalent, but the purchasing power is going to erode every month if we stay in an inflationary environment.

But get a handle on the rest of your finances before making any changes. This is a blessing in disguise if it forces you to line things up in the “harder to deal with” categories vs. just tweaking the mix in the 529. Folks love to tweak the 529, but in relative terms, being underwater on your house because you’ve got an adjustable rate mortgage which “suddenly” adjusted (no, it wasn’t sudden, you just didn’t read the fine print) is going to hurt you a lot more in the long run. Especially if you are cash flowing tuition with only modest changes in your lifestyle…

15

Thank you, everyone. I’m definitely going to research the I-bonds. (And other things you guys have talked about that I actually need to look up to understand.)

I’d like to think our overall picture can weather the storms. We do contribute max to our 401ks, have life and long-term disability insurance. Our mortgage is a fixed rate that we refinanced last year before rates went up. We have $1m+ in home equity, though that has gone down a bit since the rates went up (according to Zillow). We have 12-15 years of working left. We like where we live but might sell/cash out the house and move somewhere cheaper or wherever our kids land.

We each receive 20-30 percent of our yearly income in bonus and we don’t use much of it to live—we either put it into 529s, IRAs, sometimes a house project. That’s why it’s possible to cash flow the tuition. Rather than put it into the 529s we could use it to pay tuition as we go along or put it in a money market or I-bond.

16

You’re doing great - actually sounds like me.

With the I Bond - and not sure if it can be done in a 529 - but just know, the interest accrues but doesn’t pay til you cash it out - and if you redeem before 5 years you give up 3 months interest.

The rate is good for 6 months and then adjusts with inflation. The current rate is 9.62%.

You can do up to $10K a year per person.

Good luck.

1 Like
17

That depends on your comfort level.

The rule is to buy low, sell high - or “buy on bad news, sell on good news”.

Not investing while prices are low (because they could still go lower before they recover), and only investing again AFTER the train has left the station, is how people tend to minimize their return, or worse, are taken to slaughter with the other cattle.

So that’s what the “wisdom” will tell you, but that doesn’t mean that this is something you are comfortable with.

As far as your daughter — yes, hindsight is 2020. A good investment adviser would have told you 2 - 3 years ago to move one or two semesters’s worth of money into low-interest/zero risk money market. This way, if the market continued favorably, you’d dissolve some of the equity holdings - but if the market dipped, you’d start drawing from those money market funds.

Where you are now, it truly is everyone’s guess, whether markets will drop further by year-end, hold, or possibly recover a bit. One factor is, whether your 529 will cover all 4 years? If so, you basically should be making withdrawals each calendar year to coincide with expenses. There is no “catch-up” provision.
But, if you only have 3 years saved for, and know that you’ll be funding a year from “cash”, then the CURRENT year might seem to be a good year to do that and leave the 529 alone until the market has recovered a bit.

In my case, I have left-over 529 money that I’m using for graduate school, but I know that for a year or more, I will have to dip into other savings. So I will let the 529 “simmer” for now. No rush to “sell” while prices are down.

1 Like
18

OP- you guys sound like prudent savers and kudos to you for having your financial house in order (and your actual house!)

One thought for you as you’re doing your investment research- look up dollar cost averaging. Not for the 529’s, but since you guys are careful savers, it’s a technique for keeping a portfolio balanced without having to sell on the news, have sleepless nights, etc. You are perfect candidates for this strategy- you don’t have big expenses looming besides college and retirement, you live beneath your means, and have been using your bonuses to protect your long term financial future and not to buy toys. AND- you don’t need to become Warren Buffett in order to use the strategy, a modest amount of knowledge about your investments (which it seems like you already have) is enough.

Good luck!

3 Likes
19

But again: in these circumstances you should withdraw from the 529 and replace it with new cash. Don’t just “leave it alone” unless you intend to apply the qualified expenses to other tax deductions.

1 Like
20

I’ll just leave the daughter’s account alone, not contributing anymore to your son, pay cash for your daughter college. Then in a few years when the market recovers, you can take the money out of your daughters account to pay for the son. I think you can transfer 529 account to another person.