After reading my earlier post on How to Retire Early in 5 Steps, some of my friends asked me if it is realistic to be able to achieve early retirement given the soaring cost of children’s education. So I thought I should elaborate a little bit, which is what this post is all about.

I want to preface by saying the following

  • I personally did not plan expenses for my child's education since I do not believe in the current education system and we decided to home school our child
  • I don't believe expensive schools impart better knowledge than cheaper ones. Of course the expensive ones do provide more facilities so your child can feel more comfortable
  • Children value spending time with parents more than any expensive toys, school or fun activities

It’s not how much money you are going to leave your children; it’s the memories you’ll leave them with.

-- Being a Father

  • I don't believe that a child's education should be a parent's problem once they reach the age of 18. If they are so inclined to learn, they should be able to pay for their own education
  • Spending money on marriage is a joke and planning to foot the bill for your child's marriage is an even bigger joke
  • I don't believe in leaving a lot of money for kids

The perfect amount to leave to your kids is enough money so that they would feel they could do anything, but not so much that they could do nothing.

-- Warren Buffet

Having said that, your opinions or situation may differ from mine, and hence the financial planning for child’s education is probably important for you. So how do you go about it?

Start by figuring out your children’s yearly expenses and one time expenses. Let’s take an example of both. An yearly expense could be the cost of school, books, bus fees etc. And one time expense could be marriage or MS in the US (congratulations are in order if you are expecting this from your child and they made it this far!). Now you need to figure out what corpus will let you pay for the above types of expenses. Since we have already covered the basic math required for financial planning in my earlier post, this should be quite easy. If you have not read that post, I strongly urge you to read it. I will work out an example with some numbers, but you need to plug in your numbers in the formulas.

School Expenses

Lets start with the yearly expenses. Say your child’s school and related expenses cost Rs. 50,000 per year today. And lets say you want to retire 5 years from now. Assume that the education inflation is 10%. Lets say that your kid will be in school for another 7 years after your retirement. Since you will be earning for the next 5 years, you are paying for your child’s education from your income. After retirement, you will need a corpus to pay for child’s education for another 7 years.

The annual school fees 5 years from now (at the the time of your retirement) with 10% education inflation will be

Future Value of Rs. 50,000 = 50,000 * (1 + 10%) ^ 5 = Rs. 80,525

Then you need to be able to pay for another 7 years from the education corpus. To find the corpus, we need to calculate annuity (note that in spreadsheets you will use the FV formula)

Annuity = FV(10%, 7, -80,525, 0) = Rs. 7,63,959

So if you have a corpus of Rs. 7.64 Lakhs when you retire, you will be able to fund your child’s education. In reality you will need to have a slightly smaller corpus than that since the corpus will continue to grow even as you derive income from it for the next 7 years. Lets say you keep the investments in a moderately safe investment instrument like Liquid Funds which give you about 6% rate of return, then your effective education inflation becomes 10% - 6% = 4%. Then your corpus needs to be Rs. 6.36 Lakhs.

School Corpus = FV(4%, 7, -80,525, 0) = Rs. 6,36,014

Marriage Expense

Now lets take an example of one time expense like marriage or lump-sum amount required for MS in the US. Assume you need Rs. 30 lakhs for this expense in today’s terms. Further lets assume the inflation for this expense to be around 7% and it will happen 15 years from now. Also assume your corpus will give you 10% return from the time you retire. Then

Future Value of the expense 15 years from now

= 30,00,000 * (1 + 7%) ^ 15 = Rs. 82,77,094

Corpus you will need to build by retirement in 5 years (using present value)

= 82,77,094 / (1 + 10%) ^ (15 - 5) = Rs. 31,91,178

So all you need to do is save up Rs. 31.91 lakhs by the time you retire to fund your expense 15 years from now.

Under-graduation Expenses

If you are planning to support under-graduation for your child then do the same thing again for another corpus. Say 12 years from now, you need to support your kid for 4 years of under-graduation. Assume that the cost of under-graduation per year today is Rs. 1,00,000 and inflation of 12% for college education. You want to build the corpus by the time you retire in 5 years. Assume the return on the corpus will be 10% from the time you retire. Then

Cost of under-graduation after 12 years

= Rs. 1,00,000 * (1 + 12%)^12 = Rs. 3,89,597

Corpus needed for 4 years of graduation after 12 years

= FV(12%, 4, -Rs. 3,89,597, 0) = Rs. 18,62,014

Corpus you will need to build by retirement in 5 years (using present value)

= 18,62,014 / (1 + 10%) ^ (12 - 5) = Rs. 9,55,507

So all you need to do is save up Rs. 9.55 lakhs by the time you retire to fund your child’s under-graduation 12 years from now.

Putting all these things together, your total corpus at retirement to support a child’s expenses should be

School Corpus + Marriage Corpus + Graduation Expense

= Rs. 7.64L + Rs. 31.91L + Rs. 9.55L = Rs. 50 lakhs approximately

So in addition to your retirement corpus you will need this additional corpus to support one child. Of course if you have more children just do the same exercise for the other children. There is a bit of math in this post but hopefully if you have seen my previous post, this was not too difficult to follow along. And of course, if all this is too much work for you, then, you can hire a financial planner or use my simplified calculator. As for me, I love the math.