Invest in your child's future
As published in The Sunday Times on 5 June 2016
Senior Investment Strategist, Wealth Management Singapore, OCBC Bank
Member of OCBC Wealth Panel
OCBC advises parents to prepare for an expected rise in tertiary education costs by getting an early start in saving and making investments
PARENTS want the best for their children, and that includes giving them the best education that they can afford, from kindergarten all the way to university. However, the costs of tertiary education are set to increase in the next 20 years.
According to research done by OCBC last year, a four-year general degree at a local university (tuition fees and living costs) will cost $56,000 in 2036, up from $40,000 currently. A medical degree would cost $205,000, compared with $147,000 now.
When you factor in accommodation costs as well as stronger currencies relative to the Singapore dollar, a tertiary education at a university in the United States or the United Kingdom is a lot more expensive. For instance, a general degree in the UK will set parents back $960,000 in 20 years, a huge jump from $157,000 currently. In the US, it will cost $757,000, from just $296,000 now. Sending their child to an Australian university will set parents back $315,000, compared with just $113,000 today.
These numbers are calculated based on a male pursuing a degree at age 21 after national service; with the years for comparison being 2015 and 2036.
Save and invest early
Mr Vasu Menon, 53, OCBC Bank's senior investment strategist, Wealth Management and a member of OCBC's Wealth Panel, is also a father to a toddler. While currently enjoying the early years of fatherhood, he is well aware of how much a university education will cost for his daughter once she comes of age.
Mr Menon, who got married two years ago, says late fatherhood has its advantages. "I have greater financial resources to provide a better life for my daughter and family," he says. Having worked in wealth management for several years, he started planning his financial affairs when he joined the workforce in 1988. The efforts have paid off, he says, as he is now better placed economically to provide for his daughter and her education needs.
"To safeguard my family and daughter, I have not only bought life insurance but also medical insurance, especially insurance for hospitalisation and critical illnesses," he says. "This is important because a serious bout of illness can easily wipe out your savings and the wealth you have accumulated, leaving you and your family in dire straits and with insufficient funds to meet your child's education needs," Mr Menon explains.
He now has to plan his finances to meet both his retirement and his daughter's education needs. Most parents in their 20s and 30s, however, would first provide for their child's education before thinking of their own retirement needs, he adds.
Mr Menon believes he can achieve both goals. "It is possible to plan for both concurrently, and parents should try to do that to benefit from compounding to grow their wealth," he says. "The sooner you start saving and investing for your child's education and your retirement, the faster the funds can grow and multiply," he notes.
For those planning to send their children overseas, Mr Menon suggests setting aside some funds into a foreign currency denominated deposit or investment. He says, "If you plan to send your child to a university in Australia, for example, you can consider setting aside some savings into an Australian dollar time deposit or an Australian dollar denominated investment if you have a stronger risk appetite and are looking to grow your money faster than deposit rates."
Mr Menon also suggests that parents consider buying into unit trusts as another avenue of providing for their child's education needs. According to him, unit trusts allow investors to diversify their investments across multiple asset classes over a length of time. And they also offer access to professional fund management. He recommends investing in a basket of unit trusts that offer exposure to equities, bonds, as well as mixed assets, all put together in a way that matches the investors' risk appetite.
Endowment plans are another way to grow your savings while enjoying insurance protection as well, says Mr Menon. "Life is full of uncertainties and your spouse may face difficulties funding your children's education if you pass away prematurely, fall seriously ill or become disabled and cannot work," he notes. This is why an insurance endowment plan is useful when planning for your children's education, he adds.
For instance, MaxEdu Goal is OCBC's education endowment insurance plan that aims to assist parents to start saving and investing for their child's future. With premiums starting from $104 a month, it is suitable for new parents who have low cash liquidity. It also guarantees high payouts at 135 per cent of the sum assured, a figure OCBC claims is highest among similar products in the market so far. The guaranteed payout, says OCBC, will ensure that whatever savings parents have ploughed into their child's education will be safeguarded.
"Education planning is not rocket science, but it requires you to start early and be disciplined with your savings and investments to achieve your goals," says Mr Menon.
At OCBC Premier Banking, both customers and Premier Banking Relationship Managers have access to rich market information provided by the OCBC Wealth Panel. With over 200 years of collective investment experience, the Panel's insights are available to help guide customers' investment decisions.
Here are some of the bank's recommendations using unit trust as one of the investment solutions to build a savings nest to fund a child's education: