As any parent will tell you - especially at this time of year - kids are expensive.
They eat a lot, are always outgrowing their shoes and require an endless supply of electronic gadgets.
But the real sticker shock comes when they are accepted to university: In Canada, a four-year degree can easily run upward of $75,000 - including tuition, meals, residence and books - which explains why parents are opening their teenagers' acceptance letters this spring with a mixture of joy and dread.
That's where RESPs come in. Registered education savings plans allow you to start saving for your child's post-secondary education years before the tuition bills start rolling in. Money contributed to an RESP compounds tax-free, and the government kicks in a 20-per-cent bonus in the form of the Canada Education Savings Grant (CESG), up to a lifetime maximum of $7,200 per child.
That makes RESPs a no-brainer for most parents. But what kinds of investments should you hold in an RESP? And how should those investments change as your child gets older? To answer these and other questions, Investor Clinic asked four financial professionals to discuss what's in their kids' RESPs and why.
David Trahair, chartered accountant and author
Kids: boy (16), girl (12)
RESP strategy: Safety first
Mr. Trahair's most recent book, Enough Bull, preaches an ultra-conservative investing style based on paying down debt and buying guaranteed investment certificates. So it's no surprise that he takes a safety-first approach to his kids' RESPs as well.
"I'm basically in a 'high-interest' savings account. None of them are in the stock market or mutual funds at all. And the reason for that is that when I look at the time horizon for when I'll need the funds, which is going to be next year, I didn't want to be possibly down 20 or 25 per cent from the peak," he says.
With his son heading into grade 12 this fall and interest rates at historic lows, he didn't want to lock in his money with a GIC. The fact that he's making less than 1 per cent doesn't bother him.
"I don't care. It's never going to be a minus," he says.
Adrian Mastracci, president, KCM Wealth Management
Kids: girl (14) boy (11)
RESP Strategy: Conservative growth
Mr. Mastracci's RESP investment philosophy is straightforward: When the kids are young, put most of the money into stocks. As they approach university age, gradually reduce risk by shifting more money into bonds and GICs.
With his oldest child still several years away from university, he has about 40 per cent of his family RESP account in equities, split between the iShares LargeCap 60 and iShares S&P 500 exchange-traded funds. The rest is in shorter-term GICs.
"As the younger one gets to 14 or 15 then we're going to slide back the equities," he says.
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His advice to others saving for their kids' education: Start early to take full advantage of compounding and CESG grants, and stick to high-quality stocks or ETFs for the equity portion.
"Don't put the high-octane stuff in there. This is a child's education fund. This is not a place to speculate," he says.
Ian Nakamoto, director of research, MacDougall MacDougall & MacTier Kids: Two girls (17 and 14)
RESP Strategy: Balanced
Mr. Nakamoto, whose oldest daughter plans to attend university in the fall, has roughly a 50-50 split between equities and fixed-income securities. He agrees that dialling back the risk as the kids reach university age is the prudent approach.
"Just like with an RRSP, the closer the time to when you need the money, the more risk-averse you should become because there're no time to recapture that money," he says. The difference with a registered retirement savings plan is that you can decide to work longer to make up any shortfall in your account, but you don't have that option with an RESP.
Paul Harris, portfolio manager and partner, Avenue Investment Management
Kids: Girl (11)
RESP Strategy: Growth, then safety
Mr. Harris has most of his daughter's RESP in two bank stocks: Toronto-Dominion Bank and Royal Bank. But with both up sharply in the past year and his daughter nearly two-thirds of the way to university age, he plans to shift the RESP into corporate bonds later this year.
Why corporate bonds? Because they're generally less risky than equities, but yields are typically higher than government bonds or GICs. For diversification, he plans to buy the iShares CDN Corporate Bond Index Fund, an ETF that invests in a basket of investment-grade companies.
"That's what we recommend to people here," he says. The last thing he wants to do is to wake up one day to find his daughter's education fund cut in half by a market meltdown.
"The risk is that you go into the year that the person is taking the money out and you have a 2008-2009 happen to you, and you go, 'Oh my god I just lost all my kid's money.' This is their education, you've got to have the money there."
How to get free money
- Get a social insurance number for your child.
- Open a Registered Education Savings Plan with a financial institution such as a discount broker, bank or credit union.
- Contribute to the RESP.
- Apply for the Canada Education Savings Grant (Your financial institution has the forms).
- For every dollar you contribute to your RESP, the CESG adds another 20 cents, up to a maximum of $500 a year (or $600 for families below a certain income). For example, if you contribute $2,500 in one year, the government will kick in $500.
The lifetime RESP contribution limit is $50,000 per child, and the lifetime CESG grant limit is $7,200 per child.