Investing for education
SET UP A PLAN AND START AS SOON AS POSSIBLE
AMoneyweb asked: What’s the best investment strategy to save for our children’s future education expenses? Asset Protection International financial advisor Jesse Morgans answers:
The question on every parent’s mind is: “How am I going to pay for my child’s education, when interest rates are up and the economic pressure is on?”
Institutions such as Old Mutual, Momentum, Sanlam and Discovery have offered their solutions to the problem, with products ranging from flexible investments to tax-free savings. reader
Looking deeper into investment options, there are three factors to consider:
What are the costs associated with the product?
What are the underlying investments that can be accessed through the product?
Are there any penalties associated with the product?
The option of choice would be a simple, tax-free savings account that allows you to save R33 000 a year.
These products are easy to access, cost effective and you can access the full capital amount at any point without penalties.
A concern for investors saving for retirement is being able to make a decent return over and above inflation. Education inflation is considerably higher than that of headline inflation.
On average, an education fund must get a 9% return compounded per annum to keep up with education inflation.
This suggests an investor should target a return which is consistent with that of a multi-asset high-equity fund, if not that of a full equity fund, depending on the client’s risk profile and time frame, to ensure a net real return (after costs and inflation).
Private high school and university fees are expected to become frighteningly expensive.
The sound thing to do is to start an educational fund in the year of your child’s birth.
If your child was born in 2017, you should contribute a monthly amount of R1 000 to R1 500 escalated at 9% per annum, with the aim of fully funding your child’s tertiary education. R1 000 per month escalated at 9% pa over 18 years, with an estimated annual return of CPI (6%) + 7 compounded annually, gives an estimated capital amount of R832 419.
This capital amount should be able to fund three years of university at an estimated cost of R237 000 per year.
If you haven’t started an educational fund early on in your child’s life, your savings strategy shouldn’t deviate from that of the above.
The variable that must change is the monthly amount you contribute, to make up for lost time.
It’s also a good idea to include a life cover policy on either one or both parents. The amount doesn’t have to be excessive.
Note, the example above illustratea possible rates, solutions and outcomes. These assumptions will change.
Ask a financial advisor to create a realistic educational plan, tailored to your circumstances.
Each year they should review your circumstances and advise you accordingly on the best options available. – Moneyweb