Retirement is thought to be the grand time of our lives when there is enough time to do all those things. It is a time when you stop living at work and start working at living. But, retirement also means the loss of regular salary/income as you hang up your boots. Virtually, there is no day off when it comes to retirement if money is in short supply!
Many people do fall in an uncomfortable retirement situation when they exhaust a large portion of retirement corpus on financial goals that are important for their children. Unable to save and invest to build a higher education corpus for their children, many parents take the painful decision of funding their child's higher education dreams. This has a direct consequence: these old people are left fending for themselves if the child does not return back the money or does not support their parents later. Due to the social system, such senior citizen parents can't speak ill of their child and this situation quickly turns into one where 'retirement' becomes a nightmare. There are many such tales where old parents are forced to lower their economic standards and are forced to live day by day.
Hence, parents approaching retirement years should be careful about funding their child's higher education needs. Under what conditions should you help them? How much should the financial help be? Why is it bad to sacrifice your retirement savings to pay for your kid's college education? This article will give you answers.
A moral dilemma
'Appreciate your parents. You never know what sacrifices they went through for you.' This is one of the innumerable quotes that show how parents are viewed socially. Parents are known to sacrifice their biggest dreams just so that their children's smallest desires are taken care of. In the tight-knit Indian context, sacrifices by parents often reach epic proportions. It is well-documented how parents in India take on extra work, sacrifice holidays and borrow money to put their children through university.
An HSBC study report revealed that Indian parents say they contribute Rs 3.61 lakh on an average, towards children's higher education. The entire spend is about Rs 7.77 lakh for the university program, including bills and lifestyle costs. From tuition fees and accommodation to laptops and textbooks, parents’ spending on their children’s university education includes various costs. Considering what parents contribute and how much students end up paying, there is still an average gap of Rs 4.15 lakh. To plug this gap, parents take loans, work extra hours or take up an additional job, or even borrow from friends and relatives.
About 79 per cent of parents fund their children’s university education from their regular earning rather than savings, said the HSBC report. About 64 per cent of parents have taken on some kind of debt for their child’s university education.
While it's a noble act to try to ease your child's debt burden by dipping into your retirement corpus, you could end up reducing the amount of money you have to meet your own expenses in retirement. You may even have to ask your child to help cover your expenses—creating a financial burden on the very person whom you tapped your retirement savings to help.
When To Say 'No'
Being parents is a beautiful feeling. But, parents are not blank-cheques. Your retirement is a very serious business. Without any form of regular income, retirement is all about managing your costs on your retirement savings. Even a month where expenses rise 20 per cent can cause immense difficulties because your accrual from savings will never jump 20 per cent.
Every parent has the desire to go the fullest extent possible to back their child's dreams. If your son or daughter is good at studies, the pressure to go the extra mile to see them get the best education (often, costliest) is very high. But, the individual inside you knows the financial condition. If you are 55 and do not expect a working life of more than 8-10 years, do not make the mistake of using a large portion of your retirement corpus to fund your child's higher education. You do not have too much time to replenish the financial hole that you will create. Plus, always remember that as you age, the medical costs of your health upkeep are going to significantly increase. That is an incremental pressure. No middle-class person saves a huge retirement corpus: we usually have the EPF, the PPF, some bank deposits, and some mutual fund/life insurance schemes.
Often, your retirement corpus is not more than Rs 30-40 lakh. Take a step back and think what this modest corpus will fetch you. Assuming that a large number of people die at 80 years of age, retirement means 20-22 years of additional living if you retire at 58-60 years. During these 20-22 years, there will hardly any inflow/income. In this period, you will have to spend the Rs 30-40 lakh retirement corpus carefully so that it is enough to support you and your spouse. A Rs 40 lakh amount kept in bank FDs today will generate Rs 2.8 lakh annual interest i.e. Rs 23,000 per month.
Do note two crucial things about retirement
1. Interest rates are declining. If 10 years ago, retired people got eight per cent interest rates, today they get seven per cent. After a decade, this bank FD interest rate will go further down. At this moment, the longest FD tenure is 10 years. This means each time you re-invest your retirement corpus in bank FDs, there is reinvestment risk as the new rate of interest can be lower than the previous time. So, the Rs 23,000 per month income could fall to Rs 20,000, then to Rs 18,000 and even below.
2. If you use Rs 10 lakh of your retirement corpus for a child's higher education, you are straightaway cutting your retirement income to Rs 2.15 lakh on the Rs 30 lakh corpus (not Rs 40 lakh). This means you can get a maximum of Rs 18,000 per month as interest income. In fact, every lakh you spend from your retirement kitty will see your monthly retirement interest income drop by Rs 500. The significance of Rs 500 may not seem much today when you are earning, but when you do not earn any penny the same amount of Rs 500 becomes quite big.
How much should parents give
Given that giving financial help to your child is an emotional decision, you will be hard-pressed to help. But do not make your retirement corpus the main source of your child's education funding. Exhaust all other options before you even consider dipping into your retirement corpus.
What are the other options?
Firstly, explore all loan options including education loan, property mortgage, etc. to fund your child's education. Education loans are given if the educational institute is recognized. Mortgaging your property is also a good option, and can compel your child to repay the loan when they start earning. In the worst-case scenario, you can let go off your property --- it is much better to live in a rented place with some income than to live empty-handed in your own home. Of course, renting is a cost.
Secondly, many parents today save and invest in financing their child's marriage. Talk to your son/daughter to check whether they are okay about using wedding money for education. If there is wedding money, it is better to use it for education today only.
(The author is a journalist with 14 years of experience