Vary College Savings Strategies as Children Age

Parents should consider a riskier investment strategy for a younger child’s college savings account.

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Brad and Camille Mortensen are nervous about saving enough for college for their four children – especially as they get closer to needing the funds in their 529 plans, tax-advantaged college investment accounts.

But the Utah parents continually review their accounts and have a strategy for each of their four children, who range in age from elementary school to college.

The Mortensens and college savings experts offer the following advice for parents saving for college for children of various ages.

[Get tips on saving for college before a child is born.]

1. Elementary-age children: The Mortensens' youngest child, Brooks, is in third grade. For him, the couple likes to invest in an age-based plan option with more risk. An age-based 529 plan automatically adjusts to more conservative options as a child ages, and typically includes fewer stock-based investments in favor of keeping more money in savings and money market accounts.

New York-based certified financial planner Allan Katz agrees parents should have a riskier portfolio and investment mix for younger children. For instance, a 3-year-old has 15 years before he or she will need the money for college, he says. There will be enough time to recover if stocks drop in value, as they did in 2008.

For families who choose to buy mutual funds within a 529 plan individually rather than as a packaged age-based plan, and have children who have more than a few years left before college, Katz recommends buying more stock-based mutual funds when stock market values drop, since they can wait for values to increase.

[Take these steps before opening a 529 plan.]

2. Middle and high school students: Collette Mortensen is in seventh grade and Cameron Mortensen is a sophomore in high school. For this age range, their parents use a less aggressive age-based plan.

Katz agrees with investing more conservatively as children are closer to using the money, but he says the amount of time children have before they use the funds isn't necessarily dependent on their age.

A student in high school may need to pay for the first two years of college within four years, but they'll have a longer time frame to invest the money for their junior or senior years or in graduate school.

[Find out how students can use 529 plan funds in high school.]

3. College students: Brynn Mortensen, a first-year student at Utah's Weber State University, is getting a lot of her education paid for by scholarships. She's already discussed with her family that she plans to attend graduate school.

Her parents are still making regular contributions to her account. Her investments have about the same level of risk as those of her sibling in high school.

So while Brynn is a freshman in college who plans to use her 529 plan money in graduate school, she essentially has the same time frame for using those funds as a high school student planning to pay for an undergraduate education.

4. Children of any age: Parents with children of all ages shouldn't set a 529 plan as an age-based plan without an annual review. A 529 plan can have good investment growth one year and not the next.

If families choose a plan that automatically adjusts as children age but never review the plan, they won't notice changes in managers, performance or fees.

The Mortensens chose to invest in Utah's 529 plan, which received investment research firm Morningstar's highest rating for 529 plans eight times, says Lynne Ward, executive director of the Utah Educational Savings Plan. The plan regularly reviews the investments within its portfolio options as well as associated fees.

Each family needs to review portfolios regularly and consider not just the amount of time until their child goes to college, but also their risk tolerance and the economic climate, Katz says.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.