Advisors, don’t let your clients’ babies grow up without a college savings plan.
The question becomes: How should clients prepare for this cost? There are two ways, but both follow a similar logic, according to Christine Benz, Morningstar director of personal finance, in her column, How to Allocate Assets for College Savings.
The method of saving for college is different than for retirement, Benz notes. Mainly because a person can save for more than 40 years for retirement, while saving for college typically involves half the tie frame and a much faster drawdown (four years and maybe grad school).
There also is the problem with a bear market during the college buildup, which can take a big bite out of savings if they aren’t apportioned correctly. Retirees may have some wiggle room while college-bound kids may not. As Benz notes, “Try telling your 18-year-old that he’ll have to wait until age 21 to start school so that his college fund will have time to recover.”
Therefore, college savings funds have a much “steeper glide path — the gradual shift from more volatile investments such as stock to more conservative investments such as bonds — in leading up to and during college than the typical glide path before and during retirement,” she writes.
In fact, the timeline is fast and furious: accordingly, when a child is age 0 to 6, the mix in a portfolio — roughly — should be 72% U.S. and foreign stocks, 24% bonds and 2% cash. The stock mixture begins dropping after age 6, while bond holdings grow. From ages 7 to 12, stocks holdings should drop to 52% of the portfolio while bonds come up to 41% and cash is 4%.