15 August 2010

Misadventure of the education savings funds

An article in the Sunday papers today mentioned about using an Endowment Insurance to fund an education fund, providing the benefit of both a $100,000 protection, as well as contributing to the education fund.  This may well be the second worst option.  It is certainly a reasonable option if one was not prepared to put aside the time to manage such a fund.  So I'm not saying it's no good.  It's just that there are better ways to do so.

For one, why bother with that $100,000 protection when the child has no dependencies?  Unless of course, the parents are close to retirement and their retirement plan assumed that the child would be supporting them with $4,000 a year.  [Consider: $100,000 @ 4% returns.]  Even then, that need could be better met by a Term Insurance, which would probably be far cheaper.

But what is the worst option?  That, was precisely what we did, saving a monthly sum into a Savings Account, for years and years.  We had opened Savings Accounts for each of my kids, contributing $100 each month.  On top of that, was a further $500 annually from their "Ang Pows" that they receive during Chinese New Year.  After several years, I discovered that all we had accomplished was a paltry sum of $7,000 in each account, a far cry from the $80,000 that I had estimated to be needed, with less than 10 years to go! 

In my parents' age, it probably made sense when savings account were giving 5% interest.  But with interests down to the doldrum of zero, that assumption of good returns from keeping money in the bank no longer works.

I've since switched to a different approach, through investing in unit trust funds.  After closing the Savings Accounts, the $7,000 were used to buy into a spread of unit trust funds - i.e. an index fund for US equity, index fund for Europe equity, Global Emerging Mkt equity, Asia-Pacific ex-Japan equity, Singapore equity, and a global bond fund, and topping up $500 monthly.  Now, with 8 more years to go, the respective funds are at $20,000 and seem on track.  I hope.

As a sensitivity analysis, even if the investment portfolio end up with nil returns, it would still be:
$20,000 + ($500 x 12 months + $500 ang pows) x 8 years =  $72,000   (i.e. 90% of target)

Of course, there is no insurance against a repeat of the 2008 global financial crisis. To mitigate the risk,  I would have to remember in 3 years time (i.e. 5 years before the need), to start switching increasingly to a more conservative portfolio profile, either holding in Money Market funds, or in SGS Bonds that would mature before each of the 8th, 9th, 10th and 11th year.


Anonymous said...


I used endownment insurance, those that insured the parents instead, to prepare for my children's education fund. The reason is that there is a fixed dateline when I need the money. If I am to depend on unit trust investing for the education fund, a recession at the point of withdrawing may disrupt my plan - even though investing over a long period of 18-20 years should yield a reasonable positive returns.


Lizardo said...

Hi KM,

Thanks for sharing. Were you able to determine the expected and actual rates of return for the endowment insurance? I guess the good thing about it is the added protection to 'guarantee' the payout, and the waiver of premiums in the event of the 'unfortunate'.