Planning for kids college education (Part 3)

This is Third part of the series on college education funding.

Have you read PART 1 and Part 2 of this article ?

5)    Not adjusting the target amount as needed

Just go back 15 years of your life and see if you thought you could imagine the life you are living now !

Do you really think you can plan for something that is going to happen after 15 years accurately ?

We all know it is almost impossible. We must allow enough flexibility in our plans and adjust the goal amount as years go by.

Change is the only thing that is not changing !

Kids’ career ambition may change. They may like to do their degree in certain specialty in certain university. A three year old kid may not know what college he wants to go. But they develop  more clarity and sense for their career in middle and high school ages.

Your portfolio should have room to accommodate those thoughts.

Your own career may also have an impact. Factors like your return to india plans and choice of city where you planning to settle down also would influence the portfolio.

Ever increasing college costs, hostel and living expenses also need to be considered. Hence revise college education cost needs at least yearly once. Talk to other parents who are putting their kids in college that particular year and learn the actual costs and compare them against your goal targets, adjusted for inflation.

How Can We Help ?
Clients of RRK advisory have kids of various ages and we monitor the cost of education closely and advise our clients accordingly during the time of yearly portfolio balancing and adjustments.

6)    Not planning for tax hit

Death and Taxes are Certain !

Most of Indian families tend to have their first child before the age of 30 for the male. This means their kid will go to college before the father becomes 50 years old. Not a time to retire. Not even a time to take early retirement. For those plan to retire in USA, it is like lunch time break. You got another full innings to go.

At this stage of life, the career is at peak and income tax rate is at top slab. Liquidation of portfolio will result in high taxes. Your portfolio plan should also include tax impact at the time of withdrawal. Allow for 20-30% tax depending on your income level, country of living, double taxation impact etc

Further as I have explained earlier, year on year adjustment of portfolio is needed to reduce stocks and increase bonds. Due to that your portfolio at the time of liquidation will be mostly in fixed income securities, which are tax inefficient and unavoidable.

Retirement Vs College Education
Withdrawal from Retirement portfolio is different story. When you are planning to withdraw from retirement portfolio, you will not have other income, hence the slab tax rates will be applicable, allowing for very good tax planning.

Very few people have the opportunity to send kids to college when they retired. They have completely different challenge. That is subject for another blog. A good tax/investment planner can help in reducing the tax impact and save some money wisely.

A bad plan can get your portfolio size reduced after taxes, to get 3 years education on 4 years ‘actual’ funding ! Such is the impact of taxes. Beware !

7)    Having Plan-B for short falls – Do you need loan ?

For any long term planning, having “Plan-B” is always critical. Due to so many challenges in kids education planning, some families may end up with a short fall to target. I have already described six important factors here.

For many families, Plan-B could be availing a bank loan or personal loan to tidy up the shortfall. Banks are willing to lend money towards kids college education at a cheaper rate. For some families, it might make financial sense to go for loan instead of their own portfolio money. Last I heard, banks don’t give loans for retirement.

At the time, when you need to withdraw money from your kids college education portfolio, you should also evaluate the health of your retirement portfolio with a good financial advisor help.

While there is Plan-B for funding option for kids education, there is none for retirement funding.

Lot many investors don’t show much importance to their own retirement portfolio, hoping kid can take care of their retirement goals, if they could take care of kids education goals.

This concept was working in the previous generation and we are losing this culture very quickly, thanks to westernization of our Indian culture.

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8)    Untimely death of the parent when kids are young

Death is a taboo subject ! No one wants to talk about it. Even when they do, within a minute they want to change the subject.

It has always been a difficult subject for any planner to discuss this with clients in first meeting. For some, even after several meeting, this could not be brought up.

Nevertheless, the danger of losing one’s life at young age is always there. This could be unfortunate road accident or heart attack due to stressful job or bad life style.

A prudent investor should first plan for his family’s well being before investing for long term goals.

A family’s well being after the death of the family head is important and should be done before getting down to any investment planning.

Do you have enough life cover to allow your spouse to meet family expenses and also take care of kids education needs, if you had to die unfortunately today ?

Only if you have resounding ‘Yes’ as an answer to the above question, you should be investing your money in the market. Otherwise you are gambling with your family needs and kids education.

A good financial planner can help in developing a portfolio with a combination of insurance and mutual funds, depending on your family needs.

Contact Us for your planning Needs !

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Related link for further reading:

Calculate your life insurance cover need

Why Critical Illness Cover is so Crucial for Everyone

Child Education Plans in India – An introduction

Child Education Plans in India – Points to consider before buying

Please note there is an unique advantage of using ULIP plans for kids education goals. But it comes with certain disadvantages too. This has been discussed in detail in these threads.

 

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