Saving for children’s college education

[ClubMan]

I am not so sure about this at all. Over ten years equities will probably outperform anything else. But if the OP is regularly saving the same amount every year for ten years for a big drawdown at the end then the average investment horizon is five years.

They don't need all the money in one go for year one of college for the eldest.

It depends on OP's overall wealth, risk tolerance, future income, etc.

I agree. But many people misunderstand their needs and the risk involved in different investment options. Many think that deposit products, including State Savings, are somehow less risky than other options.

If I was on a fixed income with a big outgoing like kids' education coming up I'd probably just use state savings products due to mature around college time, certainly this approach by the kids are in late teens.

Equities is just one option. They're are others such as unit linked funds with a lower risk/reward profile. I really don't think that something like State Savings is a good option here.

Continuing to put savings into an equity-type product to cover a a 17YO's college fees in a year's time seems pretty risky to me.

I don't understand that you mean here. Neither of the kids is 16.

Anyway, as I said before, I also think that the original poster probably needs to do a Money Makeover post because it's not really possible to deal with this specific issue in isolation separate from an analysis of their overall financial situation.

 

[NoRegretsCoyote]

Many think that deposit products, including State Savings, are somehow less risky than other options.

State savings very much are the lowest-risk option for a retail investor. No government will default on hundreds of thousands of voters! The flipside is that of course the expected return is much lower than other products.

Fully agree that it all depends on broader OP circumstances.

 

[ClubMan]

State savings very much are the lowest-risk option for a retail investor. No government will default on hundreds of thousands of voters! The flipside is that of course the expected return is much lower than other products.

And the return will almost certainly be negative in real terms. So, not risk free.

 

[NoRegretsCoyote]

So, not risk free.

That's moving the goalposts! I said lowest risk, not risk free.

The only risk on a state savings product is inflation risk. You can be as sure as anything that you'll get the principal and interest at the end.

 

[_OkGo_]

And the return will almost certainly be negative in real terms. So, not risk free

You constantly drop this line despite it being completely incorrect. Inflation is not a risk, it just is what it is.

You can invest in low (zero) risk state savings and turn your €100 into €110. Or you can accept the risk choosing equities and it will be worth €70-130. Regardless of whether the final value is €70/110/130, the purchasing power will be reduced by inflation.

 

[NoRegretsCoyote]

Inflation is not a risk, it just is what it is.

Inflation is a risk (and indeed the only risk) for a state savings product. If the consumer price level doubles in ten years then your €100 in a state savings bond is worth €50 at the end.

By contrast equities are more likely to "keep up" with inflation as firms' cash flows matter most here.

 

[ClubMan]

You constantly drop this line despite it being completely incorrect.

What's incorrect about pointing out that nominal returns below inflation mean that capital falls in real value?

Or you can accept the risk choosing equities and it will be worth €70-130.

Why are you just making up figures?

 

[NoRegretsCoyote]

What's incorrect about pointing out that nominal returns below inflation mean that capital falls in real value?

It can work the other way. You could have bought a one-year state savings product in October 2008 for 2.1%. HICP fell 2.9% over that period giving you a real return of ≈5%. I remember as I bought a few at the time!

Risk of unexpected inflation or deflation is not unique to state savings products, although other asset classes are less likely to be impacted by it to the same extent.

Otherwise I've analysed inflation for many years and there is a remarkable cognitive bias to assume that inflation over five or ten years is going to be at the rate it is today.

 

[Harvard]

That's jumping the gun hugely.

Without knowing the OP's full financial circumstances putting wealth into this type of product for a decade-long investment horizon may not be wise.

No jumping the gun. I have suggested one possible avenue for the OP to explore based on s/he's query.

 

[_OkGo_]

What's incorrect about pointing out that nominal returns below inflation mean that capital falls in real value?

Because it is meaningless. Why does it matter? Subtracting 2% off the nominal return of a fixed term deposit and 2% off the "expected" equity return makes no difference to your decision making.

Why are you just making up figures?

They are examples. The point being you can take a higher risk strategy and your investment can drop in nominal value below your investment. That value will still suffer from inflation. So why specifically call it out on low risk deposits?

 

[Leper]

I think we've exhausted all investment options except a likely silly bet at the bookies. When I look back at ours attending university I cringe that no grants were available to us because our income was barely over the limit. If you're a high earner the grant makes little difference to you.

Here's my tuppence worth (if I were in the same boat again):-
1. In the years leading up to leaving their secondary education I'd work my butt off with overtime (if available). I'd cut down on expenses including heating, food, petrol etc. I'd amass as much money as I possibly could before the college year was started (or even the year before). If. necessary I'd take on a part time job. I'd set up the "college" fund and try not to withdraw from it even if it were stuffing money in a mattress.
2. If I could in the income assessment year I'd reduce my working hours (and possibly the hours of Mrs Lep) to ensure our income would be under the grant regulations limit. A career break might be a good option. These might not be an option to you for various reasons.
3. My last resort (and under duress) would be to remortgage, but for some it can be a viable route. If the banks weren't co-operating the Credit Union would.
4. I get the feeling OP will not pay too much attention to the options suggested, but many looking in will because sooner or later the college nettle will have to be grasped.

I could write more from personal experiences on the matter, but won't. And if I may add a little humour to the most famous lie in Ireland "Some Day Dad, I'll pay you back . . . " takes on a whole new meaning.