Endowment Plan Or Investment Plan To Prepare For Your Child’s University Fees?

Last updated on March 21st, 2019 at 11:06 pm

 

According to a Straits Times report in April 2015, local university fees have inched up by 1.3%-8% every year since 2010.

Currently, engineering course fees in NTU cost $36,800 for four years Assuming it continues to increase by 4% per year, a whopping $74,550 is required in 18 years time!!!

I had a friend who wanted to save for her child’s university eduction costs.

She previously bought an endowment plan (AKA savings plan) designed to allow her to gradually build funds towards her child’s future university education.

She purchased one with a $200/mth premium for 20years and based on projections, the plan will yield only $55,000 at best!

That means a MASSIVE SHORTFALLl! A difference of about $20k!!!
Of course, she can come out with an additional $800/year to build this $20k pot.
However, with budgets already tight, getting her to come out with this amount is a daunting task.
Endowment plans have their merits as a low risk investment with some GUARANTEED RETURNS! I have looked at numerous plans and returns are about 2-4% on average.
However, if you are willing to accept taking risk, you potentially can achieve a higher rate of return.
That’s how investing can help build your child’s required funds  with a smaller budget.
HOW EXACTLY?
You need less to reach your goals with a proper investment plan!

If the investment plan you make grow at a 5%/year net of fees, you will only need to invest $2,650/y for the same 18years to meet the shortfall.

In comparison to $3,200/year required with a 3% rate of return from an endowment plan, this allows you to reduce your “saving for university fees budget” by $550 annually.

If you have a few children, the difference becomes ever more significant! Your money can be reallocated to enrichment or tuition classes for your kids.

 

Is 5% net of fees achievable?
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With a new born today, you would probably have an investment timeframe of at least 18years.

This is the actual return over 18years of the STI index.

From my rough calculations, capital gains are about 4%/y compounded.

If we add the dividends of about 3%/y, the total returns will be 7%/y.

How you can potentially get more than 5% from your investment plan

In addition, there is potential upside that you can gain from having a long investment time horizon.

If you are able to wait out a poor performing period such as in the 2008 financial crisis, then you can actually invest into higher return instruments.

These include high yield bonds and small cap shares that can potentially give you higher return.

What are risks in creating an investment plan?

1. Inappropriate timing in realising investment – If the time of withdrawal for education expenditure happens in a period like in 2008 financial crisis, your value of investment would have suffer significantly.

2. Underperformance of investment– If Singapore market do not perform as expected over the entire 20 years, it will result in a much lower return compared to saving plan.

3. Loss of capital – The investment that you have bought may be exposed to default risk resulting in loss of investment. A good example is the mini bonds in year 2008.

Even though there are risks involved, I personally think it is worthwhile as these risks can be mitigated. That topic will be covered in another article.
References
1. Straits Times Article – Local universities increase fees, citing rising operating costs
2. NTU Admission fees
3. Ministry of Education – Affordability of tertiary education.

The Financial Advocate

I am always fascinated in how parents approach financial issues in their daily lives. There is an overwhelming amount of information available and through this blog, I hope I can shed some light on financial matters concerning parents!

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