Tweaking the Asset Allocation for College
Investing for college is different than investing for retirement because college covers such a short period of time. Your retirement assets can stand to fluctuate quite a bit, even after you retire, because even at age 60 or 70 you're still investing for a long period of time. College money gets spent quickly, leaving very little room for large value changes.
How other Assets Affect College Asset Allocation
A strong college nest egg involves more than just a college investing account such as a 529 plan. In many cases, parents planning for financial aid will try to limit their cash on hand to less than $30,000 or so to stay below the means protection allowance dictated by the school. If this is your case, be sure you have a home equity line available so you can easily access the equity if you need it.
I have an Employee Stock Purchase Plan at work. Is this a good way to plan on covering college accounts?
It absolutely is, especially if you think you may not qualify for financial aid. If your employer allows you to sell your stock right away and offers a discount on the market price, this is a great way to supplement your college nest egg.
You may have decided to simply earmark some of your own assets in a taxable account to your child's education. If you're planning on financial aid, realize that selling the taxable assets generates income that may reduce the aid. Consider moving enough assets to pay for two years of college into a 529 plan in this case, while your child is still in high school. If you do, sales and withdrawals won't increase your income for financial aid purposes. If you're not planning on aid, keeping the assets in your name with enough in fixed income to cover the next three years' tuition will keep the nest egg safe without hurting long-term performance.
Your employer may offer loans against the value in your retirement plan. While available, this isn't the preferred way to build assets for college. Better to borrow against your child's future earnings with a school loan than against your retirement.
When to Increase Fixed Income
The allocations of many 529 plans keep 10 percent or 15 percent of stock in the account even after the child has started college. Remember, the stock market can decline in value for three years in a row, or sometimes more. If you're concerned about saving enough for school and don't have other resources to cover costs if the account declines, move out of the age-based choice in the 529 plan and into the income or conservative choice when your child is a high school sophomore or junior. The account growth will slow to simply earning interest, but if the stock market declines your principal will be safer.
