529 Accounts and The Volatile Market: Reader Question
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I love your financial advice/information, so I came up with a question for you–and no surprise, it’s baby related! If you feel so inclined to share your wisdom…
We’re starting to look into the idea of a 529 [education savings account] for the little one–something I believe you’ve got Mini hooked up with?–but we both keep questioning whether now is a good time to START an investment such as the 529, given the uncertainty in the market.
Basically, the question for me comes down to should we start a 529 and hope that time balances out the current market, or should we put the same money into a savings account until some later date (at which point we would probably start the 529).
Thoughts from the financial whiz?
. . . And here’s my response:
Thanks for the question, I will try to answer it in more detail on the blog, after doing some research about what other people think, but the short answer is, yes, I do think it’s a good time, and I’ll tell you why we continue to invest every month for Mini:
Mini has 16 years until college, and your baby has over 18. That’s a long time for the stock market to recover, and in most cases the stock market goes up over that amount of time. The market will be volatile for a long while, but if you invest in stuff that’s reasonably diverse, I still think you’ll end up way ahead over the course of 18 years. If you put money in a savings account, it will not even keep up with the inflation rate, and if you then decide to put money in the market in a few years, the chances are that prices will have gone up and you’ll be buying less shares in mutual funds for more money. Plus, you won’t have as many years to “buffer” yourself from market fluctuations.
Mini’s 529 has lost money (on paper) in line with the market. It sucks, but I don’t really check the statements very often, because unless it goes down like 50% or something totally out of sync, I know it’s just the crappy state of the market. We continue to invest every month, though we might start breaking it up over a weekly basis, just to dollar cost average as much as possible.
After looking around the web for more information, I’ve determined that whether or not you choose to use the 529 right now has a lot to do with how much time you have before your child is due to start college. So for young kids and unborn babies, I think the 529 is still a good option, even if the market is volatile for many years to come. [Insert disclaimer here about how you are taking financial advice from somebody who has a PhD in English literature, and absolutely no financial training whatsoever–not even an Econ class, mind you–other than the School of Hard Knocks and Bad Debt Balances and several readings of Capital, so your mileage may vary, and take my advice at your own risk.]
Additionally, the Federal government’s financial aid page seems to agree with my rationale for the long time frame afforded by starting early on college savings via 529 accounts:
If the stock market plummets when the child is young, the percentage losses might be high, but the dollar losses are relatively small. That’s because the family most likely has not yet saved a lot of money in the college savings plan. On the other hand, when the student is about to enroll in college or is already in college, there is much more money at risk and much less time to recover from losses. You should plan for the possibility of losses, since the stock market has historically had a big drop at least once a decade. Even so, overall returns on investment tend to higher than other savings vehicles if you have long enough of an investment timeframe.
There are many people, of course, who have been putting money in 529 accounts for years, and saw their balances drop significantly in recent years, when their child is within a few years of attending college. I would have to say that these people are more or less in the same position as those people near retirement who had too much of their money still in the market and not removed to more conservative investments. If you are thinking of starting an educational savings account now for your child who has less than ten years to go before college, you may want to think carefully before investing in a savings account that invests in the market. For information on how 529s are handled in your state, see SavingForCollege.com, which also has recommendations about age-based allocations, etc.