How does a personal finance columnist invest his kids' RESP money in these uncertain times for stocks?
Very carefully, considering one son is 19 and in his second year of university and another is a 16-year-old in Grade 11. I haven't given up entirely on growth, but I'm mainly concerned these days with preserving what my wife and I have saved, what the markets have given us and the government's contribution through the Canada Education Savings Grant (equal to 20 per cent of the first $2,500 in contributions to a registered education savings plan per beneficiary each year to a lifetime maximum of $7,200).
Market upsets like the one we saw last week remind me that I'm on the right track in having much of the RESP in bonds, GICs and an investment savings account paying all of 1.25 per cent. Maturity dates for the bonds and GICs are in the summer, which means money is available when it comes time to pay the annual tuition bill. The full cost of the next two years of university is virtually bulletproof, if earning little. My investing goal for this money is for it to be there when I need it. I have enough to think about without worrying that stocks are heading south at time when I might need to sell them.
It occurs to me that investing in a self-directed RESP is unlike anything else. Assuming you start after a child is born, you have just 12 years to invest aggressively. You then have to start winding down the risk level gradually and then all but eliminate risk once as your kid applies for college or university. Retirement investing is somewhat similar in that you invest aggressively when young and then ease off when you stop working. But you'll want to be careful about getting out of stocks in retirement. As typical lifespans edge out to 90 and beyond, we'll need the growth potential of the stock market to help our savings last.
The big RESP investing challenge is for parents with kids who are far apart in age. With individual RESPs, you can tailor a plan to each child's needs. With a family plan, where savings for multiple kids are aggregated, you'll need to strike a balance between capital preservation for the oldest child and some degree of growth for the younger.
One area where RESP and investing while retired are similar: You'll want to keep two years of expenses in safe, liquid investments so you're not caught short when you need to make a withdrawal. Today's uncertainty for stocks makes that a no-brainer.