Retirement vs Education

2015-02-01 15:00

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Sunel Veldtman, the CEO of Foundation Family Wealth, says the retirement-education savings dilemma is a common one faced by clients.

“Ideally, by the time your children are in high school, you should already be financially secure. One of the key factors at play is that the current generation of parents mainly attended public schools and didn’t foresee that they would have to send their children to private schools to achieve the same quality of education that they enjoyed,” she explains.

“Projections that are often bandied about include figures such as R2?500, which you should save each month from the time your child is born. Bear in mind that by age three, your child will start attending nursery school and costs will start adding up quite quickly,” she warns.

Danelle van Heerde, the head of advice processes at Sanlam Personal Finance, says families are finding themselves between a rock and a hard place when making decisions about saving for the future.

“Most people delay saving for retirement, believing that they will have a chance to catch up later once their children start working. Some even believe that their children will look after them financially in their retirement years.”

What does it cost you to put education ahead of retirement?

Veldtman says it has become clear that private school education is only affordable for high-income earners or trust fund babies. For example, sending your child to Hilton College in KwaZulu-Natal will cost you roughly R209?000 a year – and that’s before you have taken into account additional expenses such as uniforms, textbooks and stationery.

Your child is likely to start high school at the age of 13. By the time your child is 18, you will have paid about R1?million on private school fees. If you begin saving for retirement at this stage, assuming you have a further 15 years to retirement and an annual return of 10% interest, the future value of R1?million after 15 years would be R4?million.

“To put it into perspective, you would be able to draw an income of R6 000 per month (in today’s value) for 20 years after retirement,” Veldmant says.

The priority for the average middle-income earner is funding their child’s tertiary education. Veldtman says a tertiary degree today will cost between R30?000 and R50?000 a year, excluding stationery and accommodation.

While student loans are not the ideal choice, Veldtman says you should seriously consider this option if it comes down to a flat choice between saving for your retirement and paying for your child’s education.

Veldtman says she has worked through the financial repercussions with clients who, for example, want to spend R500?000 so their child can complete an MBA degree abroad.

“If you take R500?000 out of your retirement fund, you are reducing your liquid assets. It’s not just R500?000 that you lose, but also the compound growth that you would have earned on that money over the next 30 years, and the loss in future income,” she points out.

Finding the balance

“If you live in a good area, it is entirely possible to access a good government school that can provide your child with a quality education,” says Veldtman.

For example, in Cape Town, Westerford High is a public school that is rated as one of the top 10 performing schools each year.

Sanlam’s Van Heerde points out that there are other options available, including bursaries.

“Encouraging your kids to take a gap year to earn some money and experience the world of work before they start their studies may also be a good idea. This will give them a better idea of the career direction they wish to pursue,” she advises.

Your child could also take on a part-time job and use the funds to pay off the interest on their student loan. This will also have the benefit of teaching them to be financially responsible from an early age. Repayments on a student loan often only start once your child is earning a regular salary.

Investment specialist Craig Gradidge of Gradidge-Mahura Investments says your starting point should be your affordability.

“You need to work out how much you can afford to save each month and then decide how to allocate those savings,” he says.

For example, your investment timeline for saving for high school education would be medium to long term, while saving for tertiary education would have a long-term timeline.

Saving for your retirement is also a long-term goal.

“Most parents ignore the need to save for their retirement in favour of spending money on their children’s education. However, you then lose out on at least 20 years of growth on your savings,” says Gradidge.

He says the ideal is to allocate some money to your retirement savings and allocate a larger portion of your savings towards your child’s education costs.

“As time passes, your priorities will shift and you can allocate more towards your retirement, but you have not cut out your retirement savings from the start,” he says.

Where to save

Most people assume that an education policy is the best investment vehicle if you are saving for your child’s education. However, this may not be the case.

“Specialist education products tend to be more expensive when a standard unit trust or exchange-traded fund can achieve the same returns at a lower cost,” says Veldtman.

Gradidge adds that specialist education policies can be inflexible.

“Think outside the box and save your money in a regular unit trust. You may find that your child is not academically suited and would benefit more by having the necessary funds to start up their own business,” he says.

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