How much should I invest monthly to take care of my child's college education?

College education expenses are essential, sizeable, unavoidable and getting dearer day by day. I like to highlight that the best way to tackle children’s educational expense is to plan as early as possible, follow disciplined investment approach and select appropriate Investment Avenue (asset mix).The steps in planning

1.      Identify how much would it cost today for your child’s planned college education

Depending on your child’s interest, identify the educational stream and the cost of it. The college fee varies depending on the education stream selected. The ball park fees of current college education in India for selected stream is as shown in the table below

Stream	Course period (Yr)	Fees/Year	Total Course Fee
B.Com/BBA	3	50,000	1,50,000
Engineering	4	2,00,000	8,00,000
MBBS	5	10,00,000	50,00,000
MBA	2	5,00,000	10,00,000

2.      Identify number of years available to plan for your child’s college education

Difference between the age at which your child reaches college education (ex under graduation  @ 18/19 years, post-graduation @ 21-25 years) and the current age will provide you the number of years available for you to plan for your child’s college education

Particulars	Years
Age of your child when attaining college (MBBS)	18
Current Age of your child	6
No of years available for financial Planning	12

3.      Compute the future cost of college education at the time your child attain college

Cost of college education has been increasing over years. Assuming an educational inflation rate of 6%; the current MBBS cost of Rs 50 Lac would cost close to Rs 1 Cr after 12 years from now.

Future College Educational Cost = (Current College Educational cost) * (Inflation factor for the required period)

Future Cost of MBBS after respective years
Period* (Yrs)	4	8	12	16	20
Inflation factor @ 6%	1.26	1.59	2.01	2.54	3.21
Future Cost of MBBS	63,12,385	79,69,240	1,00,60,982	1,27,01,758	1,60,35,677

*Period=(Year at which child attain college)-(current age)

4.      Accumulate the required future cost of education through systematic monthly investments over the financial planning years

A disciplined and systematic investment would be able to generate significant wealth in long run as effect of compounding would work in your favour. The table below indicates the future worth of Rs 1 monthly investment done over years

Future Value of Rs 1 Monthly Investment after respective years (in Rs)
Planning Years		4	8	12	16	20
Investment Total Return	8%	56	134	241	387	589
	10%	59	146	276	470	759
	12%	61	160	319	576	989
	15%	65	184	399	789	1,497
	20%	73	233	588	1,374	3,110

*Table Interpretation: A systematic/Disciplined monthly investment of Rs 1 for 12 Years generating 12% return would be worth Rs 319

The Table below provides Monthly investment required for planning your child’s college education (MBBS @ current cost of Rs 50 Lac)

Monthly Investment required to meet future cost of MBBS (in Rs)
Planning Years		4	8	12	16	20
Investment Total Return	8%	1,12,021	59,530	41,832	32,803	27,224
	10%	1,07,495	54,516	36,395	27,000	21,117
	12%	1,03,105	49,830	31,533	22,066	16,210
	15%	96,774	43,396	25,241	16,102	10,710
	20%	86,882	34,160	17,098	9,247	5,157

*Table Interpretation: A systematic/Disciplined monthly investment of Rs 31,533 for 12 Years generating 12% return would be worth Rs 1,00,60,982 in 12 years which can match the future cost of the college education (ex of MBBS)

Conclusion:

Child’s college education is of prime importance for every parent. In today’s term an MBBS would cost close to Rs 50 Lac; it would cost much higher in future and hence calls for suitable planning.

it takes a monthly investment of Just Rs 16,210 (investing over 20 years @ 12% return) while it takes monthly investment of Rs 1,03,105 (investing over 4 years @ 12% return). So planning early will reduce the burden significantly.

I advise everyone to plan as early as possible and given longer time frame, it would be better off to take exposure to equity asset class which has higher potential return over longer period.

How much wealth should I have when retiring?

A friend of mine is looking out for retirement and is keen in knowing how much he should have at retirement. To arrive at the appropriate numbers following three factors needs to be considered

·         Expected life style- Kind of lifestyle chosen will determine the expected annual retirement income. My personal opinion would be to better plan for INR 75,000- 1 lac monthly income for settling down in Indian Metros, the figure would come down for a Tier 2/3 cities   (say ex expected life style requires 12 lac annual retirement income)

·         Real Investment return- Real return is return adjusted for inflation. I have modelled 6% long term inflation. Equity instruments (stock investments, MF Equity investment) has potential to generate 4-6% real return higher than Fixed income instruments (like bank deposit; certificate of deposit, postal deposit, bond funds) has potential to generate 0-2% real return.

·         Post retirement years – life expectancy post retirement; it would be better to have optimistic life expectancy with medical advancement. For my modelling I have run a scenario of 10,20,30,40 Years of post-retirement life.

Wealth required at retirement can be computed by the following equation

Annual Income required post retirement * Income Multiplier factor

For ex Mr X wants an Annual Income of Rs 12 lac (adjusted for inflation) post retirement for 40 years; His investments would be able to generate a real return 4% return then he would require 2.45 cr and  working is as shown in table below

wealth required at retirement (Re)			Income Multiplier Factor (from table below)
Monthly retirement Income (Re)	1,00,000		Post retirement Years		40
Annual retirement Income (Re)	12,00,000		Real Return on Inv		4%
Income Multiplier Factor	20.5		Income Multiplier Factor		20.5
wealth required at retirement (Re)	2,45,73,062

Income Multiplier factor Table

		Real Return (adjusted for inflation)
		-2%	0%	2%	4%	6%	8%
Post Retirement years	10 Year	11.1	10.0	9.0	8.2	7.5	6.8
	20 Year	24.6	20.0	16.5	13.9	11.8	10.2
	30 Year	40.9	30.0	22.7	17.8	14.3	11.8
	40 Year	60.5	40.0	27.9	20.5	15.7	12.5

*Income Multiplier factor for different post retirement years and real return

Wealth required at retirement for an annual income of 12 lacs (real terms)

Amount in Cr for annual retirement income of Rs 12 Lac (real terms)		Real Return (adjusted for inflation)
		-2%	0%	2%	4%	6%	8%
Post Retirement years	10 Year	1.33	1.20	1.08	0.98	0.90	0.82
	20 Year	2.95	2.40	1.98	1.66	1.42	1.22
	30 Year	4.90	3.60	2.73	2.13	1.71	1.42
	40 Year	7.27	4.80	3.35	2.46	1.89	1.50
			Debt		Equity

Impact of Stable rental/other Income

Mr X gets monthly rental income of Rs 30,000 (contract has inflation adjustment) ; then to achieve his monthly target of Rs 1 Lac, he requires Rs 70,000 (real return) income from his portfolio; then he should have 1.72 Cr (instead of 2.45 Cr when no rental/other income)

wealth required at retirement (Re)			Income Multiplier Factor (from table below)
Monthly retirement Income (Re)	70,000		Post retirement Years		40
Annual retirement Income (Re)	8,40,000		Real Return on Inv		4%
Income Multiplier Factor	20.5		Income Multiplier Factor		20.5
wealth required at retirement (Re)	1,72,20,000

Conclusion

Retirement planning has to take into account lifestyle, Investment return, post retirement years.

Life style chosen and post retirement years are directly proportional while investment returns is inversely proportionate to the required wealth.

From the above table its clear for an annual income Rs 12 lac (inflation adjusted) for 40 years; we need to have Rs 3.35 Cr (investing in fixed income instrument @ real return 2%) whereas we need to have Rs 1.89 Cr (investing in equity instrument @ real return of 6%; 56% lower than the fixed instrument portfolio)

I suggest always plan well in advance before retirement for comfortable life style, longer years (30/40 years) and include equity in your portfolio (after considering & understanding the risk involved).