From Dawn to dusk

Claude Mills
Staff Reporter

Last week Tuesday, The Gleaner’s initiation of a fund to help with the education of a baby girl, Asheena Dawn Myrie - her middle name symbolic of the New Dawn Initiative for a better Jamaica - took the nation by surprise.

The gesture has generated discussion and contributions have already been made towards the $100,000 target which will be placed in a trust fund to help defray the cost of Dawn’s college education. At Lifestyle we got to wondering how $100,000 could be invested today to ensure maximum returns in 18 years.In Jamaica there are no college savings plans per se “but there are instruments that you can put money in to save for a child’s education,” said one investment analyst. “There are fixed income (Government securities), equity (stocks) and the unit trust which is a pool fund managed by someone with expertise but which members of the public can buy units of. “...if someone gave me $100,000 to invest for their child’s education 18 years in the future, I would spread the money 60-40, putting the greater portion in equity, and the rest in fixed income,” he added.

Nothing is guaranteed, however, noted another investment analyst. “You can’t make a prediction many years ahead, especially with equities. A company that exists now might not exist then, and the market moves up and down over time. Further, you can never tell what inflation is going to be, even the Government is unwilling to predict inflation for next year because it is dependent of so many factors out of their control, for instance the price of oil.”

According to a number of investment analysts, a $100,000 investment in Government securities today would realise a return of $768,996.58 in 18 years at a rate of 12 per cent. A $100,000 investment in equity would realise a return of 1,446,251.45 in 18 years at a rate of 16 per cent.

The current cost of education in Jamaica and the US

Earlier this year it was announced that tuition fees at the University of the West Indies (UWI) had jumped by as much as 25 per cent in some cases. In the faculty of Arts and Education, tuition leaped from $83,708 to $101, 527 annually while in Social Sciences the increase was from $67,185 to $101,527. In the medical-clinical faculty, costs soared from $253,401 to $309,310.

According to the US Department of Education, National Center for Education Statistics, tuition and fees alone for public four-year institutions amount to US$3,489. However, the average cost, when room and board, books and supplies, transportation and personal expenses are added, is estimated at US$11,608.
Tuition and fees for private four-year institutions amount to about US$15,146. The total cost, room and board, books, supplies, transportation, and personal expenses are added, is an estimated US$24,004.

These 2000-01 estimated figures assume a 4 per cent annual increase over previous years.

Tips on how to save for your child’s college fund

1. Take advantage of tax benefits.
The tax benefits offered by college savings vehicles can greatly affect how much you accumulate for your child’s college education.
By choosing a plan that allows you to defer taxes on your investment gains until you withdraw the money, your assets have a chance to grow faster. This tax-deferred growth can make quite a difference in the value of your account.

2. Think carefully before saving in a child’s name.
When you invest in a child’s name in a custodial (UGMA/UTMA - see information on investment opportunities available in other countries) account, you benefit from tax benefits and account flexibility. Keep in mind, however, that a contribution to a custodial account is an irrevocable gift. Assets in the custodial account must be used for the child’s benefit. The child has the legal right to assume control over the account when he or she reaches the age that the custodianship terminates - usually 18 or 21, depending on state UGMA/UTMA law and/or the terms of the custodianship.

3. If you like to direct your investments, remember it may take time to match the efforts of a professional manager.
Managing your own college savings account allows you to be more aggressive with your money, but you also run the risk of being less diversified or leaving yourself overexposed. You may even be too conservative to meet your savings goal.

4. Understand the financial aid implications.
Know how accessible your assets are.

Investment opportunities available in other countries

Major commercial brokerages and banks are spending millions of dollars to market dozens of new college savings tools during one of the longest-running bull (meaning very strong) markets in American history.

• College Illinois! Prepaid Tuition Program is a college funding tool that allows you to pay for your child’s tuition several years in advance. If you select an Illinois community college or public university, College Illinois! will pay 100 per cent of tuition and mandatory fees billed by that institution (for as many semesters as you have purchased coverage at the community college-level or public university-level), regardless of how high tuition and fees might have climbed between your date of purchase and your benefits-claim date.

• The Education Savings Account offers the potential for tax-free investment growth when you use the account to pay for a child’s qualified higher education expenses.

• Uniform Gift/Transfer to Minor Accounts
Uniform Gift to Minors Accounts (UGMAs) and Uniform Transfer to Minors Accounts (UTMAs) allow you to invest under a child’s name with an adult as custodian.
UGMAs and UTMAs are vehicles that allow minors to enjoy the benefits of owning securities within the limits of the law. There may also be tax savings on the earnings, as children usually have lower income tax rates than adults and the first $700 of earnings each year are not taxed.

• College Savings Bank offers the CollegeSure CD, a certificate of deposit indexed to college costs and guaranteed to meet future tuition, fees, room and board. It’s backed by the full faith and credit of the United States up to $100,000 per depositor. There are also tax-advantaged Section 529 qualified tuition programs and IRAs for college.

What a $100,000 nest egg could yield in 18 years if invested today

Projections about returns on Government Securities and Equities over an 18-year period can be inaccurate because significant changes that could occur in the economy.

However:
• Assume a conservative rate of return of 16 per cent for equities (stocks) and 12 per cent for fixed income.

• The principal of $100,000 invested for 18 years at 16 per cent per annum would yield $1,446,251.45.

• Or $768,996.58 if invested at 12 per cent per annum for 18 years.

• Keep in mind also that companies listed on the stock exchange may be wound up or merged during this 18-year period, causing returns to be higher or lower than predicted.

Inflation rates

The rate of inflation will affect the returns you get.

Below is the inflation rates for the last 11 years in Jamaica.