Deteriorating SA public education sends investment message to parents
23 October 2013 | Investments | General | Windall Bekker, REZCO
South Africa's public education system has shown signs of serious decline over the past two decades, with a significant drop in numeracy, literacy and graduation rates. As a result, many parents believe it has become increasingly critical for them to consider investing as early as possible to ensure their children can receive the best possible education that they can afford.
A 2013 World Economic Forum report placed South Africa second to last in maths and science globally, and ranked the overall education system at 140th out of 144 countries. According to Windall Bekker, Partner at REZCO Asset Management, this is hugely concerning given that maths and computer skills are often key requirements in areas with the best job growth prospects.
"When saving for a child’s education, parents need to consider that the cost is likely to significantly outstrip inflation. Assuming inflation is around the 5% – 8% mark per annum, the investment objective must at least meet and preferably exceed this target.”
Bekker notes that a family with two children in a mid-tier junior private school could expect to pay about R100 000 per annum after tax for their education. "This means, using this figure, that during the following year one would need to budget for up to R108 000. This additional cost can only come from an increase in one’s after tax-expenditure to pay the difference or else ensure that the return income on the child’s saving vehicle is keeping pace with the increase.
"It is important for parents to start investing as early as possible, so that any necessary adjustments to the contributions can be made earlier than later. The earlier someone starts, the more aggressive the investment strategy should be in order to target a larger return above inflation. Once the parents feel the capital amount is sufficient to provide for the education, taking inflation expectations into account, the strategy can potentially shift to one that is less aggressive with a lower draw-down risk.”
Bekker says that parents may also need to compare the savings of a potential lump sum payment at the start of the year with the opportunity cost of not having those funds in the investment market.
"For example, if a school offers a 10% discount on school fees for an upfront lump sum payment at the beginning of the year, and the investment vehicle returns 15% per annum, they are potentially losing out on additional investment earnings by paying the fees upfront.”
He says that for those who have started saving far later for their children, there are still options available. "Parents either need to increase their monthly contributions, as well as adding in any year-end bonus to ensure they reach their investment objective for the child, or else take on a more aggressive investment objective. The second option is a far riskier strategy, however, as there is greater potential for the investments to suffer short-term losses.”
"It is critical for parents to accept that the cost of education is likely to continue to rise at a rate above both inflation and their annual salary increases. It is therefore important for parents to consider investing in the correct investment vehicle to meet this need as early as possible,” concludes Bekker.
