Your retirement money should not be sacrificed for your children’s education
EDUCATION is possibly the biggest investment parents make for their children.
A growing number of middle-class families in Malaysia are sending their children to private or international schools from a very young age.
According to the Education Ministry, enrollment of students in international schools in 2013 stood at 20,000 as compared with 15,000 the year before.
The increase in international school enrolment was largely due to the lifting of a government restriction affecting the number of Malaysian citizens who are able to attend international schools.
What was once a luxury only enjoyed by predominantly the expatriate community has now turned into every Malaysian parent’s aspiration.
Among the 39 premium international schools in Malaysia (the most sought after and typically larger international schools), 40% of the current student population are now Malaysian children.
Even at the tertiary level, parents are all for sending their children to universities abroad for their final years of formal education.
The recent HSBC’s Value of Education report found that 88% of Malaysian parents are considering sending their children overseas for their tertiary education, a number which is higher than the global average of 77%.
Why international and foreign schooling?
The fact that middle-class parents are prepared to forego their personal luxuries in order to put their children’s education first is a big statement in itself. There are many reasons why parents feel private education is superior.
Firstly, the smaller classes offered by international and private schools mean that each child receives more attention from the teachers. Better student-teacher engagement promotes an environment where teachers and students actively learn from each other.
Secondly, the curriculum offered by private and international schools are vastly different. Children are exposed to a wider variety of subjects, and are encouraged to get involved in extensive extra-curricular activities that help build character and worldly wisdom, with the hope of better preparing them to face the increasingly global economy
In the case of tertiary education, parents see foreign education as a stepping-stone to better job opportunities (therefore translating to higher income potential), international exposure and new friends. Thus an investment in a child’s tertiary education will have a higher likelihood of them leading more successful lives.
What is the price?
On average, an international school education costs between RM30,000 to RM50,000 per annum per child.
Correspondingly, the price of sending a child for tertiary education overseas (depending on the country and course of study) can go up to RM500,000 per annum, no thanks to the weakening ringgit.
With so much at stake, how does one know whether he or she can afford the steep price tag associated with international schools? Perhaps the better question to ask is – will the cost of giving my child a quality education cost me my retirement?
One of the most common mistake parents make when contemplating their children’s education is the tendency to look at affordability through the lenses of their current cash flow.
For example, RM30,000 per year broken down into 12 monthly payments equate to RM2,500 per month per child.
All of a sudden, the cost of sending a child to an international school becomes more “affordable”.
The reality is more complexed than that.
The real price of education
Many parents end up forking out exorbitant amount of money to provide their children with the best education without truly knowing the actual cost of this move, and failing to see the bigger picture.
Consider the case of John and his wife Wendy, who like most middle class families in Malaysia, aspire to put their two children aged seven and three, through what they perceive as the “best education” experience ie, international school and tertiary education abroad.
At 36 and 34 years of age respectively, John and Wendy have an annual household income of RM440,000. They currently enjoy a lifestyle cost of RM200,000 per year, and intend to retire at the age of 55 with RM140,000 annual expenditure for 30 years.
Their combined assets currently consist of their home which is worth RM1mil with an outstanding RM250,000 mortgage loan, unit trust worth RM480,000, bank savings of RM3.2mil, and EPF savings of RM600,000 combined.
Without factoring the element of the children’s private and overseas education, John and Wendy’s projected net worth will last them till a ripe old age of 95 years (see graphs). Now, let’s look at the impact to the couple’s net worth when they provide the “best” education for their children.
At the cost of RM30,000 per annum for primary and secondary education, and RM500,000 for tertiary education overseas, the couple’s net worth would shrink considerably. Their wealth would now only last them comfortably till the age of 77. And this is just looking at the impact of one child.
Putting both children though international school and tertiary education overseas would result in the couple’s entire retirement savings lasting only four years post-retirement, up till age 59.
Bearing in mind that the above Roadmap to Financial Freedom simulation is done based on the assumption that both John and Wendy would stick to their financial plan and not deviate from it. It is also assumed that the cost of education remains fairly constant (after adjusting for inflation). Heaven forbid that either spouse is unable to work due to health reasons or if the cost of education rises astronomically.
The additional education expenditure reduces their savings capacity which results in less capital available for investing, ultimately slowing down their overall wealth growth. Many Malaysian parents tend to overlook and underestimate the impact of spending on big ticket items like children’s education on their overall net worth.
At the risk of dashing every parent’s dream of providing the best education for their children, parents need to beware that the real price of private education may very well be at the expense of their own retirement.
Therefore, I would urge all middle-income families not to take this decision lightly. Do not make this monumental decision based on peer pressure that may come from family, friends or colleagues. Understand that different families have different priorities and financial resources – keeping up with the Joneses could bring you financial ruin.
However, if you are a firm believer of giving your child the best education, consult an independent financial adviser to thoroughly evaluate the financial impact of your decision using a holistic financial plan.
Only then will you be able to truly see the impact your decision in a big picture context. If necessary, you would need to adjust your investment strategies to enable your assets to grow fast enough to support your financial goals.
As parents, you want to help your child succeed, no matter the costs. However, one of those costs should not be your retirement.
Yap Ming Hui (firstname.lastname@example.org) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000. For more information, please visit his website at www.whitman.com.my