Currently the cost of a university degree is about R31000-R35000 per year, so over 3 years that is pretty much R100000. If varsity fees continue to increase at levels above inflation then this will increase to somewhere between R200000 and R300000 per year for my 3 year old son. That’s between R600000 and R900000* for a 3 year degree in 15 years time.

At a return of 5% better than inflation, you would need to save about R1800 per month (escalating with inflation each year) for 15 years to get there. This is on top of your bond, car, medical aid and school fees!

On the face of it, that’s out of reach for just about everyone…unless you make use of the Fundisa education savings offering (see April 2009 post for more on this amazing offering).

The bottom line is that if you use Fundisa at R200 per month, for 15 years and the government continues to pay the 25% annual bonus and you get an average 10% return from the fund, then you will have ±R1.2million in 15 years time. This is more than enough to pay for the average 3 year degree. 

If you start saving into Fundisa when your child is born, then 18 years later, you should have ±R3.4 million in the fund…you could probably pay for a full medical degree for 2 and still have some change! This is because at a return of 35% per annum, the value of your fund should double almost every 2 years. And I doubt if you will ever get a “guaranteed” return of 35% for 18 years in a row anywhere else.

Surprisingly, the uptake of Fundisa has been relatively poor – the cynic in me says that this is because there is no commission on the product and so there is no incentive to sell it. Whatever the reason, if you have kids and you hoping to send them to study at a tertiary educational institution one day, and you are not yet taking advantage of this incredible offer then you are very foolish and it is time that you got “fundisa’d”#. It’s a no-brainer!

Notes:

*this assumes escalations of 12 & 15% per annum.

#For those that speak Xhosa – excuse the pun. For those that dont, “fundisa” is a xhosa verb meaning “teach”.

Related posts:

1. Fundisa (again)
2. Bank fees…moving forward!
3. Guaranteed returns of 25%?

For anyone who is prepared to be locked in for a while there is an even better option that has been overlooked while short term interest rates have been high and that is the RSA Retail Savings Bond. It is a 2, 3 or 5 year option that is being offered by the SA Government (National Treasury) directly to the public and the interest rates are far better than anything else out there (and there are no fees to get in).  The only “catch” as I can see it is that you are locked in for the period (you can exit after 12 months but there will be an exit penalty). The rates are in the table below but for more information on this go to www.rsaretailbonds.gov.za

CURRENT INTEREST RATES

They also have an inflation linked option which is also quite attractive.

That’s all for now

Gregg

Related posts:

1. Interest (ing)…
2. Talk about a conflict of interest…
3. Bank fees…moving forward!

Just read an article online about how in these tough times one of the positive outcomes is that people seem to be investing more into their retirement funds. The bad news, though, is that it is still usually too little to enable most people to retire financially secure.

Of bigger concern for me, however, is that not only are most people contributing too little, but on top of this, most people are probably not taking enough risk on their funds. This has mostly to do with the fact that most funds are completely inappropriately named or labelled.

For example, where there is individual fund choice within a pension fund, there are usually 3 or 4 funds such as the “Aggressive Fund”, the “Balanced Fund”, the “Conservative Fund” and possibly a guaranteed or money market fund. On seeing the word “Aggressive”, most investors usually panic and run for the relative safety of the Balanced or Conservative Fund (after all this is retirement money so they don’t want to risk it). Balanced Funds in this context will usually have ±50% in equities with the Conservative Funds having even less. Now we know that the best way to beat inflation (over time) is to have exposure to equities. So while they will probably not lose too much in the down cycle as a result of this choice, they will most probably also not benefit sufficiently in the up cycles.

The problem, you see, is in the names of the funds. Remember that in terms of the investment guidelines for retirement funds, you can never have more than 75% of the total fund invested in shares*…so how can that ever be an “Aggressive” fund? In the unit trust industry, funds with 75% in equities are usually referred to as Managed or Balanced Funds. So why the inconsistency in naming when it comes to pension funds?

As a result of this inconsistency, my suspicion is that not only are people not saving enough money for their retirement, but on top of this, they are also being too conservative with their fund choices and as a result of this they will have even less than they expected when they retire.

Bottom line is that if you have time on your side (at least 12-15 years before retirement) you should most probably be in the most “aggressive” portfolio that you can – this is the greatest chance you have of achieving inflation beating returns.

So remember, when it comes to retirement money, you can not, by definition, have an aggressive fund – at least 25% of the fund will be in cash, bonds and property at any stage.

*yes, I know that technically speaking there could be up to 90% in shares and property, but the reality is that this is usually not the case, with most “aggressive” funds having 75% or less in equities with the balance in bonds and cash.

Related posts:

1. Dilbert on Finance
2. Just because it is raining it does not mean the drought is over!
3. Financial Planning for Dummies – Part 3