529 Plan Contribution Calculators. They’ve Been Lying to You.

There’s dozens of calculators/ tools out there, which can help a family plan for college. Place in the age of the child and poof; see how much college will cost when the beneficiary turns 18. Then there’s a step deeper. Enter in an investment, pick an annual return and poof; see how much you should be saving a month to reach a savings goal. But there has always been a flaw with these types of tools when it comes to 529 plans.

Simply choosing a static percentage for your investment return is fine when it comes to static plans. But the majority of contributions these days are going towards age-based investments. These portfolios have varying levels of risk and high diversification. Unlike static (unchanging) portfolios, which may be highly concentrated in equities, age-based portfolios allow you diversification based on your investment horizon. As the beneficiary ages and gets closer to college, the portfolio automatically reduces investments in higher risk, equity-based investments, and shifts the funds into more conservative ones.

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So if we look at an investment that does not change over time which is 60% in equities and 40% in bonds, choosing a modest return can’t hurt when creating a college plan. But when it comes to an investment, which has different allocations depending on the child’s age, choosing a static number can lead to detrimental results. If someone is thinking about opening an age-based option for their 2 children, one aged 12 and one aged 6. There is no reason to have the same rate of return for their plans when the 6 year old could start out with 20% or more equities in their portfolio. Using the same return for both children could see the 12 year old with a drastically underfunded college fund or the 6 year old with a drastically overfunded portfolio.

At Gradvisor, we take this into account when recommending age-based portfolios. We want to give our users a realistic idea of how much they should be contributing every month to reach their savings goal.