Sunday, May 3, 2009

STI: Save wisely for your child's varsity fees

May 3, 2009

Save wisely for your child's varsity fees

A recent survey found that most parents' education fund targets will not meet actual future expenses

By Lorna Tan 


Saving for your children's education is clearly a top priority for most parents, but many fail to squirrel away enough cash for what can be a hugely expensive exercise.


A recent survey by OCBC Bank found that six out of 10 parents who plan an education fund target to save only up to $40,000.


But a three-year university course, including living expenses, in Singapore will cost about $93,190 by 2027, when a baby now will be 18 years old.


That amount snowballs if a foreign university is the aim.


Like most young parents, Mr Ivan Yew, 30, and Ms Hazel Ong, 28, who tied the knot in April last year, have already started saving for four-month-old daughter Claudia's tertiary education.


Mr Yew, a senior executive at a local university, and his wife, who works in a bank, are aiming for local tertiary education for Claudia.


'We feel that Singapore, which is striving to be a vibrant education hub, will have sufficient good universities to choose from,' said Ms Ong.


The couple have a Manulife 21-year regular premium endowment plan that will be used for Claudia's education. It was bought by Ms Ong in 2006 and has a sum assured of $60,000.


Its annual premium is $4,994 and allows for yearly withdrawals of $3,000 after the second year.


Initially, the couple planned not to withdraw the payments but re-invest with the insurer at a projected annual rate of 2.75 per cent return.


But they have changed their minds. Last July, the couple withdrew $3,000 and started investing it in small sums of $250 a month in DWS China fund. They started in October and the fund has achieved 10 per cent to 15 per cent returns.


The Yews will keep withdrawing the annual coupon payments for investing in the fund. However, by opting for the annual withdrawals, the plan's projected maturity benefits will be reduced to $70,692, comprising a guaranteed maturity benefit of $15,000 and the balance, unguaranteed.


Had the couple opted to re-invest the annual payments with the insurer, the maturity benefits would be $154,744, with $72,000 guaranteed.


The couple also have three insurance plans each, comprising two investment-linked insurance plans and a whole-life policy, for their own financial plan.


They also have lump sum investments in unit trusts, mainly in the Asia market, China and India while the family is covered under Aviva's MyShield hospitalisation plan. The couple plan to have another baby in three years.


Four financial advisers have ideas on the strategy the Yews should follow.


What the experts say...


Mr Ben Fok, chief executive of Grandtag Financial Consultancy:


Their strategy is completely wrong. Why pay $4,994 in annual premiums just to withdraw $3,000 yearly for re-investing in a fund?


People who buy endowments with such an annual withdrawal feature typically use the coupon payouts as an additional cash flow for a specific purpose and not to re-invest in another fund. The so-called $3,000 coupon is neither a dividend nor an income but is an early withdrawal of their cash value from the endowment plan.


Furthermore, past performance is no guarantee to future performance, so re-investing the annual withdrawals in a single country-specific fund is high risk. The couple should consider investing in a diversified portfolio of global funds.




Assuming that the couple's intention of buying an endowment policy is to have a certain guaranteed amount at a certain time, they can opt for a 20-year 'pure' endowment policy without the withdrawal feature.


The annual premium would be much lower at $3,646 with a higher sum assured of $75,000 and a higher guaranteed cash value of $75,000. The difference in premiums can be invested into a diversified portfolio rather than into a single fund to reduce the risk.


Mr Stanley Sim, New Independent's financial advisory manager:


By investing the annual coupons into an equity unit trust on a regular monthly basis, the couple has employed a very effective strategy to invest in a generally upward trending volatile market.


However, be mindful that a single-country fund is risky. It may be performing well now, but what of the future?




I would recommend that they consider allocating the monthly investments in a regional or global equity fund instead of a single-country fund over time to limit their risk.


They should rebalance their investment portfolio and gradually lock the profits into lower risk instruments such as fixed income or money market funds.


About three to five years before the start of Claudia's university education, the portfolio should comprise more of fixed income and cash and less of equities. This will prevent the possibility of a severe market crash, such as what we experienced last year, derailing the tertiary education goals.


The couple should also ensure that their insurance coverage is sufficient to cover outstanding liabilities like mortgage and car loans and living expenses if one spouse is unable to work.


They can use term plans or a combination of whole-life and term plans to cover the shortfall.


Ms Anne Tay, OCBC's vice-president of group wealth management:


Based on the projected tertiary education costs, the couple's current endowment plan does not appear sufficient to fund a local tertiary education when their child is of university age.


Ms Hazel Ong's current endowment plan yields $15,000 under the guaranteed portion whereas the non-guaranteed portion is projected to be $55,692. Assuming the non-guaranteed portion is right on the dot, the total maturity benefit will amount to $70,692.


Given that market conditions are rather unpredictable and will affect the performance of investments, the couple could boost their investments as their existing plan appears inadequate since the non-guaranteed portion makes up nearly 80 per cent of their total returns.




They should work out the shortfall between their current investments and the projected education cost in 18 years' time. Then they can consider buying additional investment plans to plug the gap.


They can consider getting another endowment plan such as the OCBC MaxEdu Plus, an 18-year endowment plan with an annual projected maturity rate of 3.16 per cent. For a sum assured of $100,000, the annual premium is $9,174, which is around $770 a month.


Alternatively, they can consider other forms of investment such as unit trusts that tend to yield better returns. Of course, with higher rates of return, they must be prepared to take on greater risk. Constant monitoring of their investment over the period of planning is very important to ensure they remain on track.


A combination of the various investment products can help parents spread the risk without over-relying on one investment tool. However, this may be more appropriate for investment-savvy people.


Finally, we suggest that the couple review their own individual insurance plans to ensure that they have sufficient protection against other liabilities such as medical costs.


Mr Patrick Lim, associate director of financial advisory firm PromiseLand:


The couple's strategy is inferior on two counts. Firstly, there is no guarantee that they will be able to fund Claudia's tertiary education from both the plan's proceeds and the China fund. This is because the guaranteed maturity amount from the plan is only $15,000. And there is no guarantee of the fund's future performance, especially in sustained periods of downturn.


Secondly, as the plan was bought on the life of Ms Hazel Ong, future premiums are not waived if Mr Yew dies prematurely or suffers total and permanent disability or is diagnosed with a specified critical illness from a list of 30 that are covered.




The couple can consider a 22-year education plan each from TM Asia Life which pays out $20,000 when the child reaches 19 and $10,000 annually when she is between 20 and 22.


For two policies, this works out to a combined guaranteed maturity benefit of $100,000. The annual premium per policy is $2,333 and the sum assured is $50,000. There is also an additional projected cash value on maturity of the plan. It comes with a self-funding feature where future premiums are waived if either husband or wife meets with prematuure death, suffers from total and permanent disability or is diagnosed with any of 30 specified critical illnesses.


Instead of the China fund, they can invest in a portfolio of index funds and/or exchange-traded funds, which come with lower costs like management fees.


Education costs: Now and in the future


No of years

Current cost ($)

18 years' time ($)













United States *




* These are the costs for state universities

Note: The above costs include tuition fees for non-medical degree courses and living expenses.

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