A college investment plan for all ages

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Unless your kids win the lottery the day they turn 18, you’ll probably be paying for at least part of their college educations.

It is hoped you foresaw this eventuality and began a college investment plan the day they were born.

Not everyone is an overachiever in the savings department, however. If you woke up one day to suddenly discover that your child turned 12 years old, you can still save up a tidy nest egg for college.

How much you need to save

Do you plan on encouraging a private college? Ivy League even? Your savings plan should reflect that.

Before starting your college nest egg, find out now how much a college education will cost the year your child heads off to the dorms.

A college calculator on Savingforcollege.com (a Bankrate.com company) will project the likely total cost of an education in the year your little tyke heads off to college — as well as how much you’ll need to save every month to hit that goal.

You may be amazed at the monthly savings tab, even though your child may still be in the crib. True, the cost of higher education is spiraling out of control, but saving for your children’s education isn’t an all-or-nothing proposition.

According to Nicholas Yrizarry, founder and president of Nicholas Yrizarry & Associates, a wealth management firm in Reston, Va., it’s not necessary to kill yourself trying to save the entire cost of college.

“The greatest thing that a parent can do — and this is from a parent — is to make your children invest themselves in the college experience and make them pay some. In my case it was half,” he says.

“They’re incentivized to try and get scholarships because they know that is part of their half,” says Yrizzary.

With a solid foundation of financial literacy education, kids should know that avoiding loans, if at all possible, is in their best interest.

That said, it’s easier for kids to get student loans than it is for parents to get loans to fund their retirement. Parents should not consider saving money for college unless their retirement funds are already flush.

10 or more years until college

Paying for college involves more than just savings in most cases. To determine how much you should squirrel away each month, take into consideration how much you plan to pay and whether your family may qualify for need-based financial aid.

This may be a good time to visit a financial planner to investigate all of the available options. Financial planners have some tricks up their sleeves that can help shelter college savings from financial-aid calculations.

For instance, some parents may be able to use a life insurance policy or a tax-deferred annuity to pay for some college costs.

“They are considered retirement vehicles for the federal formula for financial aid and therefore they are excluded from the calculations,” says Michael Gaer, president of Gaer Financial Group in Rochelle Park, N.J. “The benefits of sheltering the money from financial aid more than outweigh the tax ramifications.” The right savings vehicles depend on your child’s age and your family situation. While 529 plans are a good fit for most college savers, they are far from a one-size-fits-all solution.

Once the account of choice has been established, parents who begin saving early can afford to be aggressive with their investments.

Experts recommend putting at least 80 percent in equities at this point, with 20 percent of a college-savings portfolio devoted to fixed-income investments, such as bonds, CDs and Treasuries. Many 529 plans offer age-based portfolios with this type of mix for long-term investors.

Just like when saving for retirement, small contributions add up — and consistently adding a little bit is the key at this point.

“Contribute money every month, perhaps by signing up for an automatic investment plan. Contribute extra money whenever possible,” says Mary McConnell, director of college savings products at Charles Schwab.

5 to 10 years until college

Parents with kids around 8 years old to age 13 still have a long time until they will need to take their first withdrawal.

Those who have been investing all along will probably want to re-evaluate their needs and recalibrate their strategy.

“Has anything changed in your life? A new baby? A better-paying job? Consider these changes and recalculate your needs,” says Mary McConnell, director of college savings products at Charles Schwab.

For parents playing catch-up, saving a substantial amount will require bigger contributions. The temptation to use some market momentum to buoy returns should be avoided for the most part.

While there is time now to recoup losses experienced in the market, it may be prudent to pare back risk on investments and allocate more funds toward conservative investments as your child heads into the teen years.

“There are times to take a risk and times not take a risk. The closer you get to needing the money, the less risk you need to take,” says Adam Bold, author of “The Bold Truth About Investing: 10 Commandments for Building Personal Wealth.”

3 to 4 years until college

With a shorter time horizon, the late starter will likely have a different investment mix than an early starter.

A common mistake is to make up for lost time by gunning for the most returns possible in an aggressive investment plan.

As evidenced by recent market performance, that mistake can be costly if you’re caught in a downdraft with your pants down.

Whether you’ve invested in a 529 plan or just make regular contributions to a taxable account, by the time your child is a sophomore in high school, at the latest, the college investment portfolio should be almost entirely in conservative instruments.

“In my opinion, you have to be very conservative with at least 80 percent in fixed-income investments — whether CDs, municipal bonds or good-grade corporate bonds,” says Michael Gaer, president of Gaer Financial Group. “I hate to say it, but even cash or savings,” he says.

Many 529 plans offer age-weighted plans for parents who prefer to remain hands-off when it comes to their investments.

While the set-it-and-forget-it option may have worked in the early years of college planning, in the final years before college parents should check to make sure that the investments reflect the amount of risk they’re comfortable taking with their college fund.

According to Gaer, some age-weighted plans may be too risky for some investors, with as much as 60 percent of a 529 plan’s portfolio invested in equities in the lead up to college matriculation.

“In general, I always try and recommend an age-weighted plan, but if I see it’s too aggressive I will tell them to switch out of it. Most 529 plans have an option where you can invest in 100 percent bonds,” he says.

With today’s recession goggles firmly in place, it’s easy to see the wisdom in staying on the safe side of Wall Street. But in the heady days of a bull market, walking away from good returns to reap modest returns may be difficult, though necessary.

Plan B in case plan A isn’t working

Many people who have kids on the brink of college these days have suffered some kind of setback in their college fund.

For parents in that boat, Certified Financial Planner Lynn Mayabb, senior managing partner at BKD Wealth Advisors in Kansas City, Mo., recommends that they keep the money invested for a couple more years.

“If possible, avoid taking out money in the first year or two and let that account have some time to grow,” she says. “For most people, it is a supplement to other money that they’re going to be using, so they’re not taking out the full amount every year.”

PLUS loans and scholarships may be alternatives to withdrawing money from a college fund right away.

In the meantime, should parents hang on to stocks, or will this prove counterproductive?

Some advisers say it’s a mistake to lock in losses by selling after stocks have retreated, but others advise caution. “We feel like this recovery is going to be slow,” says Lyn Dippel, vice president at Financial Advantage in Columbia, Md.

Dippel says many people have told her they want to keep everything in stocks to avoid missing a rebound.

“Every indication says that this is going to be more like an L(-shaped recovery). The next three or four years are not going to be very exciting, so you want to stick with very conservative investment-grade bond funds or, if you have any stock in there at all, it would be kind of a traditional, value-type stock,” she says.

Unfortunately, there’s no quick cure for a depressed portfolio except time.

For more information about college investing, see Bankrate’s Financial Literacy series on College funding.