YOU SHOULD PROBABLY BE MORE conservative with your children’s college savings than with your own retirement nest egg. Sound counterintuitive? Remember, your kids likely have no more than 18 years until they head off to college, while you may have decades until you quit the workforce—and you’ll likely live a few decades beyond that.
The implication: While you might initially invest your children’s college savings heavily in stocks, you should probably start moving toward bonds even before they enter high school. Let’s assume you plan to put a quarter of your children’s college fund toward each of the four years needed to earn an undergraduate degree.
With that in mind, you might look to have a quarter of your children’s savings in certificates of deposit, short-term bonds or similar conservative investments when they’re five years from their freshman college year. You might aim to have another quarter in conservative investments when they’re five years from their sophomore year, and so on.
Why this caution? Over some five-year stretches, stocks have lost money. Another reason: While you might spend your retirement money over 20 or 30 years, the deadline is a lot harsher with your children’s college savings, because the money is spent over a brief four-year period.
As you invest your children’s college savings, also think about what sort of account to use, whether it’s a 529 college savings plan, prepaid tuition plan, Coverdell education savings account or custodial account. As an alternative, some parents keep the money in their own name, perhaps stashing it in a regular taxable investment account, buying savings bonds or even using an individual retirement account.
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