If you think a 10-year or 20-year endowment plan is sufficient to save enough money for your child's education, think again.
It is no longer enough to save for tertiary education only. Top-end preprimary schools in Cape Town ask for R29 000 in upfront enrolment costs and first-quarter fees, though R25 000 of the amount is a refundable deposit.
Some schools may wish to quote Benjamin Franklin's words: "The best interest-bearing investment one will ever make is in education", but in SA this statement has two meanings, and neither of them is positive.
Government's contribution to education is slowing down. For 2004/2005, R76bn has been allocated for national education as a whole. This represents an increase of just more than 7% on the previous year, but it's lower than the average 11% increase for the past four years.
Secondly, SA has one of the lowest savings rates in the world. Though household saving has improved since 1998, it's still unsatisfactory. The SA Savings Institute says the improvement is mainly the result of lower real interest rates, but this is being offset by high levels of debt, which prevent households from taking advantage of potential savings.
With rising education costs, this presents a worrying picture. KPMG investment advisory senior manager Greg Goeller says: "For school and university, using government facilities, with no boarding, the total cost, assuming 7% inflation, is about R920 000. If a parent were to start saving from the day the child was born to cover all these costs, it would amount to R1 000/month."
And that is the lowest cost option. At the other end of the scale is private institutions, with boarding. Parents could be looking at a total cost of almost R3m up to a child's 23rd birthday. To provide for this, a family would have to save R3 000/month. At present, an average private school education costs R40 000/year. By the time the child reaches grade 12, these costs would have risen to R100 000/year, excluding boarding fees.
Most education savings products are geared towards funding for tertiary education, but Goeller says "depending on the university degree, high school is fast becoming the bigger cost".
Old Mutual product marketing manager Diane Lang, who is responsible for the Fairbairn Capital product range, says: "Many parents have to adopt a shorter-term investment strategy to fund their children's schooling."
Take Marius and Rebecca. Their daughter Daniela is 10 months old. They describe their household as typically middle income. They've started investing R500/month in a call account for Daniela, but they haven't given much thought to saving specifically for her education. So, what's stopping this family from saving more?
Marius says: "We live from month to month. At the end of the month, there is not much money left lying around."
Fortunately, there are many investment vehicles for parents to choose from when planning to save for their children's education. Options include money-market instruments, bond instruments or unit trusts. But Goeller says: "With these, you are facing the risks and dealing with the elements, rather than experts pooling money."
JP Morgan equities research quantitative analyst Jaco Venter says: "Investment performance is one of the primary objectives of any investor; the risks must be weighed against performance. Time is another key element in determining appropriate asset allocation strategies."
When deciding to invest in one or more asset classes, it's important to know and understand the pitfalls. "No single asset class continuously outperforms in all economic environments," says Venter.
A recent survey of all asset classes by JP Morgan shows that equities were the top-performing asset class over the past 20 years on an after-tax basis, but they ranked behind mortgage repayments and property unit trusts over shorter periods. In the past 10-15 years, paying off a home loan has given the best returns. In 2003, house prices rose by 19% and there has been a 91% increase in the past four years.
In the past five years, property unit trusts have staged a comeback and their returns have eclipsed bonds, equities, mortgage repayments and inflation.
Over the past 10 years, the running yield on property unit trusts has averaged 13,7%. This is four times higher than the 2,9% offered by equities.
In the past five years, property unit trusts have yielded an average return of 29%. But Venter says: "After tax, their performance is reduced and is in line with equities and bonds as a result of the high-income component of their return. But cash, according to this study, has not been king and has proved to be a consistent loser. Returns from cash have been dissipated by tax, which has led to returns of below inflation in all periods except the past five years."
Phillip and Else have two children, aged three years and three months. They describe their household as being upper middle class. Phillip says he wants to give his daughters the best education possible, but knows it will come at a cost. He's tackling the issue from another direction. "If I can become debt free, I would like to build up an investment or property portfolio in the next 15 years. My plan is to improve cash flow by eliminating debt. Paying for an education will therefore be easier later."
Though Phillip's goal is to reach this position in 15 years, he believes a five-year period could be realistic. Goeller says this is a wise approach: "Property is an inflation-beating asset." But it's not an option for everybody. It depends on a family's financial situation, what the property market is doing, and where a home is located.
"The problem with this route is that you are investing in only one asset class," says Goeller. "If you rely on property prices increasing, you overexpose yourself to one asset class." Diversification is always a good strategy, he says.
"Individuals should continue to favour mortgage repayments, equities and bonds over all asset classes for their long-term investment."
But the problem with investing in this manner is that a parent cannot afford to lose any of the money being set aside for education. Though there are benefits to this approach, there is little protecting the investment. If the investor doesn't have a huge appetite for risk, an endowment option offers acceptable returns at minimal risk. But paying off a bond will still offer market-beating returns at no risk.
