529 aged-based vs US total market

[shanaling]

For 529, which option would you choose? If I only contributed in the first 3-5 years of their lives and it’s not expected to be the full amount anticipated for college and I plan on working while they are in college, is it reasonable to do US total stock market?

[FINate]

It's all about investment horizon, or how long until the funds are needed for college. Starting in a total stock market fund is fine early on, but you need to remember to gradually move it into more conservative assets (e.g. bond funds) as you get close to drawing down. Otherwise, it's possible that the market takes a dump right before you need the funds, which is the worst possible time to sell. For this reason, and because I'm lazy and forgetful, I put our 529s in target date funds roughly corresponding to when the kids will be entering college.

[reeshau]

I agree; you are setting this up to run on its own very early--good for you.   But, you are also keeping yourself from having to look at it down the road, which is just the time when you need to put on the brakes a bit, and prepare for withdrawals.

I actually did exactly the same thing: funded to max of State's deduction from years 0-5, at which point I think it will grow into "enough."  I definitely put it into age-based funds, which are nearly identical to total US stocks for a good number of years.

[roomtempmayo]

For 529, which option would you choose? If I only contributed in the first 3-5 years of their lives and it’s not expected to be the full amount anticipated for college and I plan on working while they are in college, is it reasonable to do US total stock market?

We have our one year old daughter's all in a total market fund with auto-investments. 

I'm sure we'll reevaluate in 10 or 12 years, but for now we're well outside of the point where we're in danger of getting caught by a particular economic cycle.

I think there's an under-stated case for just letting it ride in a broad index all the way through.  This isn't like your retirement nest egg where most people are reasonably going to have a pretty low risk tolerance when they start drawing since there isn't much of a Plan B.  With paying for college, there are all sorts of Plan Bs: supplementing with wages/cashflow, tapping home equity, reducing consumption, or anything else you can think of to plug a relatively small gap each year.  If you send your kid to a place where the room/board/tuition are $40k annually and the market declines 25% in year one and stays there, you still only need to make up $10k/year, or $833/mo.  The practical downside risk to staying in equities isn't likely to break you.  However, if you transition to bonds or cash three years from the start of your draw and seven years from the end, you'll likely forego significant gains.

[Louise]

We have a kid starting high school this year. We opened up a 529 when she was about 5 days old. I did the age based investment, but then switched to all stocks last year. We also have I bonds that we can use for college tax free.

However, now that the Secure Act passed and we can move some of that money to a Roth for her, I'm happy having it all in stocks. We can always use money from other sources if we need to and use the 529 money to give her a jump on her retirement savings. We'll see how things shake out in a couple of years.

[midweststache]

It's all about investment horizon, or how long until the funds are needed for college. Starting in a total stock market fund is fine early on, but you need to remember to gradually move it into more conservative assets (e.g. bond funds) as you get close to drawing down. Otherwise, it's possible that the market takes a dump right before you need the funds, which is the worst possible time to sell. For this reason, and because I'm lazy and forgetful, I put our 529s in target date funds roughly corresponding to when the kids will be entering college.

Ditto.

[YttriumNitrate]

For 529, which option would you choose? If I only contributed in the first 3-5 years of their lives and it’s not expected to be the full amount anticipated for college and I plan on working while they are in college, is it reasonable to do US total stock market?

I'd just stick it in the U.S. total stock market. You said "lives" so you have at least two kids. Assuming at two year separation, that means you'll be paying college expenses for at least six years. If the market tanks right before your eldest enters college, you can have the 529 plan funds to pay for the later years of schooling.