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Saturday, 20 May 2017

Tug of war between retirement and education

How to achieve the equilibrium to retire as happy parents

YOU and your spouse are attending your child’s graduation ceremony at his renowned university overseas. As he goes up on stage in his robes and mortar board to have his degree conferred by the vice-chancellor, your hearts swell with pride as your dreams have finally come true. It is only when the both of you are back on Malaysian soil that reality sinks back in.

Although you have managed to give your child the overseas tertiary education that you’ve always wanted, the escalating costs over the years have made a significant dent in your pockets. You had underestimated how expensive an overseas degree course could be. Despite having set aside funds for education since your child was little, you have been digging into your savings, resulting in a shrinking retirement nest egg. Your child may have graduated with a good overseas degree but the questions still remain: How soon can he find a job that pays sufficiently well and would you be able to depend on him for financial support upon your retirement?

Malaysians have always had high aspirations for their children. We want them to get good grades, get into a good university, get a good paying job, have a family and the list goes on. In fact, many Asian parents regard their children’s education as their most important investment. These aspirations, however, come at a price, and a hefty one at that. It is not so much whether you can afford it, but rather, how a choice like this will impact you in the long run.

The Wongs’ dilemma

A client found himself at a pivotal point in his life where he would soon be making a decision on his children’s tertiary education. At 45 years of age, Mr Wong is married with two children aged 16 and 14 respectively. He is the sole breadwinner in the family, bringing home a tidy annual income of RM250,000. His net assets have recently increased to RM5.8mil, of which RM3.3mil are in fixed deposits.

A conservative investor, Mr Wong’s investment portfolio return averages about 3.52%. He plans to retire at 60 years of age with retirement living expenses of RM120,000 annually until the age of 85 years old. Like many parents contemplating their child’s future, Mr Wong posed me with the million dollar question: Can he afford to send both his children overseas for their tertiary education at a cost of RM1mil each?

Without looking at things in the right context, most people would reply with a resounding “Yes. Of course!”. However, the truth of the matter is, we can’t just rely on our gut instinct for major financial decision making. After entering the Wongs information into our holistic financial planning tool, we were able to put together a few scenarios and illustrate the impact of their decision on their retirement.

 

Looking at the table, Mr Wong is unlikely to afford sending his children for tertiary education overseas, unless he is willing to make some major adjustments. If there is any consolation, Mr Wong would be forced to work until 69 years or he would need to switch gears and send his children to local private university, which cost 90% less.

The outcome came as a shock to the Wongs as they were under the impression that their net assets were sufficient to fund both their children’s overseas education, while still allowing them to retire comfortably at the age of 60.

The Wongs’ poor judgement is a classic example of what I term, “layman’s approach”. Unfortunately, the Wongs are not the only parents out there who have made the same assumption. For the lack of hindsight, many parents may end up having to retire later than expected, or worst, depend on their children once their retirement fund dries up.

Is your financial freedom worth giving up?

Some individuals may feel that postponing one’s retirement is not such a bad thing, after all, it is fulfilling a child’s education dreams. But at 69 years, you would have to ask yourself honestly if you are still able to command the same salary scale you have now, or find alternative employment that pays your expected income? The moment you go down this road, you will be forced to accept whatever comes your way, whether you like it or not.

Not all hope is lost – if one is prepared to act

Having said that, there are still ways for the Wongs to send both children overseas and retire at the age of 60, provided they take several mitigating actions now to their investment management.

They should start channelling those assets with low return on investment or ROI (for instance, the money in fixed deposits) into higher return investments to increase average investment portfolio return from current 3.52% to 4.5%.

In fact, the Wongs doesn’t need to take much risk to gain an extra 1% return. By doing so, their total wealth would grow as high as RM8.96mil at the age of 64, compared with a peak of RM8.15mil only at age 69.

Looking back, Mr Wong would had been clueless as to knowing exactly what to do to resolve his dilemma without a holistic financial plan. How would he be able to provide for his children’s overseas education without forsaking his retirement and quality of life? In contrast, a holistic financial plan was able to give Mr Wong a clear picture of where he stands and help him identify what actions to take in order to achieve what he wants.

 

Happy children or happy parents? You can have both

There is nothing wrong with aspiring to give your child or children an overseas tertiary education.

However, from a professional standpoint, it should not come at the expense of jeopardising your own retirement.

Having said that, you do not need be forced to make a choice between the two and end up compromising your children’s happiness or your own. Do what the Wongs did – capitalise on the power of having a holistic financial plan and identify ways to achieve both goals. The result: happy children who get an overseas university experience and happy parents who look forward (and not dread) retirement.

While others are spending their golden years listening to Cher’s “If I could turn back time”, you could be chilling on a cruise to the tune of “My future’s so bright I gotta wear shades” at the ripe old age of 65. Think about it.

Yap Ming Hui (yapmh@whitman.com.my) is a bestselling author, TV personality, columnist and coach. He heads Whitman, a holistic wealth management company which has helped people to grow their money with high certainty since 2000. For more information, please visit his website at www.whitman.com.my

Tags / Keywords: yap ming hui , education , retirement

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