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How to balance investing in your child’s education versus your own retirement

Published Jan 15, 2022


South African parents generally place a premium on high quality tertiary education for their children to give them the best launch pad for success. But this approach can often displace other important priorities when it comes to building a well-diversified investment portfolio, including adequately provisioning for retirement.

"Balancing education and retirement in your investment portfolio, along with a mixed basket of assets classes and funds, is vital for long-term financial stability and success. We all want the best for our children, but there is also enormous value in building long-term financial security. Investing towards retirement can bring a great sense of financial relief for the entire family later in life,” says Nic Horn, Director, Regional Head and wealth management specialist at Citadel.

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The fundamental difference between retirement and education funds

Retirement funds are invested over a long timeframe, which means they can grow exponentially through compound interest and ride out volatility in the financial markets. Education funds, on the other hand, are invested to be spent over a certain period in the more immediate future, which means they don’t have the same growth potential from an investment point of view, Horn explains.

“You don’t invest tomorrow’s money in the same way as you do the money intended for 10 years’ time, so assets and risk must be matched to the intended goals and timeframe,” says Horn.

“In considering retirement funds, the main risks are inflation and volatility. Volatility can be your friend if you start saving for retirement while still young, and not, as happens too often, when you are older, and then take on too much risk, hoping to invest to catch up. Starting young, even with a smaller monthly contribution, helps you take advantage of compounding, which can gain great wealth and enable you to ride out any volatility. Young people should focus on the growth potential in their portfolios as much as possible and consider more volatile assets such as shares which could benefit them long term,” says Horn.

A degree is no financial guarantee

Future-forward education and skills development no longer needs to cost an arm and a leg, creating room for other investment priorities, says Horn citing the various tertiary options available including MOOCs (massive online ocpen Courses) from top Ivy League universities that make impressive courses accessible to South African students who are studying online. In the booming digital economy, lifelong learning to develop marketable skills is becoming a trait that employers are looking for – and this approach also creates more room in the budget for other investments.

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“The dwindling economy combined with the oversupply of graduates boasting existing skills proves that South Africans need to focus on developing critical thinking, entrepreneurship and other skills which are transferrable, despite what the future economy looks like,” says Horn.

Teaching children financial responsibility from a young age may be more valuable than any degree, says Horn. “Children need to understand the value of money and be encouraged, as they grow older, to contribute towards their own future education and to start investing early. ”

Expecting the unexpected

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Horn admits that there is no such thing as a smooth plan. Life is full of unexpected events which must be considered in your financial plan, and business setbacks or early retrenchment can happen to even the most seasoned professionals due to unforeseen world events.

“It is in situations such as these that having a trusted financial advisor can make all the difference. Emotion is a dangerous thing in financial planning and investing, and when we are caught up in emergencies or difficulties, we need the calm objective view and the solid sounding board provided by a reliable financial advisor,” says Horn.

“In the case of retrenchment, your advisor will not only help you cut your coat according to your cloth, but help you recalibrate the plans you were working towards and now need to tweak, so that you can tap into savings, for instance, without costs, penalties and excessive tax. In difficult situations, people are often tempted to stop insurance policies or cash out their retirement investments. There are smart and safe ways to recalibrate and build your wealth again without undermining your retirement investments,” Horn says.

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