Saving for your children’s tertiary education

Saving for your children’s tertiary education – start your education fund yesterday by Mike Wood wealth director at Apio.

“The best time to plant a tree was 20 years ago. The second-best time is now” – Chinese Proverb

Apio wealth planning for your child's education

I’ve had to give this a lot of thought in the last few weeks because my wife and I have recently welcomed the most beautiful baby girl into our family.

When considering investment and savings options for your children’s tertiary education it is important to note that research has shown education inflation outperforms national inflation. This makes the discussion around where and how to invest so much more important.

In order to protect the capital in an education fund from losing value in real terms, it is vital to implement an investment strategy that looks to outperform the education inflation rate.

This may not be achieved by playing it safe and investing only in conservative asset classes and portfolios. The portfolio needs to consist of a fair weight in equity investments as well to help achieve the desired returns and outcomes.

It’s important to note that you should only look at more aggressive asset classes and portfolios if you have the appetite to do so, together with a time frame of 10+ years to invest for.

One should look to the right mix of assets and portfolios combined with the lowest fees possible.

Working with the following assumption let’s take a look at the minimum one should invest in their child’s education fund before deciding on the best investment vehicles or structures.

Assumptions:

  1. You start investing the same month in which your child is born, giving you 18 years to save and invest.
  2. You invest with a greater exposure to growth asset classes and portfolios, looking to generate an annual return of 10%
  3. The inflation rate of education remains constant at 8%
  4. The cost for a three-year degree today ranges from +/- R75,000 to over R250,000, depending on which institution your child is able to attend
  5. For the purposes of this planning, we will assume that R150,000 will be needed in today’s’ terms to cover one’s tertiary fees for 3 years.

With the above assumptions, the cost of education will be +/- R645,000 in 18 years’ time. In order have this amount available in 18 years’ time and assuming a return of 10%, one will need to allocate R550 per month towards their education fund, increasing these contributions by 10% per annum.

R645,000 in 18 years will equate to R152,000 in today’s terms (assuming education inflation of 8% per annum)

Looking at the different investment vehicles one can utilize when saving for your children’s tertiary education it is important to note that there is no “one size fits all”

Two of the more favourable investment vehicles would include simple unit trust and endowments accounts. I would like to warn against using Tax Free Savings Accounts (TFSA’s) for education purposes, only in very rare circumstances will this be a good idea.

Unit trusts offer a very liquid long-term investment vehicle that provides the appropriate mix of assets as a solution to low income and middle-class earners due to the lower capital gains tax they would pay as apposed to the higher income earners.

An endowment is an investment vehicle that is best suited for your higher income earners as they will pay a lower capital gains tax than that of their marginal rate. They also provide the flexibility to invest in a manner which allows the appropriate mix of assets required when looking to generate higher long-term returns. When considering this kind of investment for education it is important to note that these accounts have limited liquidity within the first five years.

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