NEW YORK (MainStreet) – Most parents try to set something aside for college costs, but although many put a lot of thought into just how to invest this money, many overlook an equally important question: when to shift out of growth-oriented investments like stocks and into bank savings or other cash vehicles that are safer?
Do it too soon and you could miss substantial investment gains. But if you wait too long, you could be forced to sell stocks or bonds during a downturn to meet the next semester’s bills and lose money as a result.
People saving for a 30-year retirement face a similar decision but have more margin for error, because they have options like working a few more years or tightening the budget. For most college savers, the shift to cash has to be done right the first time, so the money will be available during that narrow four-year window.
Because the financial markets are so unpredictable, there’s no guaranteed way to pick the optimum moment to shift college investments to cash.
If the accounts are fat – big enough to pay four years of tuition, room and board at a pricy private college – it can make sense to get out of stocks and other volatile holdings well ahead of time, to avoid the risk a market plunge would wipe out some of those savings.
Keep in mind, though, that college costs often rise by 6% or 7% a year. With many cash accounts yielding less than 1%, your college savings could easily fall short if you move everything to cash five years before college starts.
Most families don’t have enough set aside to pay 100% of college costs, and they want to get the best investment gains they can for as long as possible.
For guidance on timing the switch to cash, it’s worth seeing how the pros do it. Like a number of mutual fund companies, The Vanguard Group offers a series of age-based college savings portfolios in its tax-free Section 529 plans.
For people with children 5 or younger, Vanguard’s moderate-growth option puts 75% of assets into stocks, 25% into bonds and nothing in cash. A conservative option is 50% stocks, 50% bonds, while an aggressive one is 100% stocks.