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How to have enough to fund a university education?

Sunday, May 10, 2015

The Sunday Times is conducting a survey titled "Are you saving enough to pay for your children's education?" 10 readers will get to win $50 grocery vouchers sponsored by DBS Bank for just answering 5 questions in the survey.

I am sure we have read horror stories of how some people used their retirement funds or were thinking of using their retirement funds to fund their children's university education. What drugs were they on? 

If their children's academic results were not good enough for a scholarship, then, their children should think of getting a study loan or using the parents' CPF-OA money (choosing the option that attracts a lower interest rate), if the option is available.


Of course, loving parents might protest. They want to provide the best for their children and not burden them financially. That is all fine and good but they should do this not at the expense of their retirement adequacy! 

So, unless they have some money meant to fund their children's university education, love should only go so far. 

They will do well to remember this because it is like not mixing up money in our emergency funds and money in our war chests. They have their designated purposes.

Think of it this way, their children have their whole lives ahead of them. Children will be economically productive for many more years than their parents. 

There is nothing wrong with their children taking a study loan if there are no other options available. 

On the other hand, if a senior is short of money to fund his retirement, there isn't such a thing as a "retirement loan", is there?

Loving parents who do not want their children to choose an option which would require them to repay with interest when they graduate and enter the workforce should think of a plan to help meet the cost of their children's university education. 

Inevitably, for most, the plan would involve saving a portion of their monthly income. Then, the next step is to think of how to grow the savings at a faster clip while continuing to save money in a disciplined manner.

Question number 5 of the survey which is also the last question in the survey asks "Which do you think is the best way to save for this goal (i.e. your child's university education)?

The options provided in the survey are:

1. Insurance endowment plans
2. Bank deposits
3. Investments
4. All of the above

Which one would you pick?

There is another option and I wonder why it wasn't listed. 

All Singaporeans and PRs have a CPF account. So? Do voluntary contributions to their childrens' CPF accounts.


Money in the CPF-OA will grow at 2.5% to 3.5% per annum in a risk free manner. Some of the money contributed will go to the CPF-SA and CPF-MA, no doubt, which will earn higher interest of 4% to 5% per annum.





Contributing to their children's CPF account is a monetary gift to their children. For loving parents, this could be an idea worth considering. It is a gift that can be used only for specific purposes, including education.

Although it is true that their children will have to repay their own CPF-OA with interest in future if they were to use the money to fund their university education, they would be paying interest to themselves. This is more palatable than paying interest to a commercial lender, I believe.


It would also force their children to put aside a portion of their earned income every month in their own CPF account as they repay the debt owed to themselves. 


Forced savings? Yes, it is. I think this is not a bad idea for the majority of the population.

If we are disciplined about our personal finances and are set on locking away money for our children's university education, then, it would be money we would not touch for any other reasons and for a relatively long time too. I think the CPF as a tool is worth considering.

Of course, if we were to pick the CPF as our option, we won't be eligible to take part in the lucky draw for a chance to win a $50 voucher. 

Alamak!

Related posts:
1. Make CPF a part of your child's savings plan.
"I want them to save up and partially fund their own university education. ..After they graduate, they will to pay back their own CPF OA. I want them to experience some form of financial obligation when they start work so that they won’t take on debt too readily." EY

2. Why a wealthy nation cannot retire?
"Tan and her husband are currently paying for the education of their two children, including a 21-year-old daughter studying in Perth, Australia. While Tan, an administration professional, hopes to retire soon, she says she knows it might be another 10 years before that happens." CNBC

3. What is our attitude towards having children?

15 comments:

unluckid said...

Hi AK,

Much as I would like to follow your advice, the investment strategies of TH and GIC (who invests CPF funds) worry me They seem to be gambling rather than doing proper investing, with records of many 'buy high, sell low' trades having surfaced in recent years.

If this continues, would it be likely that CPF becomes insolvent? This is a great concern, as if I remember correctly, there's a clause saying CPF funds are not guaranteed should CPF become insolvent?

This worries me greatly and I would like to hear your views on it. Thanks!

The Sun said...

Hi AK,

Another viable option will be for a person to start working and of course, earning an income then pursuing his studies on a part time basis. In this way, this allows for him to fund his studies without parental financial support or having to take a loan from bank.

AK71 said...

Hi unluckid,

Oh, I am not giving anyone any advice at all. Just talking to myself, as usual. :)

I know that the CPF buys special bonds (SSGS) issued by the government. The money is deposited with the MAS and invested by the GIC. I don't think Temasek Holdings, which is more adventurous in its investments, I feel, is in the picture.

I really cannot comment on GIC's track record. I can only state what is available to the public:

"The Government’s assets are therefore mainly managed by GIC. GIC is a fund manager, not an owner of the assets. It merely receives funds from Government for long-term management, without regard to the sources of Government funds, e.g. SGS, SSGS, government surpluses. The Government’s mandate to GIC is to manage the assets in a single pool, on an unencumbered basis, with the aim of achieving good long-term returns.

"The SSGS proceeds have not been passed to Temasek for management. Temasek hence does not manage any CPF monies. Temasek manages its own assets, which have accrued mainly from proceeds from sale of its investments and reinvestments of dividends and other cash distributions it receives from its portfolio companies and other investments. Temasek also has its own borrowings and debt financing sources. The Government’s relationship with Temasek is that of its sole equity shareholder."


Source:
http://www.mof.gov.sg/Policies/Our-Nations-Reserves/Section-IV-Is-our-CPF-money-safe-Can-the-Government-pay-all-its-debt-obligations

AK71 said...

Hi Sun,

It would require a very independent individual to think and act like this. Good one. :)

aceirus said...

Hi AK,

Interesting suggestion. Totally out of the box thinking :) But what if your child can't get into a local university?

unluckid said...

Hi Ak,

Ooops guess I got it wrong about TH. but this is what worries me. Much as I would like to trust in CPF :(

Singapore, Abu Dhabi Face Losses on UBS, Citigroup
http://www.bloomberg.com/apps/news?pid=20602011&sid=aeS1DdEYqj_Q

http://www.straitstimes.com/the-big-story/parliaments-new-session/story/parliament-dpm-tharman-why-assets-investment-buffer-not-

In eight of the past 20 years, said Mr Tharman, the GIC's investment returns had fallen below the interest guaranteed on CPF savings, and the Government has had to rely on its net assets to make up for the shortfall. - See more at: http://www.straitstimes.com/the-big-story/parliaments-new-session/story/parliament-dpm-tharman-why-assets-investment-buffer-not-#sthash.uHMW34jM.dpuf

Why not have guaranteed minimum payouts?

For the scheme to be sustainable over the long term, premiums and payouts must be adjusted periodically to reflect actual mortality experience and investment returns. As such, payouts are not guaranteed.

-CPF Life FAQ

AK71 said...

Hi aceirus,

Tell the kid to be diligent and study hard to get into one of the local universities. Otherwise, go to one of the polytechnics which are very good too. ;)

I believe that attitude is more important than aptitude. However, if a child has put in his best and still cannot do well enough, then, why force him to go to a university? It could be an issue with aptitude.

Parents will know best, I like to think. I am just talking to myself here, of course. ;)

What I cannot comprehend are those parents who are very cavalier. "If they cannot get into the local universities, go overseas lor." It is either they are very rich or they don't think enough. -.-"

AK71 said...

Hi unluckid,

Unfortunately, these are questions that I cannot answer.

I can only share my view that as long as the government is able to make up for the shortfall in the years GIC underperforms, all is still good.

I also feel that a government's integrity is more important than the guarantees that they make. There is no point in guaranteeing something if they cannot deliver in the end. If they deliver, then, it doesn't matter if there is a guarantee or not.

I always say that if the CPF should be unable to pay its members (i.e. default), then, Singapore is kaput. If Singapore fails one day, I think that is when the CPF will default.

Singapore Man of Leisure said...

AK,

I'll give you a rare compliment on this post ;)

Most surveys on personal finance matters are "sponsored" by the same vested interests who want to "sell" you their financial services.

The reason why the parent's CPF is not listed as one of the options is because there's no fees or commissions to be earned...

Never mistake vested interests with bleeding hearts :)

AK71 said...

Hi SMOL,

Getting a compliment from you is like winning the Oscars. Kamsiah you. ;p

I guess some telephone marketers will be very busy after the survey results are in. Just a guess, of course. ;)

SMK said...

I disagree to the fullest extent with your post on the subject of contributing to kids' CPF.

If we are coherent in our thoughts and believe that the kids should be funding their own education through a loan of their own, then voluntary contribution to kids' CPF is akin to volating that train of thought since you would be funding their retirement! (through SA)

I agree that usage of CPF for kids' education is doable should the parent wish to provide fully for their education. But it is not possible should the kid need to take his education needs overseas. (see http://mycpf.cpf.gov.sg/CPF/Templates/SubPage_PrinterFriendly_Template.aspx?NRMODE=Published&NRORIGINALURL=%2FCPF%2FNews%2FHighlights%2Feducation.ht&NRNODEGUID=%7B0657A86D-B415-4C22-A4FF-00210F3499FB%7D&NRCACHEHINT=Guest#q4)

I was surprised that you did not include the SSB since it is based on 10 SGS as is CPF (without the perks of a floor rate nor its limitations).
that would have allowed for overseas education.

I note that you did not encourage the use of investment for children's education and am ambivalent about the general idea of investment for kids' education.

lastly, I think the decision however unwise or wise to provide for kids' education fully without having settle their own retirement needs, is not something a non-parent can ever fully weigh.

I would argue that the expectations of today's kids are vastly different from our generation and that, morals/ethics/emotions aside, kids can be a critical non-financial component of anyone's retirement.

Finally, I would like to add that I support your implicit stand that a parent should settle their own retirement before they think about providing for their kids' education.

AK71 said...

Hi SMK,

I applaud your very thoughtful disagreement to an idea expressed in this blog post. :D

As usual, I was just talking to myself and, maybe, people who hear me talking to myself might spend some time thinking about the best way forward (for them).

Yours is the second comment today I have seen regarding the savings bond. Maybe, I should do another blog post on the subject. ;p

Singapore Savings Bonds (Part 3).

AK71 said...

Reader:
Hello AK,

I am have been following your blogs for couple of years now thanks for
talking to yourself I really enjoy reading all your sharing and insights.

I hope you could talk to yourself if you were in my shoes about education
fund.

I have two young toddlers and I wish to set aside some money for their
future study say 50k each.

I have explored some options but cant seem to find a good one and decide.

1) STI ETF - which I have contributed 200 monthly
2) Sg Saving bonds 2+%
3) Education savings plan from insurance house 3+%
4) Stocks - I am not good at it and will not be to cash out during crisis
5) Gold - the expense ratio is quite high if I were to do cost averaging

I bought only 200 monthly into Sti Etf (which account for 1 child but not
2) is because I intend to diversify and avoid situation where my kid turn
23 and market crash I could not sell my Etf. As such I am looking for
alternatives to invest or buy for my second child.


My reply:
What about this?
http://singaporeanstocksinvestor.blogspot.sg/2015/05/how-to-have-enough-to-fund-university.html

I anyhow talk to myself lah.

Best wishes,
AK

AK71 said...

Reader:
Many thanks for your wise insights into managing our finances.

I am thinking of setting aside some money to pay for my four kids university education. They are of ages, 2 to 9 years old now.

My current thought is to buy education insurance policies. the maximum average annual returns are 2.5% after shopping around for insurance companies. Is there a better way of solving this aspect?

AK:
Maximum is 2.5%? What about having 2.5% as the minimum? ;)
http://singaporeanstocksinvestor.blogspot.sg/2015/05/how-to-have-enough-to-fund-university.html

AK71 said...

Reader:

I really like your idea and I tried to implement it for my kids' education planning. The problem I am facing now is that for VC to the kid's CPF account, it is either 100% to Medisave pot or distribute to the three pots which dilutes the actual amount of $ that goes to the OA.

Since the CPF education loan scheme is only applicable from the OA, I would therefore have to put in a large sum of money. Then added on to the 40% limit of withdrawal from the kid's OA further expands the investment needed.

While I strongly agree with the overall intention of leaving this love gift from papa mama, this “cost” to papa mama becomes too costly to papa mama’s retirement.

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