Okay, you get it: Yes, you know you're supposed to start contributing to your child's registered education savings plan before you even put her in her crib for the first time.
No, you wouldn't leave her hanging for a second. So yes, you're going to make the annual $2,500 contribution every year so you can take advantage of the Canada Education Savings Grant and pad the investment by an easy 20 per cent. And of course you're going to keep contributing until she heads out the door for her fully funded postsecondary education.
You've got 17, 18 maybe 20 years to make these contributions. But do you actually have a plan for how the money is going to grow?
An RESP, just like any other investment, benefits from different asset allocations over the course of its lifetime. Much like an RRSP, you should be looking for growth at the start, building into a more conservative portfolio as the plan – and, one would hope, your child – matures. There are other factors at play, though: Both an RESP's lifetime and its payout are much quicker than a retirement plan. In the end, as always, strategy comes down to your appetite for risk, but there are certainly some obvious guidelines.
You can effectively start an RESP for your child as soon as she has a social insurance number. Okay, so maybe you can wait to put her in her crib first – but don't wait long after.
A Bank of Montreal Wealth Institute report last month pointed out that while 70 per cent of parents say it's a great idea to save from birth, but only half actually set up an RESP. (And while 83 per cent of parents expect to pay for their child's education, most of those haven't calculated the actual detailed costs of doing so.) Getting an RESP open early is essential – that you can earn tens of thousands of extra dollars by starting earlier.
So you've opened it, and you've dropped in a lump sum of $2,500 to get the plan started.
What do you do with it? You take a familiar approach.
"You need to be in a plan whose asset allocation changes over time and becomes more conservative until the day you're ready to start withdrawing," says Serge Pépin, vice-president of investment strategy at Bank of Montreal Asset Management.
Mr. Pépin, whose bank approaches RESPs with "life-stage" portfolios built from exchange traded funds (ETF), recommends starting your investment with a mix of 85 per cent equities and 15 per cent fixed-income. This should gradually move, over the course of your child's life, to a 35-65 mix when she approaches postsecondary. This reduces market risk over time, so "you have that growth aspect, but you still have that safety in times of market upheaval," he says.
Everyone has their own level of risk tolerance, and some schools of thought are more risk-weighted than others.
At the start of the RESP, Jamie Golombek says, "I would advise that parents, who are comfortable with some degree of risk or volatility in the long term, to go exclusively into an equity portfolio." A managing director with Canadian Imperial Bank of Commerce's Private Wealth Management division, he recommends investing in equity mutual funds and blue-chip stocks to "get maximum growth over as long a period as possible."
(This is where schools of thought diverge. Mr. Pépin, on the other hand, includes a small amount of fixed-income and other conservative investments at first because "markets do move up and down, so you want to make sure you still have your capital preservation.")
Over the course of time, Mr. Golombek says, get more conservative. When your child is in the Grade 8 or 9, he recommends moving some or all of the RESP funds into fixed income or, "for ultimate security," into a series of laddered guaranteed investment certificates (GIC).
Here's one way to do that. Let's say your child is a few years away from entering a four-year postsecondary program; with laddered GICs, you could put the total value of the RESP into four GICs, with each reaching maturity as she starts a fresh academic year.
"Effectively, for each year of college or university, you've got a GIC that's maturing at the beginning of that program, so you're guaranteed that money will be there," Mr. Golombek says. "It's a conservative strategy, but one that will not subject you to the market volatility that's potentially possible when a child is about to start university."
The amount of risk you take on is entirely based on your personal circumstances. But RESPs are certainly a wise, tax-sheltered investment in your child's well-being – and something Globe and Mail columnist Rob Carrick suggests can be more worthwhile than an inheritance when it comes to your broader financial legacy.
And while that 20-per-cent annual grant on contributions up to $2,500 is a desirable guaranteed return of $500, you can contribute even more, up to a maximum of $50,000 for each child over the plan's life. Which isn't a bad idea – after all, a GIC might have a guaranteed maturity date, but some postsecondary students take more than four years to mature.