Never too soon to open RESP for your child

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This article was published 29/9/2018 (791 days ago), so information in it may no longer be current.

Opinion

This may come as no surprise, but higher learning leads to higher levels of wealth. OK, maybe not for those of us with history degrees.

That’s a joke (sort of).

A recent article in the trade publication Investment Executive cites a study by Credo Consulting Inc. that found individuals with the most education were likely to have the most investable assets later in life — money that can be used for retirement.

The study also found the majority of parents were not saving much for their children’s post-secondary aspirations.

This is understandable, given all the "balls parents have in the air," says James McCreath, portfolio manager with BMO Nesbitt Burns in Calgary.

"People have lots of things going on in their lives, and it’s likely difficult to maximize everything they want to do with their saving."

They have RRSP contributions (hopefully), the car payments, the mortgage, student loans to repay and all the present-day costs with raising the kids.

So, who has money for an RESP?

Heck, this handy savings vehicle might fly entirely under the radar of some — a real UFO (unidentified financial objective).

Well, the registered education savings plan — RESP for short — should get the recognition it deserves.

Here are its basics: save money that grows tax-sheltered in the account, so it can be withdrawn later and taxed in the hands of your child, the post-secondary student. Presumably, the taxes might be nil, given your not-so-little scholar doesn’t earn much taxable income.

But the giant upside of the RESP is your contributions can attract the Canada Education Savings Grant. The federal grant is a 20 per cent add-on to contributions, up to a maximum of $2,500 annually per child. That’s $500 from the government per year for each child in your brood.

So, parents who aren’t using an RESP are missing out on, potentially, a maximum of $7,200 per child in grants, likely a little less than one year’s tuition in 18 years.

Of course, the question is, how does one find the money? And then, how does one invest?

Here are some tips:

Start small and diversify

Finding money to save for anything while raising a young family is challenging. Incomes aren’t always high, yet the bills always are. But, even if you can contribute $20 a month to an RESP (you can do one family fund for all your kids), that’s a start, McCreath says.

"Start small and aspire to do more."

Even better is to come up with the cash monthly to get the maximum benefit — $2,500 in annual contributions for the $500 grant. That’s a contribution of $208.33 per child, every month.

Regardless of the size of the sum, the bright side of starting early is you can take on more risk with your investments to reap — hopefully — higher returns on your money, says David Dyck, portfolio manager with Vancouver-based robo-advisory firm WealthBar.

"A low-cost, diversified portfolio that leans a bit more towards growth-focused investments (such as equities and real estate) is usually a good option in the early days of the RESP."

This is where robo-advice platforms really shine, because you can invest in a portfolio of low-fee exchange-traded funds (ETFs) that automatically diversifies and rebalances your money.

Of course, mutual funds sold through your neighbourhood bank or credit union also do the job. The important takeaway is to keep things simple, says MaryAnn Kokan-Nyhof, certified financial planner with Desjardins Financial Security Investments Inc. in Winnipeg

Just don’t be gun-shy with the markets.

"Children born today have a long time horizon, more than 18 years," she says. "Parents can afford to take on some risk, for better returns, so a growth mutual fund portfolio might be suitable."

Even investing in one mutual fund — such as a low-cost global index fund — is a respectable starting point. This allows you to contribute a small amount every month without commissions, while keeping fund management costs low. Basically, you’re picking a fund that rises and falls — hopefully, more rising than falling — with the S&P 500 and other major global stock markets.

 

Middle of the road

OK, now you’ve got some money because you’re earning more income, and the kids are able to take baby steps (along with other milestones of civility that come from your efforts as a fearless co-leader of the household).

The challenge now is, as they get older, the timeline to post-secondary education shortens. This means you should take less risk with portfolio options. Like a greying 50-something worker saving for retirement, the RESP requires a balanced approach, Dyck says.

"Here, you’ll want a portfolio that has more diversification, with a mix of bonds for some stability."

He adds it’s also important your equity investments have exposure to the U.S. and not just Canada’s stock market, the TSX.

The overarching goal of a balanced strategy: "Getting a good return that still shields against... downs of the market," Dyck says.

Additionally, by now, you should have a sizable-enough sum to make a DIY (do-it-yourself) ETF approach viable. That being the case, you could create an RESP portfolio with one low-cost global equities ETF and one low-cost Canadian fixed-income ETF that covers both corporate and government bonds. Regardless of your mix of investment vehicles — stocks, bonds, mutual funds, GICs or ETFs — a balanced approach aims to provide growth from dividends, rising stock values and interest from bonds. At the same time, its growing focus on fixed income — bonds — provides a buffer to bear markets that cause stock prices to fall. That’s because, generally speaking, the value of bonds rises when stocks are falling. So, the whole idea here — from about age eight to maybe 14 for junior — is to get as much growth as you can while limiting the risk of deep losses (similar to the 2008-09 stock market crash).

Nearing the finish line

With the kid(s) starting Grade 9, it’s probably time to start taking risk out of the RESP portfolio. A good argument can be made to do it sooner, or even later. It’s really a matter of appetite for risk and familiarity with market cycles. The point is — just like retirement — the burgeoning adult in your basement may need cash for tuition soon, and the RESP portfolio likely can’t recover from crushing market losses in the span of about three years.

"As your child gets closer to donning the cap and gown, you want to dial down the risk... (using) a basic GIC or bond ladder," says Kyle Prevost, a  financial blogger and Manitoba-based school teacher.

Ideally, start building this ladder — which can be easily done with GICs — five years (four years works, too) before the first tuition payment is needed. Each year, set aside enough for one year’s costs in a five-year GIC. That way, by the fifth year, a GIC is maturing with enough to cover one year of expenses. The strategy creates safe and steady cash flow with a GIC expiring annually to cover post-secondary needs. Typically, ladders are done in five-year increments, with a GIC coming due in each one of the five years. But if you just plan to help with a four-year degree, a ladder of four GICs will suffice.

Of course, all of this may sound a little too much like work you don’t want to do, even though you still want to save. In that case, Prevost has another option: a target-date RESP portfolio.

"The idea of a target-date RESP account is pretty cool," says Prevost, who writes for Young and Thrifty. The reason being is you can put your money into a portfolio of investments and continue contributing, while all along, the portfolio automatically rebalances your money as your children move closer to post-secondary education.

Other similarly simple options include robo-advisers. Another good choice is to work with a financial adviser who can help you accomplish the same goals with probably less effort and a little more cost on your end.

But the big, sharp point of all this aforementioned financial "blah, blah, blah" is to try to save as much as possible to help your kids accomplish their scholastic dreams, so they can pursue fulfilling careers.

Then, as that wealth study forecasts, maybe your affluent adult children can afford to have you live in their basement, should you fall short on your retirement goals.

Again, a joke (sort of.)