Wednesday, June 06, 2012

Saving and investing for a child’s education is imperative with ever-rising cost

WITH the rising cost of education, parents today are faced with the herculean task of needing to plan well in advance for their children's future.

However, when it comes to financial planning for a child's education, most parents think of just the tertiary expenses and forget to take into consideration other costs.

“People still think of children's education in terms of just college or university. But the reality of today is that even kindergarten can be expensive,” says CIMB Wealth Advisors Bhd chief executive officer Tan Beng Wah.

“But the options for children's education today are much broader than in the past,” he tells StarBizWeek.

Tan points out that some parents even enrol their children in pre-academic programmes and activities, such as play-school, which translates to more cost.

“And when it's time for primary school, there are further choices to be made. Do you send your children to a private or public school, or to a specialised institution such as a religious or language-based education facility?”

He notes that as Malaysia moves towards entrenching its position as a regional educational hub, we now play host to over 20 public universities, 26 private universities, 23 private university colleges, several branch campuses of foreign universities, 28 polytechnics, 74 community colleges and 434 private colleges.

“The options and opportunities will only keep increasing. That is why parents need to decide sooner rather than later the kind of education that they can afford to provide for their children.

“There may also be more Malaysian parents who will want to take advantage of the recent Government announcement removing the quota of (Malaysian) students in international schools,” says Tan.

He notes also that the cost of education has escalated over the years.

“Today, when you go to a local university, education cost can be anywhere between RM30,000 and RM300,000, depending on the programme. If you're educated overseas, it can be between half-a-million and RM700,000 or in some cases even up to RM1mil.”

With so many options, some financial planners suggest that parents start saving up even before their child is born!

Monthly savings

One of the more conventional methods parents plan for a child's future is by saving up a portion of their monthly earnings.

“However, this method of planning requires discipline,” warns AmBank wealth management head Joshua Lim.

Tan points out that this method of financial planning has its flaws.

“The problem is, whatever you save might not be able to keep up with rising inflation over the years.

“And it's not monetary or economic inflation that you're looking at but the inflationary rise of education cost,” he says.

Investment instruments

There are various types of investments, with unit trust being among the most common form of long-term investments usually picked by parents.

“You need to be able to grow your funds faster than the (education) inflation, which is usually around 6%. One way to do this is to invest in unit trust,” says Robert Foo, who is the managing director of MyFP Services Sdn Bhd, a licensed financial planner.

Many parents invest in unit trust instruments over a long term period and hope that by the time the child is ready for their tertiary education, the funds accumulated would be sufficient to bare the education cost.

“Based on the individual's risk profile, we can build an investment portfolio largely on unit trust funds. This means that in 10 or 15 years time, we can project that it can reach the amount needed,” says Tan.

Lim concurs that the advantage of investing in unit trust is that the individual can plan ahead for the future.

“If you have RM20,000 now and need about RM80,000 in five years, we can plan the type of investments to help get your there,” he says.

Foo advises that individuals can also consider investing in other instruments, especially products that are a little bit more “liquid.”

“This could be mutual funds or stocks and shares. Create a portfolio for yourself and don't just rely on a particular fund.”

Tan however points out that problems can arise for unit trust investors if the payer becomes incapacitated or dies.

“Any investment, on the passing of the unit trust holder, becomes part of his estate.”

Lim advises unit trust holders to have joint accounts, so that in the event of a death, the account automatically goes to the partner rather than the deceased's estate.

Insurance plan

A good way to guard against incapacity or death is to invest in an insurance plan.

“The advantage of having an insurance education plan is that it has a payer-benefit feature. Meaning that if the payer dies or is incapacitated, the product allows for what we call a “waiver of payment of premiums” in the period of the incapacity or the person not being there,” says Tan.

“This means that the plan continues to accrue to the amount that was initially planned.”

Foo meanwhile believes that an insurance plan is more valuable for protection rather than for education investment purposes.

“The paybacks for conventional insurance is not much, perhaps between 3% and 4%. If you're investing in investment-linked insurance funds, there won't be many products and you will just be limiting yourself.

“Better to invest in a portfolio of funds and have an insurance plan solely for protection.”

Lim says having an insurance plan acts as a good safety net should something happen to the sole breadwinner that's contributing to the child's education fund.

“Insurance has its place if the parent is the only breadwinner. In case something happens to this individual, the education fund won't be compromised.

“In a way, you are also protecting your children's future by buying life insurance for yourself,” he says.

Flexible options

The best financial-planning option, say wealth and financial planners, is one that is best suited to an individual's needs.

“Traditionally, most education plans envisage a savings towards a lump sum payment that is made available when the child enters university at age 18, 19, 20 or 21. In some cases, there is a provision for spending for three or four years of the tenure of university studies,” says Tan.

He notes that today's education-spending patterns are also quite different, depending on the choices made.

“Early year education could be substantial as is spending at various stages of secondary and tertiary education. Hence, an education savings or investment plans need to be flexible from the perspective of being able to access funds when needed and yet allow for additional investment to try to ensure adequacy of funds at different stages of spending.

“The ability to withdraw funds without any penalties or increase investment amounts without having to set up new plans or programmes is the core of a flexible and effective education savings or investment plan.”

Tan says parents can today leverage on trust instruments that allow the transference of the ownership of an investment to a named beneficiary or trustee who can make use of the money for the benefit of the child.

Lim also says one should not limit themselves to investment instruments.

“One could also try to look for cheap funding, scholarship funds or even subsidies. There are various colleges that offer easy payments and it's not necessarily true that you need to pay through your nose to finance your children's education.”

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