Should you save for retirement first or for your child's education?

Here’s a trick question: what should get priority – saving for your retirement or for your child’s education?

Should you save for retirement first or for your child's education?

Here’s a trick question: what should get priority – saving for your retirement or for your child’s education? Well, both are important long-term financial goals. As a parent you might consider taking a loan on your provident fund, or withdraw your retirement savings to fund your kids’ education. This can be risky because you won’t have much time left to replenish or rebuild a retirement fund. Besides, there’s always the possibility of your children moving away – even abroad – to further their career. So when a health emergency strikes, you’re likely to be unprepared to immediately access quality medical care and attention.

Independent goals

The only thing common between your retirement corpus and your children’s education fund is that they’re both long-term financial goals. Preparing financially to provide for one shouldn’t mean that you compromise on the other.

Planning your children’s education requires financial readiness to fund their choice of graduate course after high school, generally followed by a postgraduate course. You need to consider the course, choice of college, and the time your child will be enrolled, before you can calculate the money needed. Additionally, you have to keep in mind that professional courses can be expensive – even more so if pursued abroad or in a private university in India.

Planning for your retirement, however, isn’t a one-time non-recurring expense. Rather, it should be geared towards meeting your and your spouse’s daily living expenses during your retirement years. You need to consider when you want to retire, budget an adequate source of income, and account for longer life expectancy, while maintaining your current lifestyle and preparing to face exponentially expensive medical needs.

The most important thing to remember is that unlike with your child’s education, you don’t have the option to avail of loans or receive any external assistance (such as a scholarship or grant) in your retirement years. That is, unless you want to be completely dependent on your children and expect them to provide for you and your spouse. Not recommended!

Different goals; different approaches

Start with the basic principle of financial planning – reward yourself first. Secure your financial health before you provide for the financial needs of your family.

Retirement planning must start early so you have enough time to build an adequate corpus for your golden years. The power of compounding will yield generous returns if you save and invest steadfastly.[i] Consider this: if you invest Rs 5000 every month starting at 30, your corpus at retirement after 30 years will be over Rs 50 lakh. If you wait till you’re 45, you will have only Rs 15 lakh. Imagine the size of your corpus if you had had the foresight to start saving and investing right from the time you started to earn in your 20s! Use this retirement planning calculator to understand how much you need to save to have comfortable golden days.

Invest in a child plan when your child is born. By then you’d be hopefully earning well, which will allow you to invest more in an education plan. When it’s time to pay for their graduate and/or postgraduate education, and you anticipate a shortage of funds, consider taking an education loan. Not only would the repayment be a tax break for your child when they begin working, it would also teach them a first-hand lesson on financial discipline.

Be realistic in your planning

Financial planning entails working with real numbers instead of arbitrary targets such as Rs 1 crore for your retirement corpus, or Rs 50 lakh for your child’s education in 15-30 years.[ii] Here’s an example of how could plan for your child’s education in India:

[iii]For an overseas undergraduate program whose fees are currently is in the range of Rs 50 lakh, inflate it by 5-6% every year. So, ten years from now you know it would cost nearly Rs 90 lakh. To have that amount then, you have to start investing around Rs 39,000 monthly now. Calculate the total education expenses against the inflation rate using child education cost calculator.

Investment options:[iv] PPF, Sukanya Samriddhi Account (girl child only), gold ETFs, mutual funds (equity or debt or a mix of both), bank deposits, term insurance plans

In your golden years

Similarly, inflate your current monthly expenses and cost of treatment of any major ailment to arrive at a corpus that provides adequately for an independent and comfortable retired life. Accordingly, back-track to compute your monthly savings from now to build that corpus in the years to come. 

As a rule of the thumb, it is reasonable to assume you would require a minimum of 80% of your current salary to maintain your standard of living[v]. The calculation below will help you to find out how much you need to save every month in order to achieve your retirement goals:

Investment options[vii]: EPF, fixed deposits, equity funds, NPS, pension plans, life insurance, ULIPs

Note: exposure to an option will depend on your risk appetite, age, and target corpus. Remember, you don’t have the option to borrow money after you retire!

Conclusion

Providing for your retirement and your children’s higher education are equally important. While investing for your retirement should begin as soon as you start earning, providing for your children’s academic pursuits can commence when they are born. Think of it as not a choice but striving for a balance between the two goals.

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