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ages and stages

In a perfect world, Canadian parents would be able to start saving for their children’s post-secondary education before they were born. But it’s not that simple for most of us.Getty Images/iStockphoto

In a perfect world, Canadian parents would be able to start saving for their children's post-secondary education even before Junior was a twinkle in the eye. Then by the time Janie hit her undergrad, the parents would have it all covered, without even breaking a sweat.

But it's not that simple for most of us. Rising education costs and economic uncertainty have made education funding seem like a daunting task. Many Canadian parents may be starting to save later in the game, and wondering how they can maximize their education savings if their child is past toddlerhood, or even heading off to school in a year or two.

Education issues can be the most fraught with difficulty in the complex realm of financial planning, says John Amonson, president of Unbiased Wealth Management Inc. in Calgary, Alta.

"Parents need to get really clear on what their objectives are for funding their child's education," he said. "Most parents tend to start the process by suggesting that, 'This is the way I had to do it and that's what I'd like to do for my child.' And it's pretty rare that both parents have had the same experience."

Whether they are starting when their child is a baby or soon to be a high-school graduate, parents "need to spend a bunch of time thinking about what they want to fund, and balancing their own objectives against their education objectives," Mr. Amonson says.

If you have a young child

Parents of very young children should make sure they are in good financial shape before embarking on any aggressive savings plan, advises Mike Holman, the Toronto-based blogger who runs the Money Smarts blog.

"You have to make sure your own finances are at least in reasonable order first. You don't want to be raiding your kids' education fund to make the mortgage payment later on," he said.

If you do want to start saving for a very young child but are low on extra funds, Mr. Holman suggests you start small.

"Try and save just a little bit: $25 or $50 dollars a month," he says. "Later on, once you get serious about saving the money, it will give you a head start."

As for what to do with that money, Sandra Abdool, regional financial planning consultant for Royal Bank of Canada, says that the RESP (registered education savings plan) is definitely the first place to start, as early as you can, because it will allow you to receive the Canada Education Savings Grant. Through this grant, the federal government will give you 20 per cent on every dollar of the first $2,500 you save in your child's RESP each year. (You may be entitled to even more grant funding, depending on your family's income and the province you live in.)

Once you've decided on an RESP, the question becomes what you should invest in – GICs, bonds, mutual funds, ETFs?

If you're dealing with a younger child, time is on your side, Ms. Abdool says, and so equity investing might be something to consider. "But it is up to the parents or grandparents, depending on their comfort level with different types of investment. While time is available to them to go more heavily into equities, it has more to do with that person's comfort level."

And the time horizon until the child needs the money is an important factor, Mr. Amonson says. "Many clients aren't very sophisticated about their time horizon and they tend to treat their investment assets with the same time horizon as their retirement assets." In other words, 17 years pass more quickly than you might think.

Gina Macdonald, a Vancouver-based financial adviser and portfolio manager, cautions against the assumption that just because a child is young, you have time to take a lot of risk.

"Some people think if you've got 16 years until they go to school, you can weather some economic volatility," she said. But she cautions investors to take the past decade into consideration, as extreme volatility can affect how much money is available to your child.

"If you do invest more aggressively, you might flatline or decrease the value."

Dan Bortolotti, who runs the Canandian Couch Potato investment blog, has a formula for deciding how much risk to take on with your RESP, according to your child's age:

"Subtract your child's age from 18, then multiply by 10. That's the maximum percentage of an RESP that should be in equities." The rest of the RESP would be in a fixed income investment.

Using Mr. Bortolotti's formula, a child 8 or younger would have 100 per cent in equities and 0 per cent in fixed income.

If you have an older child

Most analysts would agree that, as your child ages, your risk exposure should decrease. "Imagine if your teen was getting ready for Frosh Week in September, 2008, and her education savings were in an all-equity fund," Mr. Bortolotti says.

Applying his formula, an 11-year-old would be at 70 per cent equities and 30 per cent fixed income, a 14-year-old would be at 40-60, a 17-year-old at 10-90. But Mr. Bortolotti stresses that these are maximum stock allocations, and that if you start early enough, you may be able to save significantly "without taking any equity risk at all."

"Thanks to the generous 20-per-cent government grant on RESP contributions, $200 a month starting when your child is 6 will grow to $50,000 by the time she's 18, if you earn a modest 5 per cent annually. That may not be achievable with an all-bond portfolio today, but it has been in the past and will likely be possible again in the future as interest rates rise," he says on his website.

Another thing to keep in mind is that RESP rules allow you to "catch up" on grants you may have missed out on if you're starting late, says Mr. Holman.

"You can catch up one year at a time," he says. "The basic one-year contribution room is $2,500, but if you miss a year, you can make it up the next year, and contribute $5,000." You will then get the 20-per-cent grant on the entire $5,000, and can do the same the following year, doubling up until the year the child turns 17. "If the child is 10 years old, you can still get the maximum grant."

If you've been lucky enough to contribute regularly and substantially, you may want to switch to a tax-free savings account when your child gets older, says Mr. Bortolotti.

"You max out the grant once you have contributed $36,000," he said. "So even though the lifetime maximum you can contribute to an RESP is $50,000 per child, I would suggest that parents stop after $36,000 and use a TFSA for any additional savings. It's just much easier to get your money out of the TFSA than it is from an RESP, since you don't have to prove enrollment in university."

Once your child is set to head to his or her post-secondary institution of choice, the challenge is often sticking to the education savings plan that you originally decided upon, says Mr. Amonson. This is particularly important if you start saving when your child is older, because that likely means you are older, as well.

"I can't tell you the number of times that parents cave and end up spending more than they had planned, to the detriment of their retirement plan," he says.

"If they're late in the game on the education fund, odds are they're late in the game on the retirement end."