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Child’s education or retirement?

Both goals are important for you and one shouldn’t come at the cost of the other. However, if you haven’t been proactive in providing for your child’s higher education systematically then you may find yourself sacrificing out of your retirement kitty to cater to this important goal.

Both goals are important for you and one shouldn’t come at the cost of the other. However, if you haven’t been proactive in providing for your child’s higher education systematically then you may find yourself sacrificing out of your retirement kitty to cater to this important goal. 

Here is how you can avoid digging in to your retirement pool and at the same time prepare well for your child’s education goal.

Separate the investments

Ideally, both these investments require a long investment horizon. You are likely to have more years to plan your retirement though, making it tempting to use up your retirement savings towards your child’s higher education goal if required. 

As access to medical facilities improves and so does life expectancy, cutting your retirement kitty short could well be detrimental to your financial health in old age. One way to address this is separating your investments for both these goals. 

Given the long-term nature of these goals you will end up using equity linked investments, but try to keep the product selection separate for each goal. This will help you distinguish and use only the pile meant for the education goal when the time comes. 

For example, if today’s cost for the course mentioned above is Rs 50 lakh, at a 10% escalation each year the cost in 10 years will be around Rs 1.3 crore. Your monthly SIP in equity mutual funds, assuming a annualised return of 12%, will need to be Rs 55000 or thereabouts to achieve a corpus of Rs 1.3 crore in 10 years. 

Keep the goal achievable

You have to work backwards on this. Let’s say your child is 8 years old, which gives you 10 years to plan her higher education goal. It's too soon though to know exactly what she will choose to study or where. 

Begin your calculations with the high cost options. Look up the cost of undergraduate courses overseas in countries of choice like UK, US, Australia, Singapore and so on. Once you have a number for today’s cost, inflate or increase the cost every year by a 10%-12% margin for the next 10 years. Now you will have a figure of what it is likely to cost you ten years hence. Work backwards with the help of an online goal calculator to see what kind of monthly investments you will have to make in equity linked products to achieve this goal.

For example, if today’s cost for the course mentioned above is Rs 50 lakh, at a 10% escalation each year the cost in 10 years will be around Rs 1.3 crore. Your monthly SIP in equity mutual funds, assuming a annualised return of 12%, will need to be Rs 55000 or thereabouts to achieve a corpus of Rs 1.3 crore in 10 years. 

If this monthly SIP commitment seems out of reach, then rethink your education goal and perhaps work with the cost of a course in a domestic college rather than overseas.

It's important to begin with an achievable education goal, rather than aim for what may be out of your reach. Keep revising the expected cost periodically; closer you are to the goal the clearer your child’s choices will get and you can then estimate the amount required more precisely.

Separate goals, start early, and plan well so that you can effectively manage your child’s education expense without cutting back on your post retirement lifestyle.


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