Success! Completing Order...
The best part about 529 plans when it comes to investing is while you do have investment choices, they are limited enough that you don’t have to build a whole portfolio yourself. Most plans have investment packages that give you the flexibility to invest in riskier but higher earning investments when your children are younger and get gradually safer as your child ages. These plans are called age-based plans.
Here’s what you need to know about age-based plans:
What they consist of:
Age-based plans consist of everything from savings accounts to mutual funds. Mutual funds are stock containing a variety a partial stocks in different companies. Mutual funds are considered less risky than individual stocks because whether you make a profit isn’t based on just one stock. Your money grows as long as most of the stocks are earning a profit. There are also bond-based mutual funds. Bonds are essentially loans to companies you’re investing in to earn some of the interest gained. They are safer than stock-based mutual funds, but not as safe as a savings account. Your investment package will generally have some bond-based funds in addition to stock-based mutual funds to even out risk.
The percentage of your money in safer investments such as money market and savings accounts gradually increases as your child ages. This gradual change is generally done by age bracket. For instance, a bracket for ages 0 to 5 will have much riskier investments than the investments chosen for the 12 to 17 year old age bracket. One reason why investments get safer with age is the stock market goes up and down. If you invest in a fund and then the stock market drops, you have time for the stocks to rise again if your child is 5. You don’t have that luxury if your child is 17.
The level of implied risk:
Age-based plans can be chosen in risk levels: conservative, moderate and aggressive. The more aggressive the investment package, the more stock-based funds versus safer investments. Aggressive plans have a higher potential reward, but there is more potential risk. If potential earnings is more important to you than a set amount being available, go with the aggressive fund. Moderate or conservative funds may be a better option for most people.
When in doubt about which age-based option to choose, talk to your financial advisor or a representative from your 529 college savings plan.