09 Mar Lump sum vs. monthly investment for 529 plan

Q. I want to save monthly for our 529 plan. My husband wants to invest a lump sum from year-end bonuses. What strategy is smarter?
— Savers

A. It’s not uncommon for married couples to have different savings strategies.

And really, there is no “one size fits all” solution.

First, you should take a step back and think about what your goal is, said Matt Masterson, a certified financial planner with RegentAtlantic in Morristown.

Do you want to fully fund your children’s education or just provide as much financial help as you can?

“Identifying the goal will help you understand the savings required to reach that goal and better frame your decision making process,” he said.

Next, it is important to look at the situation from a cash flow standpoint.

If your monthly cash flow and budget allows for 529 plan contributions, monthly contributions are a great way to systematically save, Masterson said.

“Automatic monthly contributions also can help to provide some discipline, if that is needed,” he said. “Having automatic contributions takes away the option to spend that money elsewhere.”

Masterson said relying on year-end bonuses to fund the 529 plan can be a problem if there’s a year with no bonus. That would mean you lose a year of saving.

“Without taking a disciplined approach to saving, it could also be easier to prioritize other goals, say renovating a kitchen or buying a new car, and pushing off a 529 contribution until next year,” he said.

From an investment standpoint, one of the biggest challengers we see investors face is deciding the best time to invest, especially if you’re talking about a significant amount of cash.

“If you invest the funds and the market drops quickly thereafter, you may have regrets about making that investment,” Masterson said. “And if the market is turbulent, you may hold off on making an investment and in turn miss out on a rising market.”

Because markets tend to rise on average, Masterson said, investing incrementally rather than in lump sums tends to cost investors return on average and has generally underperformed lump sum investing, but at the same time, lump sum investing requires a higher risk tolerance.

So you need to consider your risk tolerance. How will you feel if you put a lump sum of cash to work and the market declines 10 to 20 percent shortly thereafter?

Also be sure to understand your cash flow and overall discipline around money, Masterson said.

“If you struggle to carve out savings on a regular basis, a disciplined monthly savings approach may better fit your needs,” he said.

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This post was first published in March 2017.