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As the College Bills Approach, Ratchet Down Risk in a 529 Savings Plan

When your son or daughter enters high school, or even before, start shifting some of the money from aggressive funds into more-conservative ones.

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QWe started saving in a 529 plan for my daughter soon after she was born, putting the money in aggressive stock funds. Now she's a freshman in high school. How should we adjust our investments with college a few years away? We're still adding to the account every month.

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ACongratulations for investing so diligently through the years! You're right that you're at a key turning point. When your daughter was young, you could afford to invest more aggressively because you had plenty of time to weather market volatility before you needed the money. But now that your daughter is within a few years of college, you should start shifting some money into more-conservative investments.

Deborah Fox, of Fox College Funding in San Diego, Calif., says it's a good idea to start shifting some money to more-conservative investments five years before the first college bills are due to make sure your balance doesn't dramatically dip just when you need the money. "I saw many families lose 30% to 40% of their 529 balances, and sometimes more, during the financial crisis of 2008-09, just before they needed those funds to pay for college expenses," she says.

She recommends two approaches for dialing down risk: The first is to move the account to a more conservative allocation, such as a balanced portfolio or an age-weighted portfolio. "That way, you'll still capture some growth but do so more conservatively," she says. Most 529 plans offer an age-weighted fund, a diversified portfolio that invests primarily in growth funds when the child is young and gradually becomes more conservative as the college date gets closer.

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SEE ALSO: Our Guide to Various College Savings Options

Alternatively, she says, you can invest 60% to 70% in a growth portfolio and 30% to 40% in an FDIC-insured savings account within the 529.

She recommends that you continue to invest new monthly contributions in growth funds, to benefit from dollar-cost averaging. With dollar-cost averaging, when the stock market drops, you can buy more shares for your money -- and then wait for those shares to rise over the years, she says.

If you don’t have to invest in your state's plan to get a tax break, Kiplinger's recommends the Utah Educational Savings Plan for hands-on investors, which offers low-cost Vanguard funds as well as an FDIC-insured bank account. For more information about our favorite 529 plans in several categories, see The Best 529 College-Savings Plans. For more information about each state’s plan, see our state-by-state guide to 529 plans and at SavingforCollege.com.

TAKE OUR QUIZ: How Much Do You Know About 529 College Savings Plans?

Got a question? Ask Kim at askkim@kiplinger.com.